LatAm banks welcome new mobile payments despite short-term impact on fees

Over the past year and a half, central banks in Brazil, Mexico and Argentina have launched digital payment systems in an attempt to foster competition, boost financial inclusion, and reduce the prevalence of cash in the region. These payment systems, which rely heavily on digital wallets and QR technology, are for the most part faster, cheaper and as secure as traditional means of payment.

The rollout of these instant payments systems remains in its embryonic stages, but the adoption of Brazil's PIX system by more than 80 million users in under six months is rapidly changing the payments ecosystem.

The recent development of countrywide standards for real-time money transfers has been well received in the financial sector, where analysts believe that a short-term loss in fee income — particularly from cards — will be offset in the medium term by the growth of transaction volume and greater access to data on their clients' behavior.

Although analysts do not see the emergence of cheaper retail payment systems as a large risk for banks, they underscore that a loss in fee income will be inevitable.

Consumer credit card fees are "the most important" source of payment revenue for Latin American banks, and amounted to over 1% of GDP in 2018, well above the 0.4% in Asia and 0.2% in Europe, bank expert Claudio Gallina wrote in a recent Fitch Ratings report.

The "increased commoditization" of payments will pressure revenue lines as users turn to these new payments systems, Gallina noted.

Betting on technology

Brazil's three largest privately controlled banks — Banco Santander Brasil SA, Banco Bradesco SA and Itaú Unibanco Holding SA — reported 88.5 billion reais in fee income in 2020, or $16.21 billion. Card income, in turn, represented 31.4% of fee income and 9.5% of total income, or approximately 8.41 billion reais.

The net fee income pool for Mexico's three largest banks totaled an estimated 67 billion Mexican pesos for 2020, or $3.37 billion. Net fee income from cards for heavyweights like Grupo Financiero BBVA Bancomer SA de CV and Banco Santander México SA Institución de Banca Múltiple Grupo Financiero Santa can make up between 30% to 40% of net fee income.

PIX in Brazil, CoDi in Mexico and Transferencias 3.0 in Argentina are all varieties of such real-time payment models aimed at attracting customers through their mobile phones. Latin American regulators are betting heavily on technology to boost levels of financial inclusion, which lag far behind those of more developed economies.

"Banks do not see this as a risk," Guilherme Machado, a bank director with S&P Global Ratings, said in an interview. "It facilitates transactions, e-commerce and a bunch of things that they are interested in."

According to Machado, transactions through PIX in Brazil already make up 80% of total transfers in some banks, which are now designing new ways to monetize clients. Banks' priority will not be about charging fees, but rather cross-selling and monetizing as well as retaining clients within the ecosystem, Machado said.

Banking on mobile

Roughly one in every two adults in Latin America does not have a bank account, according to 2017 World Bank data. Despite state-led efforts in several countries to incentivize the access of the underbanked population to digital financial services during the COVID-19 pandemic, structural deficits remain.

The use of smartphones has meanwhile skyrocketed, and central banks have taken notice.

Speaking at the Bank of International Settlements Annual Conference, Banco de México Governor Alejandro Díaz de León said that an estimated 40 million people in Mexico have a mobile phone but do not have a bank account. "Clearly (CoDi) is the type of service that we can use to narrow that gap," he said.

That gap has long been seen by the regional payment industry as a promising incentive, with several fintech players emerging to address the underbanked segment.

Earlier in March, Facebook's WhatsApp, which is ubiquitous in Brazil, got approval from the regulator to enable payments. "Those are the kind of things that can take off in a place like Brazil," Steven Leslie, head of financial services at The Economist Intelligence Unit, said. "I think they would have trouble taking off in Britain or the U.S., or in any very highly developed market."

The fact that central banks have made an entrance through digital payments might generate a unique ecosystem over time, Leslie said, with no exact counterpart in other parts of the world.

In Mexico, BBVA Bancomer, Grupo Financiero Citibanamex SA de CV and BanCoppel SA Institución de Banca Múltiple account for 90% of CoDi users.

"Most users are signing up through their existing financial institutions," Leslie said. "Although it might provide an opening for fintech challengers, it does not seem that it will alienate most people from their existing financial relationships."

PIX success

More than 80 million users have signed up since Banco Central do Brasil rolled out PIX in November. Individuals and businesses have reported transactions totaling 169.53 billion reais, or roughly $30 billion. Nearly three-quarters of individual users are 39 or younger, according to regulator data.

Higher bank penetration in Brazil and the fact that fintechs were actively included in the network was key to the success of Pix, industry experts said.

In Mexico, where banking penetration is lower and fintechs were not involved in the rollout of digital payments network CoDi, adoption rates have lagged.

More than a year and a half since its rollout, most Mexicans still do not know what CoDi is. Some 8.5 million accounts have been opened as of April 2021, with transactions amounting to 1.6 billion Mexican pesos or roughly $80 million.

"A lot of transactions in Mexico are still being done in cash," Eduardo Lopes Ponce, a bank analyst with Mexican lender Banco Ve por Más SA Institución de Banca Múltiple Grupo Financiero Ve por Más, told S&P Global Market Intelligence. "Even though the bank invested to adopt this technology, it takes time for businesses and citizens to get used to this new payment habit."

Meanwhile, in Argentina, Banco Central de la República Argentina launched Transferencias 3.0 in December 2020, to boost digital payments by allowing QR codes to interoperate so that all bank accounts and digital wallets can have access to the instant payments network.

Transferencias 3.0 will have to compete with e-payments giant Mercado Pago, which has aggressively deployed a network of QR codes, stepping ahead of the competition to achieve a dominant position in the market.

Observers agree that, ultimately, disruption to banks will be limited, and that with lots of ground to cover in terms of inclusion, all players can benefit from a growing market.

"I think that people exaggerate the extent of the disruption on banks and also underestimate their ability to respond," EIU's Leslie said. "I would not call competitors such as [Brazilian digital bank] Nu Pagamentos SA or [Argentine payment company] Ualá as total disruptors," he added.

"They are not going to wipe out the bank business," he said. "There are certain bits of it that they can grab, but banks and network operators are not going to go the way of the video shop or the travel agent."