Financial inclusion in Latin America: Regulatory trends and market opportunities

This post was originally published on the Brookings Institution’s TechTank blog and highlights results from the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard.

Financial inclusion growth and opportunities in Latin America

With its well-developed banking infrastructure and growing mobile ecosystem, Latin America presents a unique set of opportunities and obstacles with respect to promoting greater financial inclusion. From 2011 to 2014, there was a 12 percentage point increase in the number of adults in Latin America and the Caribbean with formal financial accounts, according to the World Bank’s Global Financial Inclusion (Global Findex) database. As noted in the 2015 GSMA report “Mobile financial services in Latin America & the Caribbean,” in 2014 Latin America and the Caribbean saw the fastest growth of any region in terms of new registered mobile money accounts.

Moreover, these accounts are often used for more advanced transactions that go beyond simple transfers: As stated in a 2015 post published by the GSMA, “ecosystem transactions (transactions that involve third parties, e.g. bill payment, merchant payment or bulk payment) already make up 27% of transaction volumes in Latin America & the Caribbean.” In contrast, only 6 percent of transaction volumes over the same period were considered ecosystem transactions in East Africa, where mobile money has been most widely adopted and used.

Moving forward, facilitating greater adoption of a suite of digital financial services (e.g., savings) will be a vital component of promoting sustainable financial inclusion in the region. Recent regulatory changes in several Latin American countries designed to promote a greater diversity of service providers should propel financial inclusion growth, although a need for regulatory clarity persists in some places. Financial inclusion strengths and challenges germane to our five Latin American FDIP countries are explored below.

Brazil: Branchless banking leadership combined with dynamic mobile market

Brazil achieved the highest ranking of any Latin American country on the Brookings 2015 FDIP Scorecard, ranking 3rd overall with a score of 78 percent. Brazil’s economy is the largest in Latin America, with a GDP (in current US dollars) of about $2.3 trillion as of 2014; for comparison, Mexico, the Latin American country with the second largest economy, had a GDP of about $1.3 trillion within that same period.

Brazil received strong country commitment and mobile capacity scores (89 and 83 percent, respectively) in the 2015 FDIP Scorecard and earned the highest regulatory environment score among the Latin American FDIP countries, which also included Chile, Colombia, Mexico, and Peru. As noted in the 2015 FDIP Report, Brazil launched a National Partnership for Financial Inclusion in November 2011, which has supported the development of a number of enabling financial inclusion initiatives. In 2013, Law 12865 and associated regulations permitted non-banks to issue e-money as payments institutions. Brazil boasted the largest mobile market in Latin America as of 2014, with a unique subscribership rate of about 57 percent in 2015 (a lower unique subscribership rate than Chile’s by about 7 percentage points, but otherwise higher than that of any of the other Latin American FDIP countries).

Brazil received 4th place on the 2015 FDIP Scorecard for adoption of selected traditional and digital financial services. As with many other countries in Latin America, branchless banking(i.e., access to formal financial services beyond a traditional brick-and-mortar bank) through “agents” is popular in Brazil — as of 2014, Brazilian banks’ agent networks had a presence in all of the country’s approximately 6,000 municipalities, contributing to formal account growth. Chile was the only Latin American country that received a higher ranking for the adoption dimension, placing 2nd. In terms of account usage, government-to-person payments comprise a significant source of activity for formal accounts: The 2014 Global Findex report noted that among recipients of government payments in Brazil, 88 percent received their transfers directly into an account.

Yet according to the Global Findex, about 32 percent of Brazilian adults age 15 and older still do not have accounts with a formal financial institution or mobile money provider. As with the other Latin American countries in the FDIP sample, mobile money adoption in Brazil has remained low: Brazil received the lowest score (one out of three possible points) for all six mobile money indicators included in the 2015 FDIP Scorecard. However, given that as of 2014 Brazil had the fifth-largest global smartphone market in the world in terms of subscribers, a combination of growing smartphone penetration and an increasingly enabling regulatory environment should drive greater adoption of digital financial services in the future.

Chile: Opportunities for enhanced e-money regulatory clarity

Chile tied with Colombia and Turkey for 6th place on the overall 2015 FDIP Scorecard. Chile’s financial inclusion environment is characterized by a firm national commitment to financial inclusion (earning a country commitment score of 89 percent) but a less developed mobile money environment than the other Latin American FDIP countries. While Chile’s unique mobile subscribership rate and 3G network coverage rate by population are higher than and on par with other countries in the region, respectively, Chile’s mobile money offerings are limited. The lack of a robust mobile money market contributed to Chile’s mobile capacity score of 72 percent, the lowest score among the FDIP Latin American countries.

Chile’s regulatory environment score (67 percent) was also the lowest of the Latin American FDIP countries, primarily due to a lack of regulatory clarity surrounding digital financial services. Developing or clarifying regulations pertaining to electronic money in particular could potentially drive more engagement with the sector and advance the diversity of mobile money providers and offerings. Further, supporting the interoperability of digital and traditional financial services could enhance the utility of these products for customers.

Given that 37 percent of adults in Chile did not have an account with a formal financial provider as of 2014, there is also room for growth in terms of expanding financial inclusion. However, it should be noted that Chile earned the highest adoption ranking of any Latin American country featured in the 2015 FDIP Scorecard. While Chile’s adoption levels with respect to mobile money services were limited, adoption rates of other formal financial services were among the highest of the FDIP countries. Chile received three out of three possible points for all but one indicator (savings at a formal financial institution) related to traditional financial services. Chile’s performance on the adoption dimension of the scorecard contributed to its 6th place ranking overall.

While Chile’s mobile money adoption rates are low, use of other digital financial services is increasingly popular. For example, as noted in the “2015 Maya Declaration Progress Report,” since 2012 the number of CuentaRUT accounts (accounts that feature debit cards associated with a savings account provided by Chile’s BancoEstado) has increased by about 47 percent. As of 2014, there were over 7 million active CuentaRUT cards in Chile.

Colombia: Regulatory advancements coupled with sustained country commitment

As noted above, Colombia tied with Chile for 6th place on the overall 2015 FDIP Scorecard. Colombia has demonstrated strong commitment to financial inclusion, including through involvement in multinational organizations such as the Alliance for Financial Inclusion (AFI). An example of Colombia’s national-level financial inclusion commitment is the 2006 establishment of Banca de las Oportunidades, an entity charged with fostering regulatory reforms conducive to financial inclusion. Another key player in the financial inclusion space is the Intersectoral Economic and Financial Education Committee, created in February 2014 under Decree 457.

In terms of the country’s regulatory environment, Law 1735 of 2014 permitted new institutions, called Sociedades Especializadas en Depósitos y Pagos Electrónicos, to offer mobile financial services. As part of the law, proportionate “know-your-customer” (KYC) requirements were also instituted for under-resourced customers in order to facilitate greater access to financial services among low-risk populations. In July 2015, Decree 1491 implemented Colombia’s financial inclusion law and highlighted the regulatory regime for the mobile money market. Colombia’s regulatory environment earned a score of 89 percent, ranking it 2nd among the Latin American FDIP countries in this dimension.

On the supply side, banking correspondents (also known as agents) have been utilized to extend financial access to underserved populations.  As of 2015, all of Colombia’s 1,102 municipalities had at least one financial access point, defined as bank branches, banking correspondents, and ATMs. Another innovative approach to branchless banking in Colombia is bank Davivienda’s initiative to use DaviPlata mobile wallet accounts to distribute government transfers to more than 900,000 recipients of welfare program “Familias en Accion.”

With respect to demand side figures, Colombia tied with Mexico for 7th place on the adoption dimension. As of 2014, about 38 percent of adults in Colombia had an account with a formal financial institution, and about 2 percent of adults were mobile money account holders. In terms of advancing future mobile money use, Colombia received the highest score of the Latin American countries on the mobile capacity dimension; thus, Colombia is well-positioned to advance access to and use of mobile money services in the future. Promoting usage of appropriate, quality financial services is critical, as dormancy rates have been identified as an obstacle to financial inclusion; about half of accounts in Colombia (including savings accounts, simplified accounts, and electronic deposits) were identified as dormant in 2014.

Mexico: Recent reforms may enhance competition and drive digital takeup

Mexico ranked 9th on the overall 2015 FDIP Scorecard, with adoption of traditional and digital financial services as its highest-ranked dimension. Among the Latin American FDIP countries, Mexico features the greatest parity in terms of formal financial account ownership rates among men and women, at about 39 percent each.  In terms of national-level commitment to financial inclusion, Mexico tied with Peru for the highest ranking among the Latin American countries. AFI’s Maya Declaration was signed at the 2011 Global Policy Forum held in Riviera Maya, Mexico, signaling Mexico’s public commitment to financial inclusion.

With respect to mobile capacity, as of the first quarter of 2015 Mexico’s unique subscribership rates were the lowest of the Latin American countries. Mexico tied with Chile and Brazil for 3G network coverage by population. In terms of mobile money, Mexico’s market is still developing; several providers were available as of May 2015, but the extent of offerings was somewhat limited. As noted in the GSMA’s “Mobile Economy: Latin America 2014” report, new telecommunications reforms recently passed in Mexico are expected to affect the mobile market and potentially increase competition among the telecommunications sector. This increased competition could in turn drive the development of a greater array of innovative, affordable mobile money products.

Regarding Mexico’s regulatory environment, the country has been lauded for its risk-based KYC requirements that enable underserved individuals to access low-value accounts without fulfilling the full array of traditional identification processes, which can sometimes be burdensome for under-resourced groups. Under Mexico’s four-tiered KYC system (introduced in 2011), “level one” (very low-risk) accounts feature monthly deposit limits and a maximum balance limit of about 400 dollars; accounts can be opened at a bank branch, banking agent, over the internet, or by telephone. Higher-tier accounts have more stringent KYC requirements. A 2015 AFI article noted that Mexico’s banking and securities regulator, the Comisión Nacional Bancaria y de Valores, indicated about 7.5 million new accounts were opened between August 2011 and September 2012, including over 4 million “level one” accounts.

Mexico tied with Colombia for 7th place on the adoption dimension of the 2015 FDIP Scorecard. About 39 percent of adults in Mexico held accounts with a formal financial institution as of 2014, while about 3 percent of adults held mobile money accounts. As with other countries in Latin America, debit card and credit card use were much higher than mobile money use as of 2014, although usage of both kinds of cards was lower in Mexico than in several other Latin American FDIP countries such as Brazil and Chile. Initiatives such as the Saldazo debit card, which enables customers to use a debit card associated with a savings account and does not require a minimum balance, have helped drive adoption of digital financial services in Mexico.

Peru: Enabling regulatory environment, but constrained adoption of financial services

Peru presents perhaps one of the most interesting paradoxes among the FDIP countries. While Peru’s regulatory environment has been consistently recognized as among the best in the world for enabling financial inclusion, adoption of formal financial services remains quite low. Peru received 17th place overall on the 2015 FDIP Scorecard, which can primarily be attributed to its low adoption score: Peru received a 15th place ranking on the adoption dimension, the lowest score among the Latin American FDIP countries. However, we anticipate that recent regulatory changes in Peru, coupled with increasing smartphone penetration rates (Peru’s 2014 adoption rates were about 12 percentage points below the Latin American average), will facilitate adoption of digital financial services and drive greater financial inclusion in the future.

With respect to the supply side aspect of financial inclusion, as of 2014 about 92 percent of Peru’s population lived in a district with access to financial services, according to the Superintendencia de Banca, Seguros y AFP (SBS) del Peru. Nonetheless, demand side figures lag behind: The Global Findex found that only about 29 percent of adults had an account with a formal financial provider as of 2014. Peru received a “1” for two-thirds of the non-mobile money indicators on the adoption dimension of the 2015 FDIP Scorecard, and mobile money adoption was negligible. Moreover, as of 2014 there was a 14 percentage point disparity in financial account ownership between men and women, the highest financial inclusion “gender gap” among the Latin American FDIP countries.

However, given Peru’s strong national commitment to financial inclusion (reflected in Peru’s country commitment score of 94 percent) and legislative initiatives designed to promote an enabling regulatory environment, we fully anticipate that financial inclusion growth will accelerate in the future. For example, Peru recently finalized its national financial inclusion strategy, as discussed in our earlier post. Moreover, Peru has adopted laws and regulations that permit a greater diversity of players to enter the financial services market. Law 2998 of January 2013 allowed both banks and non-banks to issue e-money, and October 2013 regulations issued by the SBS enabled e-money issuers to follow a simplified account opening process. These initiatives should facilitate greater access to and usage of formal financial accounts in the future.

In terms of electronic payments specifically, diversifying the mobile money market and increasing unique subscribership could help facilitate greater adoption of mobile money services. Demand side factors, such as ensuring that services are a good fit for customers, are also critical — as evidenced by the fact that Mexico, which had comparable smartphone adoption rates to Peru and lower unique subscribership rates as of 2014, features significantly higher rates of mobile money adoption across all demographics than Peru. Peru is making a concerted effort to develop innovative electronic platforms — for example, the Peruvian Association of Banks (ASBANC) is working on the creation of an electronic money platform accessible by both financial institutions and telecommunications companies. Implementation of this interoperable platform is expected to promote further adoption of digital financial services.

Editor’s Note: This post is part of a series on the 2015 Brookings Financial and Digital Inclusion Project (FDIP) Report and Scorecard, which were launched at a Brookings public event in August. Previous posts have highlighted regional findings from Southeast and Central Asia, the Middle East, and Africa, as well as selected financial inclusion milestones from FDIP countries. This post focuses on key financial inclusion achievements and challenges regarding the five Latin American FDIP countries: Brazil, Chile, Colombia, Mexico, and Peru.