Latin America is seeing a surge in digital wallet adoption as governments seek ways to disburse coronavirus aid to vulnerable citizens, and consumers look for safe alternatives to cash.
The need for digital payments infrastructure has led Latin American governments and banks to partner with each other and with fintechs in order to accelerate the move away from cash.
Unlike developed economies such as the U.S. and Canada, where governments leveraged virtually universal banking penetration among their populations to disburse coronavirus aid digitally, Latin American economies are cash-based, with high levels of unbanked and underbanked consumers. According to the World Bank, in 2017, 207 million Latin Americans were financially excluded from the banking system. including 59 million Mexicans and 48 million Brazilians,
Disbursing government aid via cash handouts at Latin American banks is slow and risky because of COVID-19. According to the BBC, in Brazil queues of unregistered workers outside banks, trying to get government handouts worth $115 a month, have become a common sight; but millions are yet to receive aid.
So Latin American governments have used whatever digital payments infrastructure is available, with mobile wallet accounts being the favorite. “In 2018, 64% of the region’s population had smartphones, which they can use for mobile payments and financial services,” said Edrizio De La Cruz, CEO of Latin American fintech-as-a-service provider Arcus.
The mobile wallet space in Latin America is suddenly white-hot, not just because consumers want to use contactless payments, but because mobile wallets provide a gateway for emergency government aid, according to Elizabeth McQuerry, a partner at U.S.-based Glenbrook Partners. Mobile wallet adoption has been facilitated by the proliferation of new financial regulations enabling fintechs to offer low-value accounts throughout the region.
“Brazil is providing aid for 54 million vulnerable citizens, including millions of unbanked people, through payments to mobile savings accounts,” said Jeffrey Bower, principal of Bower & Partners Consulting Services. “Only 24 hours after its emergency aid registration website and app went live, the federal government had processed applications from over 25 million Brazilians, with 40% opting to open digital accounts.”
The Brazilian federal government is using the Caixa Tem mobile app from state-owned bank Caixa Econômica Federal to enroll unbanked and underbanked recipients and disburse COVID-19 aid. So far this year, Caixa has opened 41 million new low-value accounts using the Caixa Tem app, McQuerry said.
There have been some highly successful public-sector collaborations with fintechs to disburse emergency aid in Brazil and Colombia. “In Brazil, state governments are using mobile wallets from payments institutions such as PicPay to disburse funds,” McQuerry said.
Another Brazilian mobile wallet being used for emergency aid is Conta Zap (account Zap), which uses WhatsApp to distribute private-sector donations to people.
Reuters reports that the number of PicPay mobile wallet users in Brazil reached 20 million in early May, as social isolation measures to combat COVID-19 accelerated the search for digital financial services.
The Colombian government has used payments institutions such as Movii to get financial assistance to its population. These institutions, which specialize in electronic deposits and payments, are known as SEDPEs (Sociedades Especializadas en Depósitos y Pagos Electrónicos).
In Argentina, two mobile wallets, Ualá and Cuenta DNI, have seen significant growth during COVID-19. Ualá told the Financial Times that, in the first month after lockdown, it had issued almost 140,000 prepaid debit cards and that it is signing up almost half a percent of Argentina’s 44 million population each month.
Cuenta DNI (account DNI), which is provided by Banco de la Provincia, now has over 1 million users, including 427,000 people who receive COVID-19 aid through the app.
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In Guatemala, the government uses the Visa Direct system to send emergency aid to 2 million families so they can buy essential goods using codes sent to their cellphones. “Working with Guatemala’s entire financial and payments ecosystem was key to developing an interoperable, integrated, efficient and secure system for the disbursement of these relief funds,” said Ralph Koker, VP of digital solutions at Visa Latin America and the Caribbean.
“Besides their use for receiving emergency aid, COVID-19 has led to a big rise in usage of mobile wallets for P2P transfers, for paying merchants, and for utility bill payments,” said Lariza Galindo, a Latin American digital transformation lead at the International Finance Corporation (IFC). “The Latin American mobile wallet market is now getting very crowded with a large number of providers.”
The Latin American on-demand delivery platform Rappi, for example, provides the RappiPay wallet which consumers use to pay for home delivery of items purchased from Rappi merchants.
Signing up with digital-only banks has been another route for moving from cash to digital payments. Two digital-only banks, Nequi, owned by Bancolombia, and Brazil’s Nubank are both seeing surges in new customers due to COVID-19.
Nubank said that at the end of May 2020 it had 25 million customers in Brazil and Mexico and was signing up 42,000 new users a day in the first quarter of 2020.
In Brazil alone, Nubank saw online purchases with its virtual cards grow by 31% between March 24 and April 24 this year. This was due to a demand for online streaming services and home delivery during COVID-19 lockdowns. Similar demand helped Nequi to achieve 300% growth in customers in May 2020, Galindo said.
Another key driver of digital wallet growth is partnerships between fintechs and banks.
“A trend we’re seeing is that Latin American payments services providers realize it isn’t just about offering digital payments but about ecosystems,” said Martin Spahr, a specialist in financial inclusion and digital services at the IFC. “So they are developing more robust ecosystems providing additional services to consumers and to small stores to ensure that digital payments acceptance increases.”
With incumbent players charging credit card merchant fees ranging from 2% to 4% of the transaction value and steep credit card interest rates of 200-300%, Latin America is ripe for fintech disruptors.
“The region offers an attractive environment for fintechs in which to provide alternative mobile payments solutions that are cheaper to consumers and merchants than the incumbents’ alternatives,” said Arkwright Consulting partner Francesco Burelli.
Peru’s BIM (Billeteria Móvil/mobile wallet) is a pioneering example of multiple players collaborating to develop a payments ecosystem. Launched in 2016 by Pagos Digitales Peruvianos (Peruvian Digital Payments), a subsidiary of the Peruvian banking association ASBANC (Asociación de Bancos del Perú), BIM is a mobile wallet for unbanked consumers. Supported by 30 Peruvian financial institutions and mobile money issuers plus four telcos, BIM had 800,000 users prior to COVID-19.
In January 2020, three Peruvian banks, BBVA, Interbank and Scotiabank, partnered with Miami-based fintech YellowPepper to launch PLIN, a real-time platform enabling consumers to send funds to customers of different banks 24/7, free of charge and using only cell phone numbers. PLIN, which uses the Visa Direct payment rail, is designed to be interoperable between Peruvian banks; five additional banks are expected to join the platform in the next six months.
Serge Elkiner, YellowPepper’s CEO, said that PLIN now has 1 million users and that, between April 2020 and May, usage of PLIN had grown by 100% due to COVID-19. Initially, PLIN just offers P2P transfers, and YellowPepper plans to add consumer-to-merchant payments later this year.
“PLIN is one of the largest Visa Direct P2P programs in Latin America,” said Koker.