The Digital Financial Services Ecosystem in Latin America and the Caribbean

BRINGING SMART POLICIES TO LIFE THE DIGITAL FINANCIAL SERVICES ECOSYSTEM IN LATIN AMERICA AND THE CARIBBEAN Written by: AFI SPECIAL REPORT CONTENTS ABOUT THE ECONOMIST INTELLIGENCE UNIT FOREWORD BY THE ALLIANCE FOR FINANCIAL INCLUSION 3 The Economist Intelligence Unit (The EIU) is the research arm of EXECUTIVE SUMMARY 4 The Economist Group, publisher of The Economist. As the world’s leading provider of country intelligence, we help governments, INTRODUCTION 5 institutions and businesses by providing timely, reliable and impartial analysis of economic and development strategies. FINDINGS AND TREND ANALYSIS Through our Public Policy, Economics, and Politics Consulting practice, we provide evidence-based research for policymakers Infrastructure readiness 7 and stakeholders seeking measurable outcomes in fields ranging from gender and finance to energy and technology. We conduct Regulatory readiness 17 research through interviews, regulatory analysis, quantitative modelling and forecasting, and display the results via interactive Population readiness 21 data visualisation tools. Through a global network of more than 350 analysts and contributors, The EIU continuously assesses and forecasts political, economic and business conditions in over 200 POLICY CONSIDERATIONS 27 countries. For more information, visit www.eiu.com. CONCLUSION 28 For further information, please contact: > Stefano Scuratti, Regional Director, APAC: ANNEX 1: DFS ECOSYSTEM ASSESSMENT MODEL 30 [email protected] ANNEX 2: COUNTRY-LEVEL FRAMEWORK ASSESSMENTS 33 > Vaibhav Sahgal, Consultant: [email protected] GLOSSARY 56 > Jennifer Wells, Senior Marketing Executive: [email protected] REFERENCES 56 ABOUT THE ALLIANCE FOR FINANCIAL INCLUSION (AFI) ABOUT THIS REPORT The Alliance for Financial Inclusion (AFI) is the world’s leading This document builds on a research programme undertaken organization on financial inclusion policy and regulation. More than by The Economist Intelligence Unit (The EIU) between January 100 member institutions make up the AFI network including central and June 2018 and supported financially by the Alliance for banks, ministries of finance and other financial regulators from Financial Inclusion (AFI). The views and opinions expressed in this over 90 developing and emerging countries. Together, AFI and its publication are those of The EIU and do not necessarily reflect members work to increase access to quality financial services for the official position of AFI. The foreword was written by AFI. unserved and underserved households and communities. While every effort has been made to verify the accuracy of this information, The EIU cannot accept any responsibility or liability For further information, please contact: for reliance by any person on this report or any other information, > Luis Trevino Garza, Financial Inclusion Data Policy Manager: opinions or conclusions set out herein. [email protected] Please use the following when citing this report: > Carlos Alberto Moya Franco, Regional Manager LAC Region: The Alliance for Financial Inclusion, 2019: “The digital financial [email protected] services ecosystem in Latin America and the Caribbean.” > Nicolas Morales Chavez, Program Officer LAC Region: [email protected] > Monika Lajhner, Head of Communