400 Million potential customers are still waiting for a bank to find them
No one knows exactly how many people are “unbanked” or financially underserved (“underbanked”) in Latin America and the Caribbean.
Estimates put the number as high as 70 percent – or more than 400 million – a huge market encompassing billions of dollars in cash and offering big opportunities to those who know how to reach it.
The unbanked, who have no access to traditional financial systems, typically pay their bills in cash, are obliged to carry around their earnings or keep them at home – often in high-crime neighborhoods – and pay elevated interest rates if they need to borrow from local money lenders. Those who are able to set up an account and buy on credit, from retailers for example, still face steep interest rates much of the time.
People in these groups – and not all the unbanked are poor – don’t live near a financial institution, don’t trust banks, don’t meet minimum requirements for opening an account and have no credit history or assets to support a loan. In recent years, a number of institutions have seen the great potential for reaching millions of people in these unbanked or underbanked populations in and outside informal economies. They are offering products such as microfinance, vouchers, prepaid or stored-value cards, payments made via mobile phones, and rechargeable cards linked to a mobile phone to provide mobile financial services.
Prepaid cards, used mostly as gift cards in the United States, have a wider variety of applications in Latin America. Along with the omnipresence of mobile phones, they offer significant opportunities for providing financial services to the unbanked.
Users of these products can easily set up a simple account at a merchant, kiosk, telecom outlet or a bank branch (often with only an ID card), and then use the card and a mobile phone to pay bills. Depending on the service, they can also transfer money to family and friends, receive remittances, and deposit/withdraw at ATMs.
They pay a small fee for each transaction.
For example, NovoPayment, a Miami-based company that pioneered prepaid cards in Venezuela, recently launched the first reloadable prepaid card for the unbanked in Peru through its subsidiary Servitebca Peru. Holders of LATODO MasterCard receive direct deposits on the card from an employer and can make purchases at stores or online. They can also withdraw cash from ATMs and, using cell phones, make person-to-person transfers and check their balance. The cards can be reloaded at over 2,200 retail stores, pharmacies and Interbank banking agents.
In Venezuela, Servitebca handles payrolls for companies like McDonald’s, Atento and Burger King via prepaid cards. The bank also replaces paper food vouchers with reloadable plastic cards at other large Venezuelan companies.
Citi (former Citibank) has launched prepaid cards in Jamaica, Panama and Trinidad & Tobago that can be used by client companies to pay customers, sales agents and employees. The bank, which uses both Visa- and MasterCard-branded prepaid cards internationally, plans to expand the program to other countries. Citi also has a joint venture called “Transfer” with America Movil, Banamex (owned by Citigroup) and Inbursa to offer cell phone owners a system to pay bills and make person-to-person transfers.
In Brazil, MasterCard and Telefonica created a joint venture that allows Vivo customers to carry out financial transactions on their mobile phones.
Large banks are arriving
The partners in enterprises that are beginning to tap this enormous potential include large international banks like Citi and Scotiabank as well as national and regional banks like Itau and Caixa Economica Federal (Brazil), Banamex, Azteca and Banorte (Mexico), Banco de la Pampa and Banco San Juan (Argentina), and Banco Nacional (Costa Rica).
Specialized companies like NovoPayment and Movilway are also playing an essential role by providing platforms and payment systems. MasterCard and Visa, meanwhile, offer widely accepted branded cards, networks of merchants and payment processing. Telecommunications companies like Telefonica and Mexico’s Telecomm Telegrafos, plus chains of retailers and supermarkets, are also getting in on the action.
These players are attracted by the appeal of sharing small fees from millions of clients as the unbanked and underbanked scramble into the middle class in countries like Brazil, Mexico and Colombia.
“This new middle class is aspiring to higher standards of living, and banking services are part of this,” said Fernando Iraola, Citi’s regional head of transaction services for Latin America and Mexico.
Banks generally don’t work directly with the unbanked but team up with partners, said Neil St. Germain, senior vice president of U.S.-based Speer and Associates, a financial industry consulting firm.
One spur to reaching the unbanked market is government. “Governments want to include people in the financial system, and provide cash cards in assistance programs in countries like Brazil,” St. Germain said. For example, governments can use plastic cards –either stored-value or debit cards– to pay public employees, or distribute benefits like monthly food payments or government pensions.
Another motivating factor is the high pe-netration of mobile phones in Latin America, offering a way to link potential customers to financial institutions, St. Germain noted. According to figures issued by Bradesco in 2011, Brazil, then with a population of 194 million, had 224 million cell phones.
MasterCard, whose credit and debit cards are issued through financial institutions, is working to serve Latin America’s unbanked market via reloadable prepaid cards, mobile phones, microbusiness credit and debit cards.
“How can we reach the next billion consumers worldwide and the next 10 million merchants?” asked Miami-based Jürgen Wassmann, regional head of emerging payments for Latin America and the Caribbean at MasterCard Worldwide. “Traditionally, through the urban base, but now there is an opportunity in Latin America to partner with mobile network operators and reach consumers that are unbanked with prepaid or debit cards,” he said.
“Mobile financial services are an important connection and can link emerging financial ecosystems that are developing in the region,” Citi’s Iraola said.
“Connecting the dots and correctly pricing the systems and services leads to a profitable and sustainable business model.”
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