In recent years, significant progress has been made in implementing a modern electronic infrastructure in Latin America. However, that a significant amount of work needs to be done is abundantly clear from a series of interviews conducted by Robin Arnfield with analysts and players in the Latin American payments market.
A region encompassing 20 countries large and small, Latin America represents a vast market with a population of some 570 million people and a total GDP of $3.33 trillion in 2008. However, despite these significant numbers development of electronic payments remains very much a work in progress.
And undoubtedly progress is being made, Ali Raza, executive vice-president at Atlanta, Georgia-based consultancy Speer & Associates told EPI.
Were seeing a lot of activity in Latin America across all payment types for example ACH, cards, and cell phones, said Raza. Banks, processors and mobile telcos are all jockeying for positions to find the product mix that will prove popular in Latin America.
According to the Boston Consulting Groups (BCG) report Global Payments 2009: Weathering the Storm, the main challenges to sustaining payments growth in Latin America are migrating consumer payment preferences from cash to cards and encouraging the adoption of cards by unbanked and underbanked consumers. BCG noted that credit card markets are growing rapidly across Latin America and will act as a driver to payments growth in the region.
BCG predicts that total Latin American retail payment transaction volume will rise from 17.2 billion transactions in 2008 to 44.2 billion in 2016, a CAGR of 12.5 percent, while the value of retail payments will rise from $47.7 billion to $107.3 billion, a CAGR of 10.7 percent.
According to BCG, the value of domestic retail and wholesale payments in Latin America will achieve a CAGR of 6.3 percent between 2008 and 2016 to $16.19 trillion from $9.89 trillion. During the same period, the volume of domestic payment transactions will rise at a CAGR of 10.5 percent from 27.24 billion to 60.66 billion.
Reaching the unbanked
Around 65 percent of the population in Latin America and the Caribbean (LAC) are unbanked, according to the InterAmerican Development Bank (IADB). This compares to developed countries, where there are typically over two bank accounts per person.
Getting people into the banking system is important to Latin American governments, card issuers and banks, said Raza. This can be via SMS [short message service] mobile text messaging-based services, retail consumer finance, or prepaid [payment] cards. For governments, replacing the informal, cash-based economy with electronic payments is a way to increase tax receipts. Governments also want to use prepaid cards to facilitate EBT [electronic benefit transfer]
Guillermo Kopp, executive director at US-based consultancy TowerGroup, explained that it is normal practice for Latin American banks and processors to join together, often with government funding, to share the cost of payment network development.
In Mexico, the government has a nationwide programme dubbed Boletazo in partnership with banks and POS terminal vendors such as VeriFone to roll out low-cost wireless terminals to merchants. The purpose of the programme which by the end of 2008 had seen 500,000 card readers installed is to encourage electronic payments, explained Fernando Lopez, senior vice-president and GM at VeriFone LAC, which was established in September 2008 by its US parent to pursue opportunities in the Latin American and Caribbean (LAC) region.
Jorge Becerra, a Miami-based senior partner at BCG, said retailers such as department stores play a major role in the Latin American banking industry.
If you widen the definition of who is banked to include consumers with a financial relationship with a retailer, then the percentage of Latin Americans who are banked is more like 50 percent, he says. In Chile, for example, there are 4 million branded bank-issued cards such as Visa and MasterCard, but 12 million private-label store cards.
One reason why so few Latin Americans have bank accounts is the fact that banks generally insist on carrying out a credit reference check, even when consumers just want a basic account without a loan facility.
Its a major barrier to many people that banks require so much information about applicants, Becerra stressed.
There are initiatives by banks to simplify the account-opening process. In Chile, state-owned BancoEstado has created the CuentaRut (Rol Unico Tributario/unique taxpayer number account), which provides a debit card and basic bank account to any legal resident of Chile. The only requirement for a basic account is a taxpayer identity number, there is no credit check, and the debit card only carries the BancoEstado brand, not a card scheme.
In Mexico, US bank Citigroups subsidiary Banamex is about to launch a prepaid payment card that will be very easy for consumers to obtain, Becerra said.
Youll be able to buy a Banamex prepaid card at a supermarket. If you want to convert it into a proper debit card that is linked to a bank account, you would go to a Banamex branch and produce your identity documentation.
Converting the prepaid card into a debit card is intended to be very easy, Becerra continued: Historically, Latin American consumers have been very reluctant to use banks, so creating a link between retailers and bank branches is a good move.
Becerra emphasised that as nearly 100 percent of the population in most Latin American countries has a mobile phone, and as 80 percent of these phones use prepaid airtime accounts, consumers are used to prepaid cards.
The challenge is to develop acceptance networks involving a broad base of merchants for prepaid payment cards, said Becerra.
LAC is one of the fastest growing prepaid payment card markets worldwide, said Joel Harris, president of Maitland, a Florida, US-based prepaid card processor M2 Financial. Prepaid cards can be used by unbanked consumers for payroll, cellphone top-up, retail purchases, the youth market, electronic benefits transfers, and cross-border remittances.
General-purpose reloadable (GPR) prepaid cards represent an estimated market of 300 million cards in Latin America with a purchasing power of over $200 billion by 2015, predicts Latin American-focused prepaid card issuer NovoPayment. The Miami-based firm also forecasts that there will be 47 million prepaid food voucher electronic benefits transfer cards in issue in Latin America with an estimated annual purchasing power of $50 billion by 2015.
Several Latin American initiatives are underway to provide m-payment services such as person-to-person (P2P) transfers, bill payments, and cross-border remittances to the unbanked. These services mostly use SMS text messaging linked either to prepaid mobile phone airtime accounts or to bank accounts, and are modeled on the M-Pesa service offered by Safaricom in Kenya.
Global mobile phone network industry body the GSM Association (GSMA) has a Mobile Money for the Unbanked (MMU) programme, which supports projects to provide m-finance services to unbanked Latin Americans.
Adding its weight, the IADB is sponsoring m-finance projects in Latin American countries such as Peru in association with Spains Telefonica, which provides wireless telecoms services in the region.
Its important for mobile operators to become involved, as banks dont have branches in rural areas, said Mark Beccue, an analyst at US-based consultancy ABI Research. But local convenience stores are agents for all the mobile operators in a country, so the cellphones people use can act as mobile wallets.
Beccue forecasts that in 2009 there will be 3.6 million mobile P2P transactions in Latin America, up substantially from 700,000 in 2008.
According to consultancy Gartner, the total volume of all types of m-payment transactions, excluding the purchase of mobile content and the use of interactive-voice response (IVR) mobile phone banking services, in Latin America will rise from 7 million in 2007 and 38 million in 2008 to 93 million in 2009.
Mohammad Khan, president of US contactless payment technology vendor ViVO-tech, believes that, for wireless POS payments to merchants, near-field communications (NFC) mobile phone payments will win out over SMS-based payments in Latin America.
There has been trials in Europe with cellphones where a prepaid airtime account was used to make point-of-sale purchases, he says. The trials found that such SMS-based purchases were not viable, as they took too long. What will work will be using cellphones embedded with NFC-based credit/debit card applications to make payments to merchants who are equipped with contactless card readers.
Technology leapfrog advantage
Since 2000, there has been major investment in ACH infrastructure in Latin America, said Jan Smith, a consultant at US-based Kroll InfoAmericas. Consquently, while the US ACH infrastructure is antiquated and cumbersome, Latin America has leapfrogged into advanced ACH technology, particularly Argentina, Chile and Brazil.
In most Latin American countries, there is a large-value ACH for international transactions and a small-value ACH for domestic transactions, Smith said.
By contrast, very few Caribbean countries have domestic ACH networks, said Speer & Associates vice-president Dave Lott.
