LATAM’s Advance Toward a Cashless Future through Pioneering Payment Solutions

The payment landscape of Latin America (LATAM), a region historically marked by enduring challenges in developing effective financial infrastructures, is currently experiencing a significant transformation. This evolution is driven by the adoption of innovations brought by the fintech and crypto industries, offering a modern solution for a continent with a diverse economic environment and a significant digital divide.

In recent years, LATAM has witnessed a rapid expansion of its fintech sector, which has doubled in size over the past three years. According to the Inter-American Development Bank (IDB), fintech companies raised a record $14 billion in 2021 alone, with 187 startups leveraging technology to innovate in financial services. These companies primarily focus on digital payment solutions, lending platforms, fintech infrastructure, and personal finance management tools. This surge in fintech activity reflects a growing interest in the region, backed by increasing support from local governments.

Despite this progress, the region still faces significant disparities in internet access and digital adoption. For instance, while Mexico and Brazil have internet penetration rates of 75% and 78%, respectively, countries like Belize and Haiti lag behind with rates of just 47.1% and 41%, according to Statista. El Salvador, with an internet access rate of 50.5%, exemplifies Latin America’s diverse digital landscape, where a staggering 32% of the population, or 244 million people, still lacks internet access, according to IDB’s research.

El Salvador's unique approach to embracing cryptocurrency, particularly its adoption of Bitcoin as legal tender, marks a significant milestone in LATAM's financial evolution. This move, despite the challenges of the digital divide, highlights the crucial role government initiatives play in shaping the region's payment dynamics. El Salvador's bold step sets an important precedent for other nations in the region and the world.

This shift towards digital and crypto-based financial solutions is a marked departure from the traditional reliance on cash transactions and the struggle with inadequate banking infrastructure in LATAM. In exploring the intricacies of LATAM's payment landscape, this article delves into the multifaceted dynamics at play, focusing on the region's journey towards a cashless future. The spotlight is on El Salvador's pioneering role in the region's cashless evolution.

eCommerce on the Rise

The eCommerce landscape in the region is witnessing rapid growth, propelled by the strategic priorities set by local policymakers in South American countries. This has transformed the region into an exceptionally attractive destination for eCommerce enterprises, offering robust potential for expansion.

Currently, there are over 300 million digital buyers in the Latin America and the Caribbean (LAC) region, a figure expected to surge by more than 20% by 2027. Although eCommerce adoption in this part of the world is still lower than in most other regions, online retail sales in Latin America are set to account for almost 20% of total retail by 2026. On a regional level, Brazil and Mexico are vying for the lead, each accounting for close to 30% of the Latin American e-commerce market.

The eCommerce surge in Latin America has spurred the adoption of alternative payment methods (APMs) such as eCash, digital wallets, and bank transfers. This momentum is fueled by the aforementioned widespread mobile internet access and a diverse range of payment options. With a flourishing digital shopper base (260.2 million in 2022), and a population keen on APMs where 63% of shoppers reported using digital wallets, eCash, or crypto in the last month, Latin America stands as a promising landscape for payment innovations.

LATAM goes eCash

According to the latest McKinsey Report, cash usage declined by nearly four percent globally in 2022 in favor of electronic payments. Worldwide, total online payment transaction volumes have grown 17% in the last five years, indicating a big shift in the market towards newer technology. This indicates the continuing evolution in payment preferences, a general migration toward lower-fee instruments, and the gradually declining margins accompanying scale.

Consumer payment preferences vary a great deal across LATAM, but one thing is clear: since the pandemic started, cash payments have seen the largest overall decrease across most countries. In 2018, cash transactions accounted for 80% of payments, but by 2020, amid the pandemic, this figure had dipped to only 25% across Latin America. However, cash remains the predominant payment method, still accounting for around 70% of transactions in LATAM.

Amid these changes, eCash, a digital cash solution, is emerging as a popular choice. It enables online purchases with cash payments at local retailers. According to the Lost in Transaction: Consumer Payment Trends 2023 report, eCash has experienced growth globally, with its highest popularity observed in Latin America, particularly in Colombia and Brazil, where 50% and 38% of respondents, respectively, cited it as their preferred payment method in the past 12 months.

eCash has experienced growth globally, with its highest popularity observed in Latin America.

eCash offers numerous advantages: low fees, a convenient payment process, no complex applications, no credit checks, and minimal online data sharing. Its rising popularity in LATAM, particularly in cash-centric countries like El Salvador, emphasizes its relevance. Despite a global tilt towards digital payments and a 5% decline in cash usage, about 85% of El Salvador's transactions are still in cash. This fact underscores the need for cash payment options in online stores, catering to a significant consumer segment.

Payment cards gain popularity

Aligned with global trends, credit, debit, or charge cards continue to be the primary payment methods in Latin America, encompassing the majority of online transactions.

Especially in Brazil and Chile, local credit cards are the preferred payment method for eCommerce purchases, constituting 36% and 40% of transactions, respectively. In Mexico, Colombia, and Peru, international credit cards take precedence. However, it is evident that credit cards, both local and international, have become the favored payment method in the region, utilized in 39% of all eCommerce purchases. In Brazil, this figure increases to 88%, particularly when funding digital subscriptions.

However, despite the rising number of adults possessing credit cards in Latin America, the utilization of both debit and credit cards, as well as online payment methods, has seen a decline from 2014 to 2017. In El Salvador, for instance, the percentage of the population aged 15 and older with ownership of a debit or credit card dropped from 24% in 2014 to 15% in 2021. Moreover, among cardholders, only 8% check their account balance online using mobile or internet banking, as per World Bank data.

Cryptocurrencies are here to stay

When it comes to cryptocurrency adoption across the region, despite its relatively smaller crypto economy compared to other regions, Latin America exhibits robust grassroots adoption. Cryptocurrency has gained significant prominence in everyday life across the region, particularly in countries grappling with currency devaluation. According to Mastercard's survey conducted this year, two-thirds of consumers in Latin America want greater flexibility to use crypto and traditional payment methods interchangeably in their day-to-day operations.

However, crypto regulatory approaches vary across the region. Countries like Mexico, Brazil, and Chile, which are leading the crypto adoption trend, have established explicit regulations mostly focusing on institutions dealing with crypto assets, while others, such as Colombia are in the process of adopting new rules. Argentina remains unregulated.

El Salvador is pioneering in the crypto payment realm, notably as the first nation globally to adopt Bitcoin as legal tender. This historic decision mandates all businesses to accept Bitcoin, backed by government policies ensuring easy conversion to US dollars. This bold strategy aims to enhance financial inclusion, targeting the unbanked 77% of citizens, and is part of a broader plan to strengthen the economy by decreasing reliance on the US dollar.

El Salvador stands at the forefront of crypto adoption with robust governmental backing for crypto payments.

El Salvador aims to tackle the very same issues as presented in the Americas Market Intelligence study, enhancing the efficiency of remittances, a vital component comprising 28% of the GDP by 2021, addressing financial inclusion for the underbanked population, and reducing reliance on the US dollar, fostering economic stability and autonomy.

However, two years into this groundbreaking move, Bitcoin adoption lags. El Salvador's central bank reported in early 2023 that only about 1% of remittances were received in Bitcoin, indicating a tepid response from the population. The National Economic Bureau of Economic Research found that the primary users of the government's Bitcoin app, Chivo Wallet, were already banked, younger, male, and educated, revealing a gap in reaching a broader demographic.

LATAM's Journey towards Modern Finance

This slow uptake highlights the need for comprehensive Bitcoin and blockchain education, especially among those outside the young, educated bracket. To encourage wider acceptance, El Salvador must develop more accessible, user-friendly solutions catering to a diverse population, thereby bridging the gap between innovative policy and actual usage.

With an office set up in El Salvador already, and plans for more in the region, NAKA’s mission is to be at the forefront of the transition this region is going through. Being there means being able to educate, provide solutions, gather direct feedback, collaborate with the government and institutions, and pioneering an innovative financial infrastructure for the future of El Salvador and LATAM in general. NAKA’s vision of helping facilitate this change is providing an absolutely simple payment solution, as well as currently lacking financial instruments to the underbanked population of LATAM, while at the same time solving the issue of Bitcoin and crypto volatility, that has been a deterrent for adoption, by leveraging stablecoins.

The key to mainstream cryptocurrency adoption lies in crafting payment solutions so user-friendly that they become second nature to users across all age groups, regardless of the type of asset being transacted. Intuitive platforms like NAKA, which seamlessly weave cryptocurrency transactions into existing payment infrastructure, coupled with options like asset savings accounts and advanced remittance tools, enable access to modern financial instruments to LATAM populations, which are severely underbanked.

Latin America's payment landscape is a vibrant ecosystem. E-commerce is booming, propelled by the rise of Alternative Payment Methods that cater to the unique consumer behaviors and accessibility needs of emerging markets. However, this growth is not without its hurdles, such as inconsistent internet access, varied regulatory environments, and a digital skills gap.

As the region navigates crypto regulation, there's a pressing need to ramp up digital literacy. A substantial part of the population still lacks basic computer skills or internet access, essential for leveraging online payment services effectively.

In essence, LATAM's payment practices are a complex mosaic, reflecting a blend of established preferences and evolving trends. This landscape offers a fertile ground for innovation and growth, while also posing distinct challenges that must be addressed to shape the region's financial future.