Why Digital Wallets Lack Digital Liquidity in LatAm
Most stored value wallets attempt to aid the underserved by replacing traditional bank accounts. The wallet, in theory, stores digital funds and can be used to make various types of payments: mobile top-ups, utility payments, retail payments and purchases online. But truly enabling these payments in Latin America is no small task. What is easily forgotten is that to facilitate these myriad payments, wallets must essentially build out an entirely new payments network.
Digital wallets have two main competitors in Latin America: cash and cards. Cash is accepted everywhere, nearly without exception (save some e-commerce companies). Credit and debit cards run on Visa and Mastercard rails, networks that have been built globally over more than 60 years. By connecting to these card networks, banks enable their customers to make purchases at millions of locations worldwide. The fintech companies developing digital wallets for the underbanked want to compete with these payment methods—but so far they lack the robust payments network they need to do so.
2 Keys for Digital Funds to Flow
Digital liquidity is a buzzword in the wallet industry, and for good reason. Wallets want their ecosystems to be flush with digital currency. This guarantees fee revenue and attracts investors and partners. However, to achieve digital liquidity, digital wallet products in Latin America need to convince users to do at least two things:
Inject funds into the ecosystem
Keep their funds in digital format within the ecosystem
Wallet providers are starting to catch on to this first requirement. So far, no one has been able to convince users to willingly deposit funds into a digital wallet; Latin Americans are reluctant to turn over their hard-earned cash into this novel digital format. Instead, wallet providers have found ways to inject funds into their wallet ecosystems by way of various mechanisms. These include:
- International remittances: Users in Latin America receive funds sent to them from abroad into a digital wallet. Cases include BillMo and Abra (Mexico)
- Social benefits: The government deposits monthly social benefits into a digital wallet. Cases include DaviPlata (Colombia)
- Loans: Micro-finance institutions deposit loan funds into a digital wallet. The only case known to me currently is ePesos (Mexico), although several lender-wallet partnerships are currently in the works across the region.
- Payroll: employers deposit employee wages into a digital wallet. Currently under consideration/in development by various wallet products
While wallet users cannot thus far be convinced to willingly load wallets with their cash, they are happy to receive funds digitally, because after all, they are receiving money.
However, wallets run into problems when end users attempt to use their digital funds.
Cash CrunchBy and large, the number-one transaction type initiated by digital wallets is a cash-out transaction, in which wallet users who have received funds from a beneficiary withdraw the digital funds in cold, hard cash. This is much to the chagrin of wallet providers, who wish to create an ecosystem of digital currency. At best, however, digital wallets in Latin America enable payments with perhaps only 50 merchants and service providers. This is of little use to Latin American digital wallet users, who, let us remember, are underbanked, likely work in the informal economy and are low-income. They shop mostly at small neighborhood stores who do not even accept credit cards, let alone an obscure digital wallet. Cash, in contrast, is accepted everywhere.
>>>This demonstrates that stored value wallets in Latin America have thus far failed at required component number two: compelling users to keep their money in the wallet instead of immediately cashing it out.<<<
Why Saldazo Is Working
But not everyone is struggling with cash-out challenges. Digital wallet providers may want to look at Tarjeta Saldazo, which isn’t a wallet at all, but a prepaid debit card offered by convenience store chain, Oxxo, in partnership with Banamex. With 15,000 brick and mortar locations throughout Mexico, Oxxo is a well-loved brand where many go to conduct financial transactions. The Tarjeta Saldazo essentially serves the same function as a wallet: it replaces a traditional bank account and enables electronic payments.
However, Saldazo has two distinct advantages over competing wallet products:
It is a card product branded by Visa, meaning that it can be used wherever Visa is accepted.
It is backed by Oxxo, a household name in Mexico that’s trusted by the rich and poor alike.
As a result, the Tarjeta Saldazo is the most successful iteration of a financial product aimed at the unbanked. Today, there are some 7 million Saldazo cards in circulation in Mexico. When you compare this to an estimated 10 million digital wallet users in all of Latin America, Saldazo looks like a giant.
The Reasons Saldazo Works so WellA prepaid debit product makes sense for the underbanked in Latin America because payments cards are an aspirational product—a marker of middle class status. Operating on Visa rails, Saldazo can be used anywhere Visa is accepted within Mexico—instead of trying to create its own payment network, it connects to the world’s largest existing network.
The other building block to Saldazo’s success is the Oxxo brand name and its brick-and-mortar presence. Several other digital wallets offering a companion prepaid card, such as MasterCard’s Tu Dinero Móvil in Peru, have not enjoyed Saldazo’s success, in part because they are not backed by a trusted brick and mortar retailer.
A Hybrid Solution?
Like so many other examples within payments, it would seem that Latin America is not quite ready for a fully digital experience for the underbanked. Rather, it requires a hybrid digital/physical model. This makes sense when we consider other local payments solutions in the region: cash payments make up around 20% of all e-commerce sales in the region; Uber has resorted to cash acceptance to maximize its user base; credit cards still are applied for and acquired almost exclusively in bank branches. The Tarjeta Saldazo might represent the hybrid step required in the customer life cycle in Latin America toward a fully digital experience.
In the absence of a Saldazo-style payment card, digital wallets must give customers a reason to keep funds within their ecosystems. Digital wallet Nubi in Argentina has done just this, through partnership with PayPal. As of Q2 2017, Nubi users can load funds into their wallet to be used to make purchases internationally wherever PayPal is accepted. This is an appealing incentive; international e-commerce brands are highly attractive to Argentines. Of course, Nubi caters to banked customers, not the unbanked, and has a focused value proposition: enabling international e-commerce.
“In the absence of a Saldazo-style payment card, digital wallets must give customers a reason to keep funds within their ecosystems.”Another example is the Mexican start-up MoneyPool, which enables users to create social groups among friends and pool money to be used for a specific purpose. A successful application is moms who want to pool money for a school or community event. This has a clear and culturally relevant use case; whether or not it is scalable is another question.
A Step That Shouldn’t Be SkippedSo far digital wallets in Latin America function primarily as a channel to disburse cash. Little additional value has been created, and mobile wallets may actually add friction for users who are looking for cash. A select few wallets are on the right track—those that provide a foolproof cash-in mechanism, and others that have developed a very specific use case. These products may be leapfrogging over an important step, however, in the effort to go fully digital: the brick-and-mortar retailer partner. No one has yet proven that this step can be skipped when it comes to the unbanked in Latin America today.
Contact Americas Market Intelligence for customized analysis and market intelligence for implementing digital wallets successfully in Latin America, as well as specialized market research for LatAm e-commerce, debit/credit cards, remittances, mobile commerce and other key payments topics affecting Latin America.