The Good, the Bad and the Ugly in Latin America’s Payment Industry in 2024

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    The Good, the Bad and the Ugly in Latin America’s Payment Industry in 2024
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    Lindsay Lehr

    Managing Director

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    If it was harder than ever to connect the dots in the increasingly fragmented payments industry last year, in 2024 we see some trends are meant to stick. It’s that “I told you so” moment that every consultant loves, as our primary mission is to support our clients in decision-making.

    While it is increasingly difficult to grasp the magnitude of some of the transformations in the industry, it is undisputable that in 2024 we will see even greater penetration of digital payments, consistently contributing to the decline in cash usage in Latin America.

    But progress does not come without hardships. The region where people most easily adopt digital technologies is also a champion in informality and cyber insecurity.

    Let’s look deeper at what I feel could be good, bad, and ugly for this sector this year, shall we?

    The Good: Digital Wallets and RTP Are Growing Their Penetration

    For decades, we have heard that cash is king in Latin America, but movement away from cash is truly accelerating in some of the region’s main economies. Alongside India’s UPI, Brazil’s instant payment system Pix stands out as the RTP disruptor in the world, already accounting for 35% of all transactions in the country. Pix also snagged a 29% volume share in e-commerce in 2023 per PCMI data, and according to fresh statistics from the Central Bank1, it has been decisive in making cash usage drop.

    While 2020, the year the system was launched, ended with around BRL 370 billion in banknotes circulating in the country, in 2023, this volume fell to close to BRL 340 billion (a 9% drop). Of course, there are other reasons for there to be more cash circulating in an economy than the offer of digital alternatives. Informality and inflation — two chronic problems in many Latin American countries — are often linked to it.

    Pix has managed to digitize millions of transactions that were paid in cash before, creating the basis for all new types of innovation that can be built on top of this system. It could even gradually surpass credit cards in consumers’ preference as it gains new features. A game-changer functionality is expected to roll out in October this year: the “Automatic Pix,” which will enable the auto-bill function of the system, allowing users to authorize the payment of utility bills and recurring services by direct debit from their bank accounts. The new feature is likely to cut into the service revenues of the major banks, while competing to some extent with the credit card industry, a primary payment method for recurring purchases.

    Brazil’s Pix is not the only easy-to-use 24/7 payment initiative in the region. In Colombia, we have seen the Banco de La República taking its first steps towards the interoperability of QR Code transfers and low-value payment schemes, establishing parameters that will allow digital wallets like Nequi and Daviplata to talk to each other. More importantly, those rules lay the foundations for a real-time payment trail in the country. Although regulators appear to be taking a proactive stance, it is still unclear whether the Colombian system will be as centralized model as the Brazilian Pix.

    Pix snagged a 29% volume share in e-commerce in 2023 per PCMI data, and according to fresh statistics from the Central Bank, it has been decisive in making cash usage drop

    In Peru, things are moving more through the private route. Based on the interoperability guidelines set by the Banco Central de Reserva del Perú in 2022, clearing house Cámara de Compensación Electrónica (CCE), an organization owned by 15 financial institutions and responsible for all bank-to-bank electronic transactions in the country, has been making partnerships with major global financial providers, such as Mastercard, ACI Worldwide, YellowPepper, and Visa, and integrating all players, into a single real-time network.

    CCE has already integrated with 24 financial institutions2. In 2024, when other fintechs and telecom carriers will join the network as part of the last interoperability step, the challenge is to disseminate the new system massively so that more Peruvians adopt it, and reduce their use of cash.

    In the first half of 2023, the Central Bank registered 397 million digital transactions in the country, including CCE’s system and digital wallets such as Yape and Plin, 76% more than in 20223. In Latin America’s fastest-growing e-commerce market, cash-based payment remains dominant, but this could also start to change in 2024 as local digital-born players link up to big tech players and tap into the credit market.

    This year, Apple Pay and Google Wallet are expected to connect to Yape and Plin4, following their expansion plans in Latin America. Peru is GPay’s sixth market, after Brazil, Costa Rica, Chile, Ecuador and Mexico. As for Apple Pay, it reached Chile last year, together with other countries in Central America. Its first market in the region was Brazil in 2018. In 2023, Apple chose Latin America’s biggest economy as the eighth market for its Tap to Pay solution.

    The biggest question mark hangs over Mexico. Only around 60% of the adult population has a bank account, which is low for the second-largest economy in Latin America. If Dinero Movil or DiMo, the instant payment solution launched by Banxico last year, happens to be the tool for financial institutions to change that, then the potential is huge for anyone making money in the digital payments industry, card networks, fintechs, and so on. We are talking about doubling the size of the country’s current electronic payment system.

    DiMo enables users to make instant bank transfers through the country’s real-time gross settlement system — known by the acronym SPEI — by using only a recipient’s phone number. None of the previous solutions were as easy to use. Yet questions on DiMo’s success remain: How will Mexico increase bancarization (a prerequisite to use DiMo)? Will and how will banks proactively promote DiMo? What are the financial incentives?

    Whether DiMo scales or not, SPEI in its own right is showing signs of cash displacement. Banxico’s latest data available show that low value transactions (<$600 USD) within SPEI have been increasing steadily, which means Mexicans are finally using this RTP scheme to their day-to-day payment needs instead of cash.

    As I said, some trends are expected to stick and consolidate this year. Digital wallets and instant payments helping to bring cash use down in LatAm is one of them. From the financial inclusion perspective, bank and wallets accounts offer people a pathway out of poverty by helping them manage expenses and access credit. Increasing digitization enables transactions outside people’s physical proximity. Over time, having people spend on e-commerce and sending money to their family and friends through digital channels can increase economic opportunities and the emergence of new businesses.

    For the industry, bringing more people on board means being able to offer more products and services and monetize on increasingly larger and qualified customer bases.

    The Bad: SMBs Not Yet Convinced by the Fintech Revolution

    Labor markets in Latin America have shown improvements over the last three decades or so, but major gaps in productivity and informality persist, as a recent report5 by the International Labour Organization (ILO) has shown. The region’s informality rate stood at 48% in mid-2023. Only integrated public policies that allow entrepreneurs and small businesses – the largest employers in Latin American economies, responsible for around 70% of job creation – to take advantage of technological changes can bring about a significant transformation.

    Many challenges in this sense involve fiscal requirements and higher costs to meet them. If formalization can bring advantages in management and credit access, it can also mean having to hire more specialized staff to deal with accounting and taxes, which generates additional costs, especially in Latin American countries where the tax burden is already heavy.

    But then again, the payment industry has already come a long way in breaking barriers to include more people financially, especially with fintechs developing products for lower-income consumers and putting them at the center of their business model. Without it, people would continue to receive their income in cash, keep it in cash, and spend it in cash at the venues close to their homes.

    Tackling the informality of small businesses at the other end of this initial digitization cycle is, therefore, crucial for a truly digitized economy. And that is where we find payment providers, digital banks, and traditional financial institutions still struggling.

    SMBs are increasingly adopting low-cost real-time schemes but they are doing so erratically. They tap into free-of-charge transactions — as with all P2P transfers on Brazil’s Pix or low-value payments on Costa Rica’s Sinpe Móvil6— only when convenient, which means using personal instead of business accounts. Or they offer digital alternatives only when their customers don’t have cash. These businesses end up not digitizing because they have not yet been convinced to pay for value-added services that offer anti-fraud protection or can be integrated with ERP or CRM tools.

    In Latin America, SMBs are increasingly adopting low-cost real-time schemes but they are doing so erratically”

    Optimizing costs while building service packages that make sense for entrepreneurs to thrive is still a big challenge for Latin America’s payment industry, mainly because encompassing a wide range of businesses with different revenue levels and operational structures translates into a clientele requiring service customization. Doing this is not easy from a business perspective. It’s no wonder that some fintechs have started “abandoning” their retail portfolios to focus solely on business clients.

    For example, since 2022, Brazilian digital bank BS2 has been divesting individual operations to focus on commercial clients. Last year, also in Brazil, PicPay, the largest digital wallet in Latin America, incorporated7 individual customers from the Original, a digital bank under the same holding company. Original’s operations now focus on business, corporate, and agribusiness customers.

    Fintech startups born with a focus on account and expense management are also quickly expanding their markets to offer banking services to SMEs in Latin America. This is the case of Mexican-origin Clara and US-based Jeeves, which debuted in Mexico and later expanded to Colombia and Brazil.

    We will see these moves happen more in 2024, and hopefully, many of these players will find the right formula.

    The Ugly: The Rampant AI-Powered Fraud Trend

    Fraud is an ongoing and worsening problem in Latin America, especially in online channels, as it is around the world. Estimates by Mastercard8 reveal that the region loses 20% of total e-commerce revenue to fraud, ranking second globally, following Southeast Asia. While fraud and scams have not stopped Latin Americans from trying and using digital payments, real-time solutions have taken the challenge of offering secure transactions and services to a new level.

    With real-time payments on the rise, fraudsters are finding new ways to steal money, seeing them as easier routes to cash out the proceeds of targeted consumer attacks and distribute funds in an almost untraceable manner. Combine this with a prevalent issue in the region, the lack of education among users regarding the safeguarding of personal data and payment information, and we have the perfect storm for increased insecurity.

    An example of this is the authorized push payment (APP) scams. In these scams, fraudsters employ social engineering to get victims to initiate payments to an account, posing as a legitimate payee. In Brazil, reported losses to APP scams were close to US$ 247 million. While this amount accounts for only 1% of Pix e-commerce volumes in 2023, it could grow to US$ 636 million by 2027, according to ACI Worldwide estimates9.

    From the business perspective, this is a massive problem as finding the sweet spot between fraud prevention and high purchase conversion rates gets trickier. We believe there will be more innovation around fraud prevention, refunds, and transaction revokes, but as RTPs are also very new, this may take a while.

    With the greater availability of powerful AI-driven image, audio, and text tools since 2023, we also expect to see those technologies making fraud prevention more challenging. That is, perhaps, the most worrisome trend in the payment industry, as AI can be used to create fake accounts. While many banks and fintechs have developed AI-based identity verification processes to offer frictionless digital onboarding, these procedures can prove fragile in dealing with deep fakes and AI personas posing as real people. Most companies in the region (and in the world) are not prepared for that yet. We can expect this to become clearer, for better or worse, throughout 2024.

    Next Steps

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    Lindsay Lehr
    Lindsay Lehr

    Lindsay Lehr is the Co-Founder and Managing Director of PCMI. With 15 years’ experience, Lindsay is specialized in the region of Latin America, executing over 400 consulting engagements for Fortune 500 clients in the region.