Aron Schwarzkopf is the CEO of Kushki, a Latin America-based payment platform that standardizes local payments and conversion rates across borders.
Financial technology solutions are sprouting rapidly throughout Latin America. While fintech adoption varies from country to country, the region as a whole is experiencing a push towards upgraded technologies and innovative banking options.
The growth is seen in venture capital investment, as well as in local changes. Latin American fintech startups received more than US$600M in VC funding in 2017 alone. Of that group, 56% were payments and remittance startups. In 2018, of all VC investments in Latin America, 25% were fintech related.
The payments industry looks very different in Latin America, compared to the United States or Europe. Completing online payments, while incredibly easy for someone in the US, is not as simple in Latin America. To compare, only about 6.5% of households in the US don’t have a bank account. Though this number is decreasing, until 2018, less than half of the population in Latin America had access to a bank account or debit card.
However, with smartphone adoption in the region, reaching almost 50%, there is a push for more digital payment options. Here is why now is the right time for a payments boom across Latin America.
New solutions for the unbanked
Opening a traditional bank account in Latin America can be a complicated process. It requires proof of citizenship, financial records, and other documentation, plus delays and red tape. While there has not been an overwhelming increase in traditional banking, there is a slew of additional options that meet the banking needs of the population.
Neobanks, for example, are mobile, branchless banks, that mainly focus on consumer needs. Neobanks grant the unbanked population easier access to financial services and have sprouted up across Latin America. Brazil’s main option is Nubank, Argentina’s is Ualá, and in Mexico, many use albo or Cuenca. Each neobank offers different solutions. Nubank boasts a very robust offering, including credit cards, loyalty points systems, digital savings account, and more. While others may only offer a debit card or a prepaid credit card, they all give users the ability to use digital bank services, such as paying bills online and transferring money. Neobanks are banking the unbanked and spurring the growth of digital payment options in Latin America.
The rise in electronic invoicing
On the B2B side of things in Latin America, the rise in electronic invoicing has helped grow the need for and adoption of digital payments solutions as well. Electronic invoicing (e-invoicing) is a digital invoicing system gaining significant traction in Latin America.
To compare this adoption, in the United States, there are over 150 service providers that offer automated e-invoicing solutions, but only 38% of US organizations actually use electronic invoices. In countries such as Brazil, Chile, and Mexico, e-invoicing rates have reached over 90%. Rates in Chile, in particular, are impressive. The country implemented mandatory e-invoicing in 2003, and now over 97% of billing is filed electronically.
E-invoicing can help businesses save time and resources, and it helps invoices get paid faster. With billing moving online, it’s no wonder that companies have sought out a digital payment solution to complement this move. While Latin America is behind in digital payment rates, the fact that the region is a global leader in e-invoicing signifies that now the region is experiencing a fintech boom, which includes digital payments.
Cross-border payment solutions
One problem that Latin America has, and arguably that all global companies have, is cross-border payments. On the B2C side, customers may find it confusing or expensive when purchasing products across borders. For B2B companies, as more businesses expand across Latin America and enter new markets, receiving payments from other companies and from consumers is a challenge. Local regulations vary from country to country, not to mention cultural barriers that make cross-border expansion difficult.
The traditional way to solve this problem is through banks that span across the region. However, a lack of transparency and high currency conversion costs have made this solution unideal for most. Cross-border payment solutions have cropped up across Latin America to solve this problem.
Adopting digital payment solutions in Latin America
Because of the rise of neobanks, e-invoicing, and cross-border solutions, digital payments are ready to boom in Latin America. The consumer and business demand for digital payments will help this growth and adoption as well. One challenge to this growth is fraud prevention. The fear of fraud and lack of trust is one main reason why many consumers in Latin America have stayed away from traditional banks. However, many Latin American governments are using biometrics to prevent fraud and increase transparency. And online payment solutions are implementing security measures to prevent phishing and cyber attacks as well.
Furthermore, given Latin America’s high rate of cryptocurrency adoption, it’s clear the region is already experiencing a fintech boom. Especially in countries such as Argentina, Brazil, and Venezuela, cryptocurrency offers an alternative, open way to transfer money, invest, and pay for goods. Though cryptocurrency startups still face challenges, such as wavering government regulations, the increased use of Bitcoin across Latin America shows a clear shift to digital payment options.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.