Latin America and the Caribbean is undergoing a transformative shift in digital payments. Between 2019 and 2023, the average number of electronic transactions in the region grew threefold. This surge in the way in which transactions are made in the region coincides with a strong preference for digital payment methods. According to the Inter-American Development Bank’s landmark study Beyond Cash: The Digital Payments Revolution in Latin America and the Caribbean, at least half of the population in 16 out of 17 countries with available data prefers digital payments over cash. This digital payment revolution holds great potential for boosting efficiency, financial inclusion, and economic growth.
That this revolution occurred, amid severe structural issues including low trust in financial institutions and high rates of informality, is a testament not only to a dynamic private sector and its capacity for innovation, but, as the report argues, to public policies that addressed key supply and demand issues. Rising to the needs of the moment, policies that successfully aligned technology and incentives helped digital payments become the backbone of the economy. A key message of the report –- given the wide variety of successful strategies employed across the region — is that there is no one-size-fits-all solution.
The Actions Behind this Revolution.
One obstacle on the supply side to greater adoption of digital payments by users has been the problem of fragmented systems. While the number of digital payment providers in the region grew substantially, users often can only transact cheaply and easily with users in the same network. This obeyed a certain logic: providers could consider unprofitable investments that made their network compatible if those investments also benefited the users of other platforms.
The report emphasizes the importance of actions to promote interoperability in payment systems. In recent years, at least 11 countries in the region established dispositions or mandates to promote interoperability. These actions contributed to creating an enabling environment for users to send and receive payments to and from other users, regardless of the provider.
The development of this more inclusive framework varied across countries. In some countries, the creation of the payment platforms was left to the private sector but the achievement of interoperability was a consequence of public policies. In other countries, the financial authorities took the lead in both developing the payment platform and the corresponding regulation to achieve interoperability. In either case, the actions to promote interoperability led to a sharp, sustained uptick in interbank transactions.
Another problem came from the demand side; specifically, the reticence of some users, to connect to a digital payment system when those they transactwith were not connected. Here the solution was some big push policies from governments that encourage the mass adoption of digital modes of payments, including tax rebates for digital transactions, mandates to pay wages electronically, and most especially efforts by social programs to use digital payments to disburse transfers to beneficiaries. For example, the share of beneficiaries of social programs in our region who receive their benefits digitally grew from 40% in 2014 to 80% in 2021.
The Challenge of Informality
With more than half of the region’s workforce in the informal sector, informality remains a challenge. Digital transactions make firms’ inflows and outflows traceable, which can potentially increase tax compliance. However, the report argues that this is not something that should be taken for granted. The same incentives that drive the decisions of firms to transact informally can shape the outcomes of well-intentioned policies to promote the use of digital payments. After Uruguay imposed a mandate requiring the electronic deposits of salaries, for example, a recent study showed that many firms in cash-intensive sectors started operating informally, leading to an increase in informal employment and a more than 3% decrease in tax revenues. While policymakers have launched well-intentioned initiatives, they will have to take into account these unintended consequences as they work to push financial digitalization forward.
The Payoffs of Financial Digitalization
The reports argues that the payoffs are potentially immense. Broad access to digital payments means more transactions, which can generate valuable data. That, in turn, can help expand access to other financial services, such as savings accounts and credit, that might otherwise be unavailable to underserved populations.
Regulations that enable FinTechs to continue to grow and fairly compete with incumbents in the industry and the provision of more support for financial institutions that have a focus on inclusion, are essential in this regard. So is the digital public infrastructure that can allow the secure and seamless sharing of consumers’ financial data to third-party providers so that they can increase the financial options available to underserved segments. Policymakers, regulators, and financial service providers all have a critical part to play in these efforts to deepen financial digitalization, as their collaboration is key to reforms that can lift remaining barriers. The report details experiences from the region. It aims at helping countries choose what is right for them, given the unique social and economic circumstances of each country, and help them unleash the possibilities of greater economic efficiency, growth, opportunity, and inclusion that financial digitalization can bring.
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