Digital banking in Latin America: Trends and opportunities
Reports on banking in Latin America tend to provide aggregate figures that treat it as a homogenous region, whereas of course it is very diverse in terms of markets, regulation, telecommunications costs & coverage, and demographics. There are, however, some general patterns that point to a largely positive environment for banking innovation.
Management message 1: The market is there and so are competitors.
- The opportunity for expansion in terms of customers is recognized as high, since such a large percent of the population is unbanked. The overall estimate for the region is 60%, ranging from 44% in Brazil to 86% in Nicaragua. The challenge will be to monetize services, which are largely message- and remittance-based payments. These are rapidly commoditizing as more and more new players enter the online market. “Bancarization” – adding services to existing customers – is the dominant strategy of banks in LATAM. This demands an IT capability for rapid and flexible development and integration.
- The long-term distrust of financial institutions was compounded by the financial crisis of 2007 and remains a significant barrier to attracting many potential customers, especially among lower income groups. Fears about the security of mobile channels remain a drag on growth. “Generating confidence in the security of the channel will be vital in promoting more sophisticated and complete mobile banking.”
- Foreign banks have been and will carry on targeting LATAM. Their home markets are slowing in revenue growth. Many of these have strong IT capabilities that they will draw on but that are likely to need substantial customization, especially to meet regulatory compliance. Traditional core banking systems do not have the flexibility or adaptability to meet the demands of localization, compliance and targeted customer focus.
- The region was less affected in credit markets than the US and Europe and is seeing far more growth opportunity. The President of Banco Santander Chile confidently sees a continuation in the 15% annual growth of its loan book. Only 9% of surveyed small businesses get loans from banks, versus 37% from family and associates. In general, any client with a direct credit relationship with a bank is almost sure to adopt Internet and mobile services.
- A major focus of development across the region is to use mobile phones for “financial inclusion”: opening up banking and other services to the poor. These generally involve a consortium of NGOs, telcos, banks, credit cooperatives and international agencies. They are following the patterns set in Asia and Africa, with major applications being microfinance, information services to farming associations, government wage and social payments, and remittances.
- Regulation varies widely across the region. Some countries require a second authentication mechanism (SFA) for SMS text messaging that may include IVR callback. In many, mobile payments are limited to banks while in others the many new online players are positioned for market entry.
Management message 2: Broadband changes the opportunity.
- Historically, telecommunications costs, services and monopoly control have impeded the growth of online banking. That is changing rapidly, with 4G capabilities being rolled out across the region, offering speeds from 4-10 times faster than today’s fixed Internet connections. This immensely expands the variety and richness of content of interactive applications.
- There has been a severe underinvestment in digital channels, which have been largely handled as informational and separately, losing many opportunities for targeted sales and integration of services. Of the estimated 10% of bank clients who have signed up for a mobile banking service, 87% use only text messaging. SMS texting and standard one-by-one basic transactions barely qualify now as mobile banking. It is limited to information and lacks the security essential for financial transactions.
- While mobile penetration is very high, 90% of users do not have a subscription service plan and use low end devices on a prepaid basis. The growth of digital banking is very much paced by the relative initial cost. This amounts to 14% of average household income in Nicaragua versus 1.5% in Panama. Not surprisingly, penetration in Panama is the highest in the region, having grown by a factor of four in ten years.
- Despite telecommunication blockages, growth in general online consumer Internet activity has been very high. From 2000 to 2009, use increased by almost 900% compared to 350% for the rest of the world. LATAM now has among the highest rates of online search in the world, with Colombia’s monthly average 18o per capita versus 100 globally. Social media has been the main area of growth, with Facebook dominant across the region.
Overall, just about every aspect of both banking and mobile shows both a relatively fast growth rate and a wide market space of opportunity, in many instances because of the removal of existing blockages, such as telecommunications speeds, device costs and regulatory restrictions.
For many customers across the region, mobile and Internet access will be their very first banking experience. They have no loyalty to banks. They are likely to trust a proven social media or IT platform company like Apple, Google or Amazon as much as a bank brand.
The main principles for winning in the digital arena are to offer simplicity, accessibility, convenience and trust. The management priorities are to ensure the firm has the IT platform designed for the Internet world of apps and Internet and mobile displays and interactivity. Existing core systems and SMS messaging are a dead in this regard. The IT platform enables and opens up the opportunity. Core systems that are 10-30 years old close them down. If your bank doesn’t have a state-of-best-innovation IT platform, you will be squeezed out of all but legacy markets and legacy customers.