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Latin Prepaid Cards: Silver Lining?

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Prepaid Cards and the Credit Crisis – Silver Lining or Just More Clouds?

BY ANABEL PEREZ

As the dark clouds of the global financial crisis descend on Latin America with their economic gloom, early talk emanating from the region’s boardrooms regarding its potential lessons may hold a silver lining.  This storm, with its poor visibility and shrinking effects on credit markets, is our latest reminder of the increasing interconnectivity of the global economy.  As many economists have reminded us in the past, when the U.S. markets sneeze Latin America catches a cold.  Maybe it is time for the region to take up the serious and long-overdue work of formalizing its cash-dependent economies. 

INFORMAL ECONOMY

Despite significant growth in recent decades, nearly half (approximately 45 percent) of our region’s purchasing power still resides outside the formal economy.  We’re talking about hundreds of billions of dollars, largely static and disconnected from our economic mainstream.  This is due in part to the fact that nearly 65 percent of our region’s population has neither a banking relationship nor the basic financial tools that most of us take for granted.  

How seriously will the credit crisis affect Latin America?  Tightening credit markets have already begun to reduce commodity prices as a result of money becoming more expensive. What's more, foreign direct investment – a backbone of the Latin American economy – will be seriously curtailed as investors’ appetite for risk is diminished by real fear of capital loss. Additionally, Latin American currencies are depreciating, which reduces consumer purchasing power and increases national debt burdens.  

This series of events means that Latin American banks and financial institutions could be hit especially hard.  Not surprisingly, according to the World Bank, even international banks in Latin America are feeling the pinch as U.S. and European headquarters are telling their regional branches and subsidiaries that they will have less money to spend this year and that they need to revise their business focus. 

SILVER LINING

What’s the silver lining?  It’s the growing recognition in those boardrooms that the crisis could be better mitigated. The credit crisis accentuates the need for banks to rely less on credit and more on payment and transactional services, a business area where prepaid card programs have proven that they can deliver results.  Through greater market liquidity and increased transactional, non-interest-based revenues, prepaid card programs are able to attract those customers that have lost or never had credit capacity.  As an added benefit to a bank’s corporate clients and the public sector, these programs can reduce transactional and administrative costs for the entire value chain of goods and services.  Further, the quality of life can be improved for millions of working individuals, particularly those that are underserved. 

Prepaid card programs today use the existing payment infrastructure to extend basic – and in some cases, advanced – financial/transactional tools to the base of our population without requiring an underlying bank account.  By 2015, the potential number of unbanked Latin Americans with the means and access to take advantage of prepaid general-purpose cards could surpass the 300-million mark, which would represent an estimated purchasing power of more than $200 billion per year.  By providing unbanked consumers with new financial options through branded prepaid cards, these enormous sums of cash will be moved from under mattresses into banks’ coffers, reducing acquisition costs and bolstering critical sectors of the economy -- and filling key gaps in economic data. 

MULTI-USE CARD

Think of the hundreds of millions of laborers, drivers, waiters and small merchants who will be able to put their hard-earned cash on a card, indistinguishable from a bank card, that they can use to pay their bills electronically, transfer money to others via SMS messages on their cell phones, withdraw money from an ATM or make a purchase at a point of sale or online. Now imagine if public and corporate benefits that are currently distributed via vouchers and remittances that are paid in cash at teller lines were instead delivered electronically to their beneficiaries.  With this, you begin to get the picture of how these programs can alter banks’ balance sheets and the region’s economic landscape. 

What does the future hold for prepaid cards in Latin America?  During these dark economic times, prepaid cards represent one of the few shining lights – a sustainable initiative that banks and financial institutions can implement now in order to minimize the harmful effects of the crisis and emerge in better shape once the storm has passed. With improved financial health, bankers can return to their true calling, which is lending to productive sectors and providing transactional services to their customer base. 

As the credit crisis worsens and markets continue to tighten in Latin America, for banks and financial institutions, prepaid cards might just be the silver lining in the dark clouds. 

Anabel Pérez is cofounder and CEO of NovoPayment, Inc., a leading prepaid card service provider and program manager in Latin America. She wrote this column for Latin Business Chronicle.

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