As yet another new year starts with headlines about unending protests, an economic downturn and an attempted coup in Latin America, some interesting, and surprisingly enduring, trends are flying under the radar. Defying dire predictions, remittances to the region are estimated to have reached 142 billion dollars in 2022, a new record and an 8.4% increase from 2021, according to the World Bank.
In recent years, Latin America has been the only region that has experienced sustained growth in remittances, making it a very attractive market for financial technology (fintech) companies.
It did not have to be this way. At the onset of Covid-19, it was widely assumed that economic setbacks would mean fewer remittances and the World Bank predicted they would drop by 20%, “their sharpest decline in recent history.”
They were wrong. Remittances to Latin America and the Caribbean plunged in the beginning of the pandemic but rebounded quickly and even climbed in some countries in Central America, the second largest recipient in the region, following Mexico. Millions of migrant workers kept their jobs and sent much-needed money to their families in Latin America, where unemployment surged. Most remittances come from the United States and Europe, but there’s also a growing intraregional market as political unrest opens new migration corridors.
Technology has played a key role in driving the record number of remittances in Latin America in recent years driven by the growing penetration of mobile devices and services. Paula Valle, country manager for Latin America and director for the Americas at WorldRemit, a global money transfer app, expects the trend to continue this year as “consumers become more tech-savvy and opt for the convenience of digital solutions.”
WorldRemit´s “Cost of Living 2022” study, indicates that the number of people using web pages, mobile applications and bank transfers doubled to 16% between 2016 and 2021. The number of fintechs operating in the region more than doubled between 2018 and 2021 and many of them are homegrown. Almost a quarter of fintechs are from Latin America and the Caribbean, with Brazil, Mexico and Colombia as the main financial innovators due to their economies of scale, easier regulations and legal framework.
The until recently staid world of remittance was ripe for change. Traditionally, remittances to Latin America were made through traditional institutions like banks and specialized companies like Western Union, and MoneyGram. But these institutions charge high commissions of around 6% of the money sent. Digital apps make the process cheaper, faster and easier. “The beneficiary can collect it 24/7 without ever leaving his or her home, without wasting time or money going to a retail store and, above all, without the risk of being mugged,” says Ulises Téllez, CEO of Pagaphone, a fintech offering cross-border payments from the United States into Mexico. As for commissions, they range approximately from zero to US$2.
So other than making remittances cheaper, and faster what can fintechs contribute to a region where cash still reigns? For one thing, they can help address one of the region’s biggest economic challenges: financial inclusion. “We’re trying to reach part of the population that today doesn’t have banking services, to offer a financial service that allows them to forget about cash and start operating more digitally and reliably,” Carlos Hernandez, CEO of Mexico’s ABC Capital, recently told Bloomberg, a newswire. ABC Capital is in the process of being acquired by Argentine fintech Ualá. According to Tomas Bercovich, CEO and founder of the Chilean remittances fintech Global66, Latin America has more than 600 million citizens of which 300 million are underbanked.
It’s a large world
Traditional players have noticed the switch to digital and are making partnerships to exploit the opportunity. Ualá founder Pierpaolo Barbieri has said that ABC Capital will operate a new remittance service from the U.S. to Mexico in partnership with Moneygram. And Moneygram has also announced a partnership with Jingle Pay, a payments app based in the United Arab Emirates, to send digital remittances to 160 countries.
Meanwhile, PayPal’s international transfer service Xoom has announced an agreement with Visa to send remittances directly to debit card holders in 25 countries. The list includes Indonesia, Pakistan, the Philippines, and Vietnam, which add up to over 700 million people in total population, plus countries in Europe, the Middle East, and Latin America.
But about those fees
The U.S. is the largest source of remittances by volume, with $72.7 billion in 2022, according to the World Bank. Now the Consumer Financial Protection Bureau, a regulatory agency the U.S. Congress started after the 2008 financial crisis, is looking into remittance fees to analyze if companies are complying with its rules about cross border transfers, which regulate service fees and also exchange rates. This could further benefit digital players which often compete by offering lower fees and better rates.