Latin America: Challenges and Opportunities in Dynamic Emerging Markets
About eight years ago, I worked for a bank in Colombia that used a helicopter to deliver cash to small towns in very remote parts of the country. Upon landing, it would often be met by people who had travelled for a day to get there. They had set forth by horse, scaled mountains and crossed rivers - just to collect a small amount of money that would see them through the rest of the month.
And because they didn’t know exactly when the helicopter would arrive, sometimes they spent a day waiting around, which meant people were regularly spending up to three days a month travelling to a town to pick up some money and return home.
I think about those people, and I wonder what it’s like for them now - when instead of striking out on a gruelling journey across mountains and rivers, they simply take a phone out of their pocket and see the money they need appear on the screen. Today, as vice president of network development at global payments company Thunes, I understand the impact of technology on the way people bank and work. But I also know and feel from personal experience that this technology profoundly affects how people live here in Colombia and throughout Latin America.
The rapid expansion of the Internet, mobile phones and digital payments is triggering a cascade of progress that is improving the wealth and well-being of hundreds of millions of people, and it’s just getting started.
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Let’s look at some numbers that illustrate how much progress we are making in the region. Every year, another 15 million people in Latin America start using the mobile Internet for the first time, which will bring the total number of users to about 424 million by 2025. The amount of data being sent over these mobile networks is even more impressive, increasing 50% a year as users ramp up their consumption of video, social media and financial services like digital banking.
Just one of these digital banks - Nubank in Brazil - has grown from a little over one million customers five years ago to 40 million today, making it the biggest digital bank in the world. Everywhere we look in Latin America, we can see evidence of a massive and accelerating transition to a digital future.
There’s a lot to celebrate. But there is also a long way to go - because, despite all of this progress, Latin America continues to wrestle with some stubborn problems from its past.
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Even with the rapid adoption of technology in Latin America, almost 80 million people out of the region’s total population of about 650 million still lack access to the Internet. While smartphone use is rising quickly, it only amounts to a little over half of the people in countries like Mexico.
And yes, digital payments are expanding, but economies throughout the region still depend heavily on cash, with up to 90% of payments in Mexico conducted with paper money and about 70% in Brazil.
This is partly due to the large number of people who still don’t have a bank account. Among medium to large countries, Mexico has the fifth-highest share of unbanked people in the world at 63%, with Peru, Colombia and Argentina all in the top ten.
Why is the share of unbanked still so high at a time when mobile banking is so convenient and accessible? One reason is trust and the understandable hesitancy among people who are used to cash suddenly putting their trust in numbers on their phone screen.
Though this is changing as more people become familiar with digital banking. I recall one project from several years ago when a government wanted to distribute subsidies to poorer communities. But people still wanted paper money in their hands and not digital money on their phones. So an essential part of the project involved sitting groups of people down in towns around the country and walking them through the process - having them take out their phones and showing them how money can be sent from one phone to another.
Thanks to efforts like these, we’re going in the right direction, and every year we see millions of new people experiencing the benefits of digital money for the first time.
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I already mentioned that Brazil is home to the world’s biggest digital bank. It’s also the world’s second-largest market for WhatsApp, with 120 million users in Brazil and the rest of Latin America now using the app to chat with friends, pay bills and buy products online.
Thanks to growing connectivity and the use of mobile phones, Latin America is experiencing a large migration to digital services - and this is fueling a thriving ecosystem for fintech startups. In 2020, fintechs attracted 40% of all venture capital, and it’s continuing this year - as we saw when JP Morgan invested a reported $2.3 billion in a Brazilian digital bank that was founded just two years ago.
This rise of mobile money and the fintechs that drive yet more adoption is occurring alongside yet another digital transformation in Latin America - an explosion of ecommerce. The region boasts the second-fastest expansion of online shopping in the world, and Brazil and Argentina are leading the way with growth of at least 26%.
And to illustrate just how connected Latin American consumers are becoming, a rising number of these online purchases aren’t local - they are for products around the world. Mexico, for example, is the only country on the planet where a majority of people prefer to shop on international ecommerce sites instead of on sites closer to home.
It’s exciting to see consumers in Latin America tap the power of digital payments to connect with companies all over the world. But cross-border transactions by individuals, while rising quickly, remain a small slice of a pie dominated by payments between businesses.
Global B2B payments are expected to account for $150 trillion of the total $156 trillion in cross-border payments next year. And here too, Latin America is growing quickly with an annual growth rate up to five times faster than developed markets in North America and Europe.
Whether it’s the expansion of medical device makers in Costa Rica, new US factories in Mexico or the foreign manufacturers setting up shop everywhere from Chile to Brazil, the youthful and increasingly business-friendly countries of Latin America are attracting many international companies. These moves will fuel yet more cross-border flows for local purchases and payroll.
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Latin America is on the same digital journey as more developed countries in North America, Europe and Asia. But in many ways, it’s moving faster, as Latin Americans leapfrog past some stages of digital development and embrace others - like international ecommerce - with an intensity rarely matched elsewhere.
One explanation for this is the region’s familiarity with receiving money from family members working overseas. Latin America is traditionally a leading recipient of foreign remittances. It led the world in the growth of remittances last year, while Mexico ranks fifth globally for the total amount of money received.
The ease with which Latin Americans send money across borders, whether receiving remittances or purchasing products online, points to a bright future for the digital economy. Fortunately, this is an idea that the region’s governments are increasingly getting behind.
Brazil initiated an open banking plan this year after the country’s central bank launched an instant payment scheme in 2020. A few years ago, Mexico passed a favourable fintech law that led to 93 fintech companies applying for an operating license in early 2021.
Chile is following suit with its own favourable proposals. At the same time, Colombia recently launched a project that allows startups to experiment with different business models without navigating the regulatory requirements of traditional finance institutions.
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These initiatives, coupled with the rapid adoption of new technology and the desire of Latin Americans to connect online with businesses here and around the world, are the start of something special. In less than a decade, we have moved on from a time when people travelled for days to visit a bank - and we have arrived in an era when we don’t think twice about tapping our phone to buy something from the other side of the world.
We are at the dawn of a digital revolution that is transforming peoples’ lives, and it’s my privilege to play a small part in helping it unfold.
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