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The Rise of Digital Payments in Latin AmericaJOÃO GARCIA AND VALERIE DE LA FUENTENot to be distributed without permission.The Rise of Digital Payments in Latin AmericaJoão Garcia and Valerie de La FuenteCONNECT WITH US© 2021 Euromonitor InternationalContents1Introduction2Latin America: Connected but unbanked6Mexico: CoDi aims to accelerate consumer financetransformation10 Brazil: PIX is rapidly changing the way people and businesses pay14 What should key financial stakeholders consider next?16 About the Authors17 About Euromonitor International18 How Can Euromonitor International Help?© Euromonitor InternationalIntroductionInternet use in Latin America has jumped from 50% of the population in 2015 to 66% in 2020, mostly driven by young and connected adults, especially in large countries such as Mexico and Brazil. The median age in the region is 31 years-old and 71% of households possess a smartphone. Nevertheless, the consumer finance industry is largely dependent on cash, resulting in a relatively high level of financial insecurity and exclusion across the region. Although the covid-19 pandemic accelerated instant and digital payments, there is room for development in this area to facilitate easier and faster transactions for businesses and individuals. Several governments within Latin America are implementing strategies aimed at developing a more formal financial sector, hoping to increase market digitalisation, access to financial services, control over tax payments and economic growth. As an example, Brazil lost approximately US$76 billion due to tax evasion in 2020 according to the Brazilian Institute of Planning and Taxation (ibpt), which could be drastically reduced by more intelligent and traceable payment mechanisms. In this white paper, we explore the current state of digital payments in Latin America, analysing how demographics and specific government initiatives are fuelling development of the sector to help understand the changing payments market in the region. We examine two of the most disruptive digital payment frameworks, CoDi in Mexico and pix in Brazil, and the potential impact of these systems, both inside and outside the finance industry, and throughout Latin America.© Euromonitor InternationalLatin America: Connected but unbankedIt is important to analyse demographics and access to technology and consumer finance services in Latin America to understand the potential market for digital payments. 58% of the population above 18 years old are considered “Young Adults” (between 18 and 29 years-old) or “Middle Youth” (between 30 and 44 years-old). This percentage of “Young Adults” and “Middle Youth” is high when compared to Europe and North America, 44% and 46% respectively. It is also higher than in Asia Pacific (55%), where technology use and digital payments are already in the day-to-day activities of a greater part of the population. Population Segmentation (2020)Source: Euromonitor InternationalThe large, young population in Latin America has accelerated the adoption and use of technological devices, with 71% of the population owning a smartphone in 2020. Latin America had one of the highest smartphone ownership growths in the last five years, even though ownership is still below the developed markets of Asia Pacific (77%), Western Europe (80%) and North America (87%). Smartphone ownership grew 9.2%, just below the Middle East and Africa (12.1%) and above Asia Pacific (7.4%).© Euromonitor InternationalInternet Use (% of total population, 2020)Latin America 3Source: Euromonitor InternationalWhile Latin America closes the gap with other regions in terms of technology access and possession of devices, phone use continues to be limited to messaging and phone calls. Only 20% of the population uses the internet for banking / financial services and 16% for selling goods or services. There is enormous potential for growth. In North America 82% of the population used the internet for banking services in 2020 and 51% to sell or buy products, so this is where untapped opportunities exist for Latin America.High unbanked population limits the potential to obtain financial servicesThe biggest question governments and companies are asking is ‘how can we empower these potential consumers?’. It is not enough to grant people access to mobile internet or smartphones. To expand the digital financial inclusion of the population, efforts must be made to incentivise an adequate ecosystem, expanding payment infrastructure both from the demand and supply side, improving financial literacy and creating incentives for companies to innovate.Brazil has been successful at providing financial services to a large portion of its population, with 91% of people above 15 years-old banked, meaning they have more than one of the following products: checking account, current account, savings accounts or credit card. This is because two of the largest banks in the country, Caixa and Banco do Brasil, are owned by the state and poverty alleviation programs are run through them.© Euromonitor International4 Latin AmericaLess than 75% of the population is banked in most of the other large countries in the region, including Mexico, Chile and Colombia. In Peru only 37% of the population is banked and in Argentina it is 51%. This places Peru behind Nigeria and Argentina behind Indonesia in terms of the banked population. Mexico, with 65% of its population banked, is behind Turkey, Russia and South Africa, countries that are in similar development situations, but offer better mechanisms to add people to the financial system. Unbanked Population (% of population +15 years-old)Source: Euromonitor InternationalThe picture worsens when considering the underserved population, which considers individuals 15 years and older with only one type of financial product. 61% of Mexicans are underserved and so are 58% of Peruvians. Compare this to countries like China and Russia, who have significantly reduced their underserved populations by digitalising the economy and increasing access to banks. China had 42% of its population underserved in banking services in 2010, while Russia had 24%. These numbers halved to 21% and 12% in 2020. While Brazilians are in a favourable position, with only 19% of them underserved, these statistics highlight the broader underdevelopment of Latin America’s financial sector.Eliminating cash is key for regional developmentIn Latin America cash remains the dominant form of payment, bringing direct and indirect costs to the government, companies and society. Problems associated with high cash use include tax evasion, crime and reduced lending mechanisms.© Euromonitor InternationalLatin America 5Mexico shows a clear example of the dominance of cash in Latin America. 107 billion cash transactions took place in Mexico in 2020, equivalent to US$345 billion. India, with a population 10 times greater than Mexico, has only four times more cash transactions in value terms. In Brazil there were 41 billion transactions, equivalent to US$165 billion. Seven out of ten transactions in Latin America are done using cash as the payment method, compared to five out of ten in Western Europe and three out of ten in North America. Cash is still greatly used in Asia Pacific and has similar numbers to those in Latin America, however, the decline is greater: 85% of transactions in Asia were done using cash in 2010 versus 81% in Latin America; in 2020 this figure declined to 66% in Asia Pacific and 68% in Latin America. Cash Transactions (as a % of total transactions)Source: Euromonitor InternationalAlthough all regions present a decline in cash usage, Latin America shows a slower adoption of alternative payment methods than other regions. Governments and financial players recognise that taking advantage of the high number of people with digital devices and internet access will open new channels and reduce costs through the launching of new payment methods. As the economy digitalises, online purchases will become more common and the use of cash will diminish. Mexico, with CoDi, and Brazil, with pix, have launched initiatives to leverage digital infrastructure in favour of financial inclusion, increased competition and reduced costs. Understanding the similarities and differences between these two initiatives, as well as what they mean for the finance industry, is important to predict the future payments landscape in Latin America.© Euromonitor InternationalMexico: CoDi aims to accelerate consumer finance transformationMexico’s low levels of financial inclusion and high cash transfer rates incentivised the Central Bank to launch CoDi in 2019. The goal of the platform is to build upon the Interbank Electronic Payment System (spei in Spanish), which facilitates ach (Automated Clearing House) transactions in Mexico, creating a mobile phone payment system that facilitates more agile and simpler payments. Payments are done through qr codes, nfc (Near-Field Communication) proximity technology and links on text messages.CoDi allows for instant, free, secure and simpler paymentsBanks in Mexico with more than 3,000 accounts are required to offer CoDi. It is also available for smaller financial institutions and non-financial businesses and users must have an account in a financial institution. The platform does not operate like a digital wallet because funds are not stored on CoDi, instead, they transfer funds between financial institutions.The main characteristics of CoDi are: Instant payments: Payments appear instantly on the users’ accounts, although this was already a standard with spei ach transfers. Cost: Using CoDi is free, like spei. Security: The platform uses secure encryption protocols and validation points for the legitimacy of messages. Simplicity: Payments can be made very simply using smartphones. Availability: Payments can be made 24/7.Instant transfers are already the norm in the Mexican market thanks to spei. The main advantage of CoDi is simplicity; transfers using spei usually required more steps logging into internet banking or going to a bank branch.© Euromonitor InternationalMexico 7As of September 2020, the Central Bank estimates 18 million registered users and 28 million transactions. The average transaction amount is MXN $819 (US$ 40). CoDi transfers and users (thousands)Source: Mexican Central Bank (Banxico)Impact on key stakeholdersConsumers and merchants will benefit from cheaper and faster options but the impact on financial inclusion is slowConsumers using the CoDi system are winners since they can use a free, simpler, faster and more secure payment method than bank transfers or cash to pay in establishments or make p2p (peer to peer) transactions. Individuals can also avoid merchant fees constantly transferred to the consumer for using card payments. CoDi aims to foster financial inclusion, creating an ecosystem that increases acceptance of digital payments. However, it is not clear if this will be the outcome in Mexico. Individuals need an account at a financial institution to be able to use CoDi, hence, most users already had access to the financial system before. Some banks are promoting schemes allowing individuals to remotely open digital accounts, with lower account balances, so that more people can benefit from the CoDi infrastructure. However, only 36% of the institutions enrolled in CoDi have enabled a digital account opening service. Furthermore, Mexico’s Development Bank, which oversees social programs and subsidy distribution, has not enabled this option.© Euromonitor International8 MexicoMerchants are also benefitting from the CoDi innovation, since they can accept payments without additional fees. Furthermore, their cash flows are not interrupted since the clearing of funds happens in real time. This is a big advantage compared to the 24 or 48 hours that some transfers may take. Even though there are clear benefits, CoDi penetration has been slow compared to similar services in other countries. 14% of the population has adopted it in more than a year since launch, according to the Central Bank in September 2020. Whereas, the Brazilian model pix was adopted by 27% of the population within a month. Furthermore, only 448,797 accounts have used CoDi to make a payment. The limitations on account opening, lack of expansion with Mexico’s Development Bank, fear of being taxed, a reluctance to give away private information and lack of awareness are all possible explanations for this slow adoption. What are main barriers for in-person mobile payments in Mexico?Source: Euromonitor Voice of the Consumer: Digital Consumer Survey, fielded March to April 2021As CoDi is adopted it will impact stakeholders, from banks to payment processorsCoDi represents a way for banks to offer a better digital service but could also decrease the usage of credit cards. Moreover, it is not clear if it will create more competition for banks, since there are not many fintechs or non-financial institutions enrolled. Private non-financial companies like Mercado Libre or Oxxo, a leading convenience store chain, already use similar technologies to accept payments, unrelated to CoDi, using their own in-house systems.© Euromonitor InternationalMexico 9It also represents competition for other stakeholders in the financial payments industry, such as acquirers, pos (point-of-sale) providers and payment processors such as visa or Mastercard. They will earn less from operational fees for card transactions if CoDi continues to be adopted. Since CoDi utilises funds from savings accounts, the impact on credit card transactions is minimal. CoDi’s main challenge is broadening its adoption by the unbanked, either by developing easier ways of creating remote accounts or enabling users to store money without the need for accounts i.e. digital wallets. The latter may be possible with new fintech regulations. Raising awareness of its benefits and creating the right incentives for the private non-financial companies and merchants to adopt it is needed, or it risks staying as an enhanced banking feature for financially included consumers.© Euromonitor InternationalBrazil: PIX is rapidly changing the way people and businesses payBrazil has the largest population in Latin America and is one of the most digitally connected. There are more than 210 million people in Brazil and 97% are covered by at least a 3g mobile network and 93% have access to a mobile phone. However, financial services are limited to a small number of providers; 81% of all commercial assets are concentrated in five banks, according to the Brazilian Central Bank. Brazilians have few options in terms of investments, access to credit and are subject to very similar banking fees.To reduce the cost of financial services and transactional fees, the Brazilian Central Bank designed and launched a new payment system called pix in November 2020. It promises to make in-person and digital purchases and sales cheaper, faster and smoother.Pix operation moves consumers to digitalPix operates completely digitally. It allows users to make in-person purchases using smartphone banking apps, which scan qr codes or allows users to manually enter personally identifiable information known as “keys” to share with the payee. Users have four options for “keys”: cellphone number, cpf (taxpayer identification number), email address or a random “key” that is generated by the financial institution with which the user is associated.Although pix aims to reduce the use of cash during in-person purchases, it has impacted mostly ACHs and bank wires (in Brazil known as TEDs and DOCs). Pix is ahead of these payment methods for four reasons: Instant payments: Bank transfers take seconds to go from one peer to the other. Old systems took hours and, depending on the transaction, one or two business days to be processed. Data protection: TEDs and DOCs require payees to share many different types of information with the payer, including full name, financial institution where he/she would receive, bank branch, bank account and cpf. Pix only requires users to share one of the four keys mentioned above and, if a user does not want to disclose any personal information, they have the option of registering a random key. 24/7: pix can be accessed and used every day of the week and at any time. TEDs and DOCs can only be done during working days and hours.© Euromonitor InternationalBrazil 11 Costs: pix is free for p2p transfers, while other systems charged between R$5 (US$0,95) to R$10 (US$1,90) per transaction in December 2020.In the first month of operation, 27,6 million transactions were done using pix according to the Brazilian Central Bank, with a total value of R$25,1 billion (US$4,8 billion). 57,5 million users were registered, 95% were individuals and 5% were companies. A significant proportion of transactions were business to businesses (b2b), highlighting the importance of pix as a corporate payment method as well as a consumer option. Transactions increased by 8 times to 229,3 million transactions per month by February 2021, representing R$169,5 billion, and the number of users more than doubled to 116,6 million users. Transactions using pix per type of Payer/Receiver — November 2020 vs. February 2021 (Billion R$; % growth)Source: Brazilian Central Bank (bcb)Impact on key stakeholdersConsumers will enjoy cheaper and faster operationsThe immediate winners are individuals, as fees are cheaper and bank transfers are smoother, easier and faster. Errors and problems are barely reported, eliminating any lack of confidence that was initially expressed by users. Using pix for p2p transactions has been welcomed and is expected to keep increasing in coming months.© Euromonitor International12 BrazilBusinesses with c2b (consumer-to-business) transactions are also benefiting from pix. Even though costs to accept debit and credit cards have declined 30% in the last 11 years, according to the Brazilian Association of Credit Card and Services Companies (abecs), renting or purchasing pos machines and paying interchange fees to card players are among some of the most important costs for small merchants. As well as reducing direct costs, companies have a better cash flow because they receive transactions with pix instantly.B2b transactions have a lower use of debit and credit cards or cash. Instead, at least 90% of b2b transactions in Brazil are made through traditional payment methods. Boletos, a bank slip with a bar code, and bank wires are predominant. Pix needs to offer additional features to gain traction in this space; these might include scheduled charging on defined payment dates and mechanisms that match payments and receivables with a company’s financial software systems.Banks and card operators will be challenged differentlyPix is a clear threat to banks, pos machine companies and intermediaries like Visa and Mastercard because it is expected to take users away from traditional methods, offering a new and user-friendly experience. However, it is necessary to understand how pix will affect each of these businesses and when.Banks, as the holders of accounts, will probably be the least affected by pix, since values will continue being transferred through their systems. Cuts in fees charged by DOCs and TEDs are considered marginal and not a big issue for institutions to deal with. Instead, as new users will be added to the system with pix, banks will receive more data from these new clients, which will allow for a better targeted service offer.Bigger threats will come from institutions outside of the traditional financial space offering pix to clients through digital wallets. The transaction loop will close, with organisations becoming a provider of products and services. According to the Brazilian Central Bank, two prominent large non-financial players are exploring this space through digital wallets; Ame (from retailers Americanas and b2w) and Mercado Pago (MercadoLibre.Com). Another player, WhatsApp payments in partnership with visa and Mastercard, has expressed interest to integrate with pix. This would facilitate payments for more than 10 million small business and 120 million users of WhatsApp in Brazil.Other financial players will be more affected. The profit that pos machine operators and intermediaries make from transactions being made through their systems will be hit, as consumers reduce their use of debit cards and move to pix.However, the idea that pix would replace debit or credit cards upon launch has not been confirmed yet. Consumers do not seem to want to replace cash, debit or credit cards, due to convenience and consolidated habits, while retailers have not seen great advantages in offering pix since fees have not reduced as much as expected.© Euromonitor InternationalBrazil 13Insights into why pix adoption is being hindered are found in a Digital Consumer global survey conducted by Euromonitor International. According to the survey, the main barriers to the use of mobile payments during in-person purchases are related to problems with retailers offering those options, instead of lack of interest in digital payments. What are main barriers for in-person mobile payments in Brazil?Source: Euromonitor Voice of the Consumer: Digital Consumer Survey, fielded March to April 2021As consumers are more comfortable with current payment methods offered by the market, merchants will be responsible for increasing the use of pix during in-person purchases, by offering reduced prices or benefits for consumers who pay using pix. Meanwhile, it will continue to expand and replace conventional methods when consumers shop online.© Euromonitor InternationalWhat should key financial stakeholders consider next?Latin America’s young population and increasing adoption of technology makes it a ripe market for disruptive financial systems. Consumers will enjoy better experiences and less costs. Established financial players may struggle with the emergence of competitors challenging the status quo. For other stakeholders there will be opportunities: Card operators and pos machine companies should try to diversify their business and find new revenue streams. Banks and Fintechs will have access to a greater number of clients, with different profiles, and need to adjust their product portfolios to serve new consumer groups. Retailers are diversifying into different areas, including payments, and need to optimise and better understand what is valuable to their clients. Software companies need to adapt their systems to governments in the region that may follow Brazil’s and Mexico’s initiatives.The biggest countries in Latin America coordinated efforts between the government and the private sector to digitise payments, and other countries are starting to follow suit. Challenges persist, including cultural barriers, distrust of technology and underdeveloped financial ecosystems. Nevertheless, the development of these payment infrastructures are steps in the right direction to disrupt the Latin American payment landscape. Some of the most important topics stakeholders should research about this new landscape are: What is the size of the opportunity within the unbanked population? What are the needs, services required and key success factors to win with the unbanked? What are the white spaces for new payment methods and unmet needs in b2b? How are new solutions working to solve b2b payment difficulties? How much can government gain when investing in cashless payment solutions? Who are the best business partners to take advantage of these initiatives?© Euromonitor InternationalAbout the AuthorsJOÃO GARCIA Consultant Euromonitor International Connect on LinkedinJoão Garcia joined Euromonitor’s team in 2017 working as an Consultant at the São Paulo office. He is responsible for project management and conducting insightful market research for his clients. Since joining Euromonitor, João has worked in projects within the Retailing, Food and Beverage, Luxury, Beauty and Personal Care, Financial Cards, and B2B industries. Furthermore, he has developed competitive assessments, market sizing and strategic intelligence projects, with exposure to C-level presentations.João has a bachelor degree in International Relations from the University of São Paulo (USP) in Brazil and a post graduate course in Market Intelligence at FIA (Fundação Instituto de Administração). Additionally, João participated in a selective six-month international bachelor exchange program at The University of Oslo in Norway. João is fluent in English, Portuguese and Spanish.VALERIE DE LA FUENTE Associate Consultant, Latin America Euromonitor InternationalValerie de la Fuente joined Euromonitor’s Chicago office as an Associate Consultant in September 2018. Since joining Euromonitor, Valerie has gained a wealth of experience working with high-profile global clients across various industries including Consumer Finance, Food Ingredients, Packaged Food and Consumer Finance. Her background in finance and the public sector, elevates her skills to engage with C level stakeholders in these spaces.© Euromonitor InternationalAbout Euromonitor InternationalEuromonitor International is the world’s leading provider of global business intelligence and strategic market analysis. We have more than 40 years of experience publishing international market reports, business reference books and online databases on consumer markets. As an independent company, we offer unmatched detail and unbiased content for every region, country, category and channel, from socioeconomic context to intimate detail on the smallest products or markets. Our expertise in consumer finance in Latin America spans a dedicated team of specialists, as well as research teams based in our Brazil, Chile and United States offices. In our consulting projects we have partnered with global organisations, helping them understand the impact of pix in the Brazilian payments market, sizing opportunities in b2b payments and designing go-to-market strategies for new financial products and services. Euromonitor’s research capabilities help clients to identify new opportunities in payments, advocating for the acceleration of initiatives to limit the use of cash and increase the use of digital payments worldwide. Request a consultation to learn more about digital payments or our custom research solutions.© Euromonitor InternationalHow Can Euromonitor International Help?Euromonitor International is a global market research company providing strategic intelligence on industries, companies, economies and consumers around the world. Comprehensive international coverage and insights across consumer goods, business-to-business and service industries make our research an essential resource for businesses of all sizes.
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