2025 Latin America Payments Outlook: The Bad

The Good, The Bad and the Ugly in Latin America Payments 2025

Below we’re focusing on The Bad, the rough spots we foresee to cause payments professionals problems and hold back growth.

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The Bad

Despite cash digitization, the informal economy persists

To overcome this, the value prop for formalization needs a complete overhaul

Latin America’s cash economy has persisted partly due to its massive informal market. Defined as the sector of the economy that is ‘neither officially taxed or monitored,’ the informal market represents 33% of GDP in Latin America,¹ and 42% of Latin Americans live in a household fully dependent on informal labor.² This has both positive and negative consequences. It enables millions of low-skilled workers to earn a living and affords the freedom to work outside of government oversight. However, one major negative consequence is that the informal economy is one of marginalization; informal businesses cannot access banking, capital, or government services and are limited in how much they can participate in the digital economy. Informality also limits a government’s tax base and restricts the market available to banks, fintechs, and payment industry innovators.

As mentioned in “The Good” article, Latin America’s cash use has declined in recent years, from 57% of consumer spending in 2022 to 37% today. This digitization, however, does not signify growth of the formal economy. Instant A2A schemes have created a glorious gray area in which previously informal, cash transactions are now digital and under the auspices of banks, but are not properly formal either: they flow to personal bank accounts, they are not declared as business income, and in some cases, such as with SINPE in Costa Rica, they receive government endorsement to stay informal—while revenue collected via credit and debit card are subject to VAT retention, SINPE transactions are not.

Additionally, cash represents over 50% of consumer expenditure in markets like Guatemala and the Dominican Republic, where the informal economy represents nearly 50% of GDP. Mexico is the largest hotbed of informal small businesses, with around 8.5 million, or 63% of all small businesses in the market.³ These make up a portion of Mexico’s over 12 million independent workers, 76% of which conduct their economic activity outside of a formal place of business, revealing their informal, transitory nature.⁴

This sticky informal segment is part of the reason why small business penetration of POS terminals (and digital payment acceptance in general) is low. Accepting cards means bank account, proper business registration, and monitoring by tax authorities. It also implies a cost of 3%+ per transaction plus fees related to the POS terminal itself. Small businesses avoid these costs and the larger burden of paying taxes due to one foundational reason: the perceived value proposition for formalization is weak. The perceived benefits don’t outweigh the cost.

And the benefits are many. It is well-documented that entering the formal economy and accepting digital payments results in more customers, higher sales, access to financing, and business growth overall. This is a headscratcher—while nobody likes to pay taxes, being part of the formal economy promotes growth. Why, then is there such resistance to it, despite a clear and accelerated trend toward digitization? PCMI research over the years indicate the following reasons:

• Costs: High cost of business licenses, permits, financial services, etc.

• Complexity: Difficult, manual and time-consuming processes to obtain such permits and services

• Taxes: An added cost that neither small businesses nor their customers want to pay

• Fear of “being seen”: Doing things by the books makes businesses feel exposed, monitored and subject to penalties if they do something wrong

• Misaligned identity: Being part of the formal economy is often associated with “rich people” or “proper people.” Those those whose families, neighbors and entire communities operate beyond the reach of formal institutions see themselves as outsiders

• It’s easy to stay the same. There are no penalties for operating informally and no direct, easy-to-obtain benefit for doing things differently

These are not easy obstacles to overcome. Like it or not, governments, banks and fintechs who want to encourage full formalization must make some potentially radical moves, all of which require making formalization worth it for enterprising individuals. The good news is many of the same principles applied in the fintech industry to promote financial inclusion can be applied to formalization. These include:

To summarize, for the payments industry to reach its maximum potential, the formal economy needs to grow. For that to occur, both tax authorities and the payments industry need to answer the very simple question posed by an informal business: “What’s in it for me?”

If the industry succeeds in providing a clear and persuasive answer to this question, an entire third of GDP could be transformed for the better. The informal economy is not an easy or quick thing to solve, but one that public and private actors need to tackle for the industry, and the economy, to thrive.

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