The Time for Progress is Now

Latin America: Ditching Cash and Finding Crypto

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This post was originally published in 2022 and has been updated as of May, 2024.

Throughout Latin America, funded fintechs and progressive governments are embracing digital payments. Continued post-COVID comfort with online experiences, plus unsettling inflationary issues in certain parts of the region are supporting interest in crypto. But enthusiastic consumers may not be enough to bring reimagined payments mainstream.

For the first time in history, cash no longer represents the majority of payment preferences in Latin America. Today, only 36% of consumer transactions are cash-based, and the shift toward digital payments is gaining momentum.

According to a global survey, Latin American respondents were the biggest adopters of alternative payment methods, with research suggesting that they were more likely than their global peers to feel comfortable without physical wallets. They were also the most likely to believe mobile wallets would fully replace cash within the next 10 years.

Going forward, cashless transactions are expected to grow 52% between now and 2025, and then 48% thereafter until 2030.

Post-COVID, millions of consumers moved en masse toward internet-based shopping and banking. The heightened online connectivity led the shift from cash to digital wallets; this adaptability signifies promise for technologies like blockchain and digital currencies.

Still, the region suffers from a fragmented payments landscape resulting in low interoperability and high fees for both payment senders and receivers.

Regulators in the region are working to enable real-time payment options — with varying progress and approaches — that improve interoperability, increase financial inclusion, generate revenue for banks and businesses, and help protect economies from global market volatility. Use cases like inbound remittance flows are still seen as a critical component of GDP for numerous countries across Latin America, so reducing costs associated with those remittances is a key driver of regional growth.

Interoperability: Insist or Encourage?

Payment apps and services depend on interoperability to maximize their potential. Many providers are encountering regulatory pressure to open their networks, including Yape and Plin in Peru and various P2P apps in Colombia. Brazil has opted for a proactive approach, including launching PIX — the central bank’s real-time payment system — that serves over 140 million users and was modeled after popular Asian super apps.

Several instant payment programs are already available in Costa Rica (SINPE Móvil), Argentina (Transferencias 3.0), and Mexico (SPEI and CoDi), but success and adoption levels vary. Notably, the two fully interoperable bank account schemes in the region, Pix and SINPE Móvil, enjoy nearly universal adoption by their nations’ respective consumers.

Where interoperability mandates do emerge, improved payments infrastructure tends to appear from marketplace participants. For instance, private efforts were behind building underlying infrastructure in both Colombia (TransfiYa, powered by Minka) and Peru (Yape).

Coming Waves of CBDCs and Crypto

Key Latin American markets are showing interest in digital asset adoption, in particular, CBDCs. Currently, Brazil, Argentina, Colombia, and Ecuador rank among the top 20 in global adoption of digital assets. Through CBDCs, these governments likely seek protection against uncertain domestic macroeconomic conditions, circumvention of capital controls, improved financial inclusion for unbanked populations, cheaper and faster payments, and stronger competition.

As national regimes target these benefits, they create an opening for the crypto and blockchain sectors to build payments systems that make low-cost, faster and more seamless transactions a real possibility.

Bitso, Latin America’s leading crypto exchange, recently launched a suite of products supporting international crypto payments. The company notes that this new set of products will allow businesses to send and receive payments in crypto or stablecoins in the countries where Bitso operates. With modern APIs, users will be able to make payments in real time, from any country in the world at more competitive costs compared to traditional options.

The various integrations and alliances made by Bitso will allow its institutional clients to access more efficient cross-border payment methods.

Of course, not all crypto assets are created equal. Using a digital asset that was designed specifically for payments will be key to implementing a successful digital payments system that can handle high transaction volumes without the frictions associated with legacy payment rails.

Surveying Crypto-Positive Trends

Latin America remains highly dependent on the US dollar: from US remittance flows and USD as a reserve currency, to economies like Costa Rica and El Salvador that use dollars interchangeably with local bills. Some regional businesses even use USD as a liquidity source by routing payments through American banks to transfer funds to international accounts within the region. This interconnectivity means crypto adoption in the United States is likely to influence crypto adoption levels in Latin America.

In addition, Latin American workers are opting to receive salary payments in both US dollars and cryptocurrencies.

Deel, a Latin American HR firm partnering with Coinbase, reported a nearly 30% increase in crypto withdrawals in the first six months of 2023. According to company leadership, the region’s existing banking systems present challenges — particularly around transaction speeds — which have driven consumers to crypto.71 Persistent inflation issues and variation in banking processes among Latin American countries are also behind crypto adoption, as this payment technology offers needed stability and accessibility.

Many see Brazil as the de-facto fintech pioneer in Latin America, and it's worth noting the intensity with which the country is pushing smart and progressive crypto use and regulation.

In August of 2023, IMF officials praised Brazil’s CBDC, calling it the regulator’s “flagship initiative” to deepen the reach of digital financial services in the region. Dubbed DREX, the Digital Real is set to launch at the beginning of 2025.

Importantly, Brazil’s CBDC project is distinct from many others worldwide. While regulators in emerging markets tend to prioritize financial inclusion, the IMF contends that the Pix system already addresses this. The real significance of the Digital Real is the additional innovation layer; the “smart platform” which seeks to harness the benefits of a public blockchain in a safe and reliable environment.

From a compliance perspective, businesses in the region are able to use the same fiat compliance measures, like Know Your Customer (KYC) and Anti-Money Laundering (AML), for crypto transactions to ensure the safety of these flows and help protect the integrity of the financial system.

Travelex Bank Taps into Blockchain for Payments

As the first specialized exchange bank to be approved by the Central Bank of Brazil, Travelex Bank has emerged as a pioneer financial institution in Latin America using blockchain solutions for cross-border payments. By leveraging Ripple Payments — a cross-border payment solution powered by blockchain technology — Travelex can support dramatically more efficient payments. And with Ripple’s global payments network that provides around-the-clock access to liquidity, real-time settlement, and local currency payouts, Travelex customers can leapfrog the process of establishing correspondent banking relationships while adhering to global compliance and security standards.

Barriers to Digital Payments Progress

Many in the established bank sector perceive crypto as a threat, and unfortunately, sector incumbents still exert influence in the financial markets and among regulatory and legal structures in the region.

Thus, any major shift towards crypto is likely to encounter some structural resistance. This may mean incumbents lean on cozy governmental relationships to slow upstart innovations and enact favorable regulatory rulings. In addition, unless required by law, financial institutions may also choose to curb interoperability and maintain closed ecosystems to inhibit competition.

Further, banking institutions are for-profit businesses, and many struggle to adapt product and service availability for lower income citizens. In many countries, a few national banks still hold the majority of deposits within a given nation, and thus can control related payments, borrowing, or lending services. These large banks often impose high, excessive fees on individuals in order to open an account.

While digital and so-called “neobanks” add an important counterforce, their banking models aren’t invincible.

Regional central bankers have noted how neobanks’ credit segment is under tremendous pressure, since fintechs tend to concentrate on high-risk unsecured loans like credit cards or personal loans. Brazil’s central bank reported that neobank credit delinquencies rose over 10% at the end of 2022 as inflation pressures mounted, increasing from 6% the year prior.

Separately, regulators took measures to boost financial services availability via fintechs. These include facilitating the implementation of some AML/CFT requirements using digital tools. Other measures included permitting electronic-KYC (eKYC), facilitating digital onboarding, and even waiving of transaction fees for payments and remittances and the increase of transaction limits/thresholds.

Should these measures expire or change, fintech companies—including crypto or mobile payment providers—may experience system shock and some unpredictable impacts.

Due to the region’s dependency on USD and US-clearing institutions, as costs rise in the United States, fear and volatility seep into the Latin American market. Adding insulation from others’ financial swings underscores why achieving interoperability across Latin America is so critical.

While the crypto-winter dynamic has unfortunately cast doubt, education will be integral for hundreds of millions of consumers to grasp the distinctions between crypto as a store of value and crypto enabling better payment methods.

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