But they do offer international wire transfers via SWIFT, due to the presence of offshore banks, he added.
In many of the Caribbean countries without an ACH system, inter-bank payments are handled via cheque, Lott explained.
In some countries, banks swap electronic payment files rather than cheques; but, since there is no central ACH, they have to send/receive an electronic payment for each bank, rather than sending all not on-us payments to the ACH which then sorts them out, he said.
ATMs in Latin America are can also be quite sophisticated, said InfoAmericas Smith: You will, for instance, see ATMs with an ACH payment capability, and retailer advertising on ATMs.
He added that in Argentina, taxes and utility bills can be paid and prepaid mobile phone airtime topped up at ATMs, while remittance payments are available at ATMs installed at 7-Eleven stores in Mexico.
According to London, UK-based Retail Banking Research (RBR), the number of ATMs in LAC has been growing at around 8 percent a year. This growth rate is expected to continue for the next two to three years, before slowing, RBR says. Brazil is the largest ATM country in the region, deploying 60 percent of all ATMs. Mexico, with 15 percent is the second largest.
E-commerce has enjoyed a rapid growth in consumer acceptance in LAC. Indicatively, a study undertaken by AmericaEconomia Intelligence for Visa published in June 2008 revealed that e-commerce in the region grew by 40 percent in 2007 to $10.9 billion.
In total e-commerce reflected a combined increase of 121 percent in 2006 and 2007 with the highest growth rates achieved by Venezuela (224 percent), Chile (183 percent), Mexico (143 percent) and Brazil (16 percent).
Growth, explained AmericaEconomia Intelligence, was driven by sustained economic growth, advances in technology and changes in consumer behaviour. Technological drivers included a total increase of 48 percent in internet penetration in 2006 and 2007 and a more than 100 percent increase in broadband access.
From a behavioural and social standpoint, the study noted that the young market is leading e-commerce spending, as they feel more comfortable adopting and using new technologies.
In addition, the study also highlighted that more than one-third of online transactions made by online consumers in the LAC region are for purchases made outside of their country of origin while in countries where e-commerce is less developed the percentage of international transactions could be as high as 90 percent.
AmericaEconomia Intelligences study, which covered 17 countries in the region, also revealed that bank-issued credit cards are the favoured online payment methods for 72 percent of Latin Americans, followed by debit cards with 9 percent. Other online payment methods are: payment on delivery (8 percent); bank deposit (8 percent); and bank transfer (3 percent).
Visa noted that in 2007, the Latin American business-to-consumer represented only 0.32 percent of combined GDP of the LAC region compared with the US where B2C e-commerce was 0.98 percent of GDP in 2007.
A big issue in Latin America is the plethora of non-card web payments such as bank transfers in Brazil, and retailer payments in Argentina, said Speer & Associates Raza. Non-bank firms active in Latin American web payments include DineroMail and Western Union subsidiary Pago Facil.
Consumers can pay for their online shopping in cash at a Pago Facil bill payment office, while DineroMail is an email-based payment system similar to PayPal.
Raza expects to see PayPal expand its Latin America penetration, and said: However, going has been slow for PayPal, which added the Mexican peso as its first Latin American currency in late-2008.
Uptake of e-commerce and internet banking faces a notable challenge in the form of low levels of internet penetration present challenges in certain LAC countries. For example, in Mexico only 25 percent of the population has internet access, said Raza.
The penetration of internet banking is lower per capita in the LAC than Europe or the US because of the lower penetration of the internet, Speers Lott explained.
All the LAC banks offer internet banking, but their services are less sophisticated than the internet banking on offer in Europe or North America, added Lott.
For example, you can look up your account activity and balances and there will be some kind of bill payment service, but you couldnt apply online for products such as loans, he says.
However, certain LAC countries are acting to promote the internet. Of particular significance, in 2008 the Chilean government passed a law mandating same-day electronic transfers for low-value payments.
This generated a big take-up of internet banking in Chile, and were now seeing quite high penetration levels for web banking in Chile, said Alfredo Piquer, chairman of Chilean systems integrator Optimisa. Even low-income consumers are now using web banking, logging on at internet cafes to carry out payment transactions.
According to InfoAmericas Smith, there are 35 million online banking users in Brazil.
Online bill payments via web banking services account for around 7 percent of total Brazilian bill payments, Smith said.
When viewed against the background of US Central Intelligence Agency (CIA) data showing Brazils population at 190 million and its GDP at $1.67 trillion in 2008, the scope for significant development of the electronic payments market.
A similar picture is evident in Latin America as a whole. Indicatively, CIA data shows the combined GDP of Brazil, Argentina, Mexico, Chile and Peru, Latin Americas five largest economies, stood at $3.79 trillion or 6.1 percent of the worlds total GDP of $62.25 trillion.
However, based on BCGs data the entire Latin American regions transaction value of $9.89 trillion in 2008 represented only 3.2 percent of total transactions valued at $313.65 trillion recorded throughout the world.
Looking ahead BCG forecasts that the value of Latin American transactions will increase from $9.9 trillion in 2008 to $16.2 trillion in 2016, a CAGR of 6.3 percent.
Based on BCGs forecast of an 8.4 percent CAGR of 8.4 percent for the value of total world transactions over the same period this would see Latin Americas share slide further to only 2.7 percent.
Rêv Worldwide revs up in Latin America
Exponential growth forecast for mobile phone banking and payments in developing markets is attracting new players at a heady pace, among them Rêv Worldwide, a mobile payments services vendor with a strong focus on Latin America.
Established a year ago with backing from venture capital firm MPOWER Ventures, Rêv has initiated numerous programmes now in varying early stages of development throughout the region, Richard Child, Rêvs executive chairman responsible for international strategy and corporate development, told EPI.
As one of the first providers in the region, Rêv is focused on establishing a retail base for distribution with partners that have significant brand credibility among consumers where they can conveniently enroll in programmes and load and access their funds, explained Child.
He continued: We are on track to see availability of programmes and reload in locations in Mexico and expect to make some announcements on that front soon. We are also working on major bank partnerships and expect to have a presence in Brazil, Dominican Republic and Ecuador this year.
So far the best example of a partnership Rêv has established is with Omnilife, said Child. Mexico-based Omnilife manufactures and distributes nutritional supplements via 4.5 million independent distributors in 23 countries.
The programme is designed to serve Omnilifes distributors in Mexico by linking their mobile phones to a prepaid card. This enables them to place orders by sending a text message and to pay for the order with funds loaded on the card.
Distributors then pick up their order at a distribution centre where they can reload funds onto the card. Distributors enjoy numerous benefits, said Child, including elimination of the need to carry cash, elimination of queuing at distribution centres to place orders and the ability to place orders after hours.
We formally launched the programme at Omnilifes annual distributor rally in September 2008, and the reception so far has been amazing, said Child.
On mobile payments future in Latin America Child stressed that Rêv believes prepaid cards have a critical role to play.
Combination of prepaid cards and mobile phones offers a powerful mechanism for bringing more consumers into the mainstream financial system, said Child. Prepaid debit cards can quickly and simply transform any consumers mobile phone into a device capable of withdrawing and transferring funds, making purchases and accepting payments anywhere, anytime.
Child emphasised that while purchases and remittances are extremely important opportunities for mobile payments, the mobile phones potential as a financial services channel reaches far beyond them.
The mobile channel has the potential to dramatically transform consumers lives across the spectrum of financial needs. By creating entry points to the financial system in hard-to-reach places, mobile channels significantly increase the potential impact of all strategies to expand financial inclusion.
Examples, said Child, include the ability to repay a microcredit loan, pay bills and establish a transaction history.