Latin America Advisor

Financial Services Advisor

A Daily Publication of The Dialogue

Will Latin Americans Save and Invest More After the Pandemic?

A branch of Bolivia’s Banco Unión is pictured. An increasing number of people in Latin America and the Caribbean have become part of the formal banking system. // File Photo: Bolivian Government.

Amid the pandemic, there have reportedly been some advances toward greater financial inclusion in Latin America and the Caribbean. In a five-month period last year, 40 million people in the region became part of the formal banking system, according to research by Americas Market Intelligence in partnership with Mastercard. What are the main factors driving greater financial inclusion in the region, and what forces are still keeping people out of formal financial channels? How will long-term savings rates be affected by the pandemic, which has pushed tens of millions of people in the region into poverty? To what extent are savers in Latin America and the Caribbean able to invest their money and build wealth beyond saving cash, and what barriers stand in their way?

Axel Christensen, chief investment strategist for Latin America at BlackRock: The research conducted by Americas Market Intelligence, in partnership with Mastercard, reveals an increase in financial inclusion across Latin America and the Caribbean as more individuals gained access to the formal banking system. A potential explanation of this growing trend is individuals’ need to use digital platforms during the pandemic as widespread lockdowns have directly affected the traditional cash-based transactions normally used in local stores and markets. With this said, the high degree of labor informality across the region continues to be an obstacle for sustained financial inclusion as formal relations are strong connectors for people to establish access to formal banking products. Digital access continues to be limited, and people still require physical access to bank branches, which the Covid crisis has hindered. As we look ahead, BlackRock’s outlook for the region is optimistic as per our most recent People and Money survey, which globally compiles the perspective of people about their financial well-being. The region faces challenges if we analyze the results in Brazil and Mexico, for example, which revealed that 60 percent of respondents recognized that not having enough money to start investing was a major obstacle to financial inclusion. However, the responses from these two countries also point to a higher awareness than the global average that their financial future would improve if they began investing earlier (more than 80 percent for both countries vs. the global average of 61 percent). Additionally, the survey results revealed a higher level of use of financial advisors compared to the global average (more than 80 percent vs. the global average of 76 percent). As the region recovers from the pandemic, people will see their income improve and will be able to improve their financial education. The heightened awareness of the benefits of investing, as well as having support from an advisor, should play a role in more Latin Americans looking beyond cash when making their financial decisions.”

Carolina Costa, head of Latin America government affairs at RELX: “Financial Inclusion in Latin America is being driven by a single short-term trend and two longer-term trends. The short-term trend is the Covid-19 pandemic, which has accelerated consumer and business adoption of digital services across all socioeconomic groups. Latin American countries experienced various forms of lockdown in 2020 and into 2021. These lockdowns forced consumers to adopt digital behaviors such as moving from cash to digital wallets and ordering food and services online. The two longer-term trends facilitating financial inclusion are: 1.) increased use of Internet services over the last 10 years among the middle and working classes—mainly through a dramatic increase in smart phone usage—and 2.) advances in big data analytics and machine learning. Collectively, these two trends have generated large amounts of data that can be used to increase lending to these underserved groups. Historically, consumers seeking credit needed a meaningful credit history—a Catch-22 situation that effectively excluded roughly 70 percent of working adults in Latin America who have had no formal credit history. The use of this data is a game changer for financial inclusion, but challenges still remain, with incentives for people to continue working in a cash economy (which does not generate a helpful digital footprint for the consumer) and some country regulations that inadvertently discourage technology innovation. Regardless of the timetable of an economic recovery from Covid-19, in the next several years these new technologies and the competition they are creating will enable historically underserved populations to leverage the benefits of access to the formal financial sector.”

Alejandra Ruales, senior manager at the Financial Health Network: “The pandemic has forced the reimagination of financial interactions. Limited in-person contact and a need for quick distribution of relief efforts have led to increased adoption of digital banking. Governments disbursed voucher and relief programs using hybrid models of in-person and digital payments. It is a hopeful trend, but in a region where the use of cash is predominant, the longevity of these inclusion efforts is uncertain. Working with new users to understand the long-term benefits of participating in the formal banking system is essential to advancing inclusion efforts. However, it is not just about access to improve one’s financial health. This is a prime time for public and private organizations to work hand-in-hand to cultivate trust in financial institutions, ensure basic infrastructure in rural areas to expand broadband access and demonstrate the value of engagement for customers. Focusing inclusion efforts with a long-term vision of financial health can support one’s ability to conduct day-to-day transactions and also to help them pursue future opportunities. Supporting the financial health of customers is key to building long-term and sustainable relationships. Transparency in cost structures for financial products can encourage activities such as savings and long-term investments. Limiting access barriers such as minimum balance requirements for newly banked consumers and designing solutions guided by behavioral science principles will help to maintain inclusion efforts. Ultimately, aiming at financial health outcomes will not only facilitate increased adoption of banking products, but it is also a sustainable way for individuals in the region to spend, save, borrow and plan.”

Ione Amorim, economist at the Brazilian Institute of Consumer Defense (IDEC): “The need to help the population affected by the loss of income and the imposition of the use of digital banks and electronic commerce amid the pandemic were responsible for the greater financial inclusion in 2020. However, it was not a movement structured by public policies for this purpose, and there are challenges to maintaining it. Technological advances in the banking sector have been the main reason for the increase in financial inclusion. But the social inequalities that exist in Brazil present barriers that have become more profound with the health crisis. The lack of financial education, low levels of education and the high cost of banking services are still important barriers, exposing the vulnerability of many consumers with a high level of indebtedness and exposure to frequent financial fraud. With the end of emergency aid payments, it is possible that the level of financial inclusion reached will not be maintained for long. It won’t happen without the adoption of measures to increase vaccination against Covid-19, policies to recover the economy, increase security in the use of virtual financial services and combat abuses committed by financial institutions. The environment for generating and maintaining domestic savings in the long run is very challenging. The scenario is not favorable in view of the increase in the number of Brazilians in situations of misery and hunger. The poor performance of macroeconomic indicators in the country, in addition to the increase in prices of food, essential services and fuels, will hinder the formation of domestic savings with return of inflation.”

Chris Gunias, managing director at CorCom: “The Covid pandemic has been a great equalizer from a financial inclusion perspective. With many stores limiting hours, lockdowns and the belief that cash might be ‘contaminated,’ it is no surprise that so many consumers in Latin America have turned to digital banking and shopping. Digital banking has been a lifeline for many in paying bills, shopping and ordering much-needed food and supplies. As more consumers turn to digital channels for banking and paying bills, they will inevitably use the convenience of digital banking to save money. Instead of having loose change or small bills lying around, they will instead transfer those funds into savings accounts. This will result in increased assets, which banks can use to lend money for home improvement loans, small business loans and large purchase loans, such as automobiles. This will in turn spur local economies. It will not be quick stimulus money that brings these countries out of poverty, it will be the banks reducing interest rates on small business loans that will result in long-term economic growth, leading to eventual prosperity. Another tool that will work to reduce poverty will be investing in foreign stocks, bonds and converting local currency into cryptocurrency. This can all be done easily once a person has adopted digital banking. By purchasing foreign stocks, bonds or cryptocurrency, the consumer now has assets that do not depend on the influences of the local interest rates, inflation or government interference.”

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