How digital payments work to solve financial inclusion challenges in the LATAM Region

May 25, 2023 |
By - Cristina Nicoara
3 minutes read
3 minutes read
By - Cristina Nicoara

Latin America is one of the most exciting regions to follow for innovation in the financial sector and the emerging fintech ecosystem. Updates to infrastructure through open banking initiatives, embedded finance, Banking-as-a-Service (BaaS), and more are helping to bring payments and banking to those underserved by the existing financial system. Even today, 58% of PoS (point of sale) purchases happen through cash in Latin America while 70% of its population is either unbanked or underbanked. 1 But as fintech firms are gradually transforming the market, the situation is finally changing in all the right ways.


Opportunities through digital

The rapid rise of fintech services is being hailed for its potential to surmount financial barriers and boost financial inclusion within the region. This could happen via lower cost barriers for accessing financial services since costs can be challenging for marginalized groups, the urban poor, and those living in remote locations, as well as by addressing information asymmetry between consumers and service providers, especially the unbanked.

Universally, access to credit and digital infrastructure are considered two key drivers for furthering financial access to the underserved cohorts in LATAM. Broadening credit access in rural regions has historically been a challenge due to infrastructure and other constraints. Since much of the LATAM populace remains unbanked, credit bureaus will not cover them. As it is difficult to underwrite such individuals, banks and other legacy lenders do not serve them. Looking at the numbers, 81% of Latin Americans had no credit cards in 2020 and 45% were without bank accounts.

As fintech enterprises can undertake due diligence without the traditional paper trail by using alternative data, they are well placed to evaluate credit risks and underwriting decisions. Fintech companies also create credit ‘ramps’ that ease underwriting hurdles by offering smaller credit amounts initially, for instance. Once these are paid, the model is scaled to permit higher limits since trust in a customer’s ability to repay has been established.


Pandemic-linked tailwinds

The impact of the pandemic was truly felt worldwide, and within the financial sector, it worked to disrupt and accelerate the evolution towards digital transformation. More education, medical care, and other basic services are being offered online, alongside financial services. Throughout COVID-19, 40 million unbanked persons opted for financial services, many to be able to take advantage of the pandemic-linked government support. With digital payments emerging as a crucial impetus for economic activity, it impacts business growth, financial inclusion, digital trade, and much more.

Digital payments also help in creating a level playing field between small and large businesses. In the LAC (Latin America and the Caribbean) region, between 2020’s first and second quarters, e-commerce web traffic in five of the region’s main markets soared to more than 150%. 2 As the pandemic nudged thousands of local businesses to embrace digital, the advantage was quite dramatic for SMEs (small and medium enterprises). While online SMEs were able to reach twenty foreign markets and diversify their customer base, those operating offline could reach only two to five marketplaces.

Financial inclusion remains important to the impact of digital payments. As per the G20 Global Partnership for Financial Inclusion, excluded groups often use financial services initially via digital payments, which include sending or receiving remittances, availing of government assistance, etc. Digital payments then act as a gateway for credit, insurance, and other financial services that allow individuals to save money, start a business, expand upon an enterprise, or manage risks and sustain through financial hardships. Governments also use digital means to distribute resources directly to the unbanked rather than providing cash, which brings with it the potential for misuse.


The future is bright

Digital transformation presents tremendous opportunities for both entrepreneurs and financial entities. According to LAVCA3, LATAM witnessed almost four times the growth in VC investments in 2021, soaring to $15.7 billion from $4.1 billion a year earlier. Within a fast-growing financial market, Latin American fintech firms bring more competition and access through technological innovation.

Given the benefits of digital payments in promoting greater financial inclusion, a collaborative effort between government and industry as well as public and private sector players is required to ensure faster penetration of digital services across Latin America. For instance, in Brazil, one of the neobanks, Nubank, became the world’s largest and most valuable challenger bank, on its way to becoming a fintech super app. The key to fintech’s success has been a focus on digital solutions and financial inclusion and this is likely to continue.

Increased smartphone penetration, younger demographics, more urbanization, and regulatory reform are contributing to the significant growth in the region. These positive trends resonate globally as well – for example, mobile banking and mobile money have acted as strong drivers of financial inclusion across the Asia-Pacific region and Africa, and continue to transform the global financial landscape.