BY TRICIA JUHN
Driven by the $250 billion remittance industry, an entirely new banking model is emerging in the Americas. This model will be created by the convergence of a new demographic — the 20 million transnational households in the United States who send money back home to their families in Latin America — combined with innovations in mobile banking and money-transfer technology, also known as mobile remittances.
The new banking model will emerge first in areas of the United States with large populations of transnational households, then, very quickly, in Latin American countries with strong remittance economies: Mexico, El Salvador and Ecuador, to begin with. This new model merges simple banking services like deposits and checking with free or almost-free remittance transfers. After a relatively brief period of time, for example six months with a problem-free checking account, or three months of direct deposit, the new banks may begin to offer credit cards, savings accounts, money markets, cross-border insurance or mortgage programs based on remittances.
The new model will go to the customer: it will aggressively court the Hispanic and Latin American under-banked, offer multi-cultural services, and go where the customer is, for example out to the work site on payday or to the grocery on market day, so that customers can attend to their banking and remittance needs at their convenience, rather than the bank’s. It will also target the needs of small- and medium-sized enterprises (SMEs), chronically short of credit on both sides of the border.
The new banks will be heavily technology-driven to make their margins, capitalizing on accelerated clearing house systems, mobile transfers and other IT solutions coming out of innovative Silicon Valley firms or sold as turn-key operations by bulge bracket firms.
Mobile remittance technology will allow customers to move their money more safely, quickly, transparently and cheaply than has thus far been the norm. It is a growing solution for monetizing a highly mobile and dispersed market with an entrenched suspicion of traditional banks. The U.S. outbound remittance market lags behind Europe and the Gulf States in this highly lucrative segment — operators in the Philippines alone are earning $1 million a day in fees — because of Patriot Act provisions that make remittance transfers vulnerable to sudden and arbitrary seizure.
The new banking model will also have either cross-border operations or at the very least “partner” banks in Latin American countries. They may emphasize or cater to a very specific customer segment. In New York, for example, there are bank branches that cater not only to the 1.1 million Mexican workers in the New York metro area, but to specific cities of origin from whence comes a preponderance of the workers. Finally, the new banking model will navigate the current strict Know-Your-Customer (KYC) and Patriot Act regulations to protect their new revenue streams from sudden and arbitrary seizure.
OTHER INNOVATIVE TRENDS
We also foresee a number of other innovative trends in Latin American consumer finance.
Smaller customers, but more of them. This year, growth in financial services is driven by renewed attention to the income and savings potential of hitherto neglected groups of consumers in the SES B and C segments. Bulge bracket banks will migrate their asset mix toward more retail and loans, especially loans to SMEs, a historically credit-deprived sector in Latin America. In the US, SMEs run by Hispanics and Latino immigrants are the hot market. In our view, the smartest investors have already positioned themselves to benefit from the first tranche of credit-seekers, the cream of the crop.
More players will expand, not shrink the market. On the retail end, more non-banking financial institutions (FIs) will be granted licenses to render simple services like checking, savings and money transfers to the B, C and D segments on both sides of the border. Mexico is the leader in this trend, granting licenses for “sofoles” (sociedad financiera de objeto limitado) to Wal-Mart and a number of other non-banking operators who believe that their retail experience and brand equity with lower- and middle-income segments give them a natural marketing advantage. In Mexico, the market leader remains Banco Azteca, owned by consumer retailer Elektra, the pioneer of low-income consumer finance.
While retailers have always been better at marketing and customer service than bank — and we expect this to remain the case — what remains to be seen is if retailers like Wal-Mart can make money as a depository institution. We expect market watchers and shareholders, as well as regulators, to keep a very close eye on this segment.
While sofoles and other non-bank FIs enter the Latin American consumer finance market at retail levels, we expect to see two parallel trends. The first is continued consolidation, as bulge brackets continue to look for acquisitions in the region. Now that Central America is divided between two global giants, HSBC (which bought number one Banistmo of Panama for $1.8 billion) and Citi (which bought number two Cuscatlán for $1.5 billion and number one credit card issuer Grupo Uno for an undisclosed sum last year), we expect the global giants to move into the Caribbean.
The second trend we expect is that some early entrants to the game will divest their consumer holdings in the region, and choose to concentrate operations on less opaque markets. We anticipate further divestiture along the lines of BSMB’s acquisition of Wells Fargo’s consumer finance assets throughout the region, as big banks retrench from the aggressive ventures of 2002 and 2003.
LATIN BANKS CROSS THE BORDER
More Latin American banks will quietly acquire majority shares of local U.S. banks to experiment participating in U.S. Hispanic markets, especially in California, Texas, Arizona, Las Vegas and New York City. While U.S. Hispanics are financially underserved as a group, Latin American banks — as all foreign banks — are forced to be cautious in their approach to this lucrative market because of heavy-handed KYC regulations and other Patriot Act complications.
This reflects the rise of more small local banks in the U.S. to meet the financial services needs of 10 million Hispanic SMEs, 14 million US Hispanic households and 20 million Latin migrant households.
Since the U.S.-Latin corridor is the most lucrative remittance corridor in the world, global markets will be watching this cross-border convergence very carefully as a model for meeting the changing financial needs of the world’s 175 million transnational families — that is, families where the breadwinners send earnings to support dependents in their home countries.
Businesses are only now beginning to slice and dice the Latino market as they’ve diced up demographics segments before. This market is like other markets in that with proper research, it can be segmented very usefully. It’s unlike other markets in that changes in consumer behavior are extremely fluid and nuanced, and require a trained eye to detect.
Tricia Juhn is director of the financial services practice of U.S.-based consultancy InfoAmericas. This article is republished with permission from Tendencias, the magazine of the InfoAmericas.