Latin America’s financial landscape harbors several factors that breed payments innovation: diverse populations, a large contingent of unbanked or underbanked consumers, and a need for efficient money movement across regional borders. The lack of a concrete set of banking habits makes it easier for new products—especially those mandated or supported by governments—to find root.
“Latin America is much more ripe for innovation than the U.S.,” says Craig Lancaster, Analyst in the Payments practice for Javelin Strategy & Research. “The United States has a well entrenched payment system, and each new thing has to find its way. Latin America is much more of a blank slate, so in a counterintuitive way, it was easier to imagine a digital framework.”
Lancaster is the author of Latin American Payments: The Emerging View From South of the Border, a new report from Javelin. It identifies four broad payments areas likely to see high levels of innovation in the months and years ahead. These include the further rise of instant payments, evolution in cross-border payments and platforms, entrenchment of digital currencies and blockchain technology, and deepening investments by legacy financial players in response to the flurry of activity from fintechs.
Leading the Way in Instant Payments
Cash remains king in Latin America, where it is still used at a considerably higher rate than the global pace. But the region is also ahead of worldwide usage trends in instant account-to-account (A2A) payments. Platforms such as Brazil’s Pix have allowed the region to considerably outpace worldwide usage in this area.
The bulk of instant payment development in Latin America has been initiated by central banks. Pix remains the standard-bearer of what’s possible through a concentrated central bank push, but other areas have fallen short of that. For example, Mexico has endured a tepid reception for CoDi, its instant payment system based on QR codes.
“Latin America has some well-established instant payment systems, dating back to before The Clearing House put the RTP Network into effect [in the United States] in 2017,” Lancaster says. “Interestingly, Pix in Brazil is not one of those older systems; it’s fairly recent and has developed really fast.”
One of the reasons for Pix’s quick success pics is that it received a strong push from Brazil’s central bank. Mexico is a nation that might have seen similar success but didn’t, in large part because the central bank wasn’t as aggressive in promoting CoDi.
Countries to Watch
One of the key countries that Lancaster will be watching is Argentina. It has historically been victimized by currency destabilization, and new president Javier Milei has talked about shutting down the Central Bank of Argentina. That could have significant ramifications for Transferencias 3.0, an open payment system under the imprimatur of the Central Bank of Argentina that facilitates payments through interoperable QR codes.
Chile, which had one of the earliest fast payment systems in South America, received a sizable influx of venture capital following the pandemic, and the investments that were seeded are starting to come up now. Areas such as fintech and e-commerce are still gaining the lion’s share of Chile’s VC dollars, which could potentially lead to greater innovation in those industries.
Chile’s TEF, begun in 2008, was one of the earliest fast payment systems in South America, implemented by the private sector in response to the government and regulators. But TEF was not envisioned as an open-API system, and Chile’s central bank is now moving toward an instant payment system with a foundation of low-value clearinghouses, which has received legislative approval.
Obstacles to Growth
The report also explores some of the problems facing the payments industry in the area, starting with the fact that more than 90 million Latin Americans remain on the outside looking in at formal banking systems. Despite its success with Pix, Brazil is home to nearly a third of them.
The region is also lagging in investments in artificial intelligence. AI’s ability to analyze large data sets and glean insights that drive innovation and customer experiences will drive the next generation of payments products. If Latin America’s economies do no invest in AI, we could see the progress now being made end up thwarted.
Data privacy standards remain a mishmash across Latin America. Mexico, Colombia, Peru, and the Dominican Republic, for example, have rules that date to the early 2010s, and may not be applicable in today’s information environment. Other nations, notably Brazil, instituted their rules later on, when the landscape had evolved. The inconsistencies of regional data protection have caused financial institutions to embark on a lot of difficult, intricate, and time-consuming work. More consistent standards would streamline the process for everyone.
Finally, data localization policies have slowed the movement toward open banking and interoperability. Such policies have impeded the flow of information, put a costly onus on data-dependent industries such as payments, compromise security, and are corrosive to countries’ economic standing. Again, a movement more toward universal policies would help keep the Latin American payments landscape progressing into the future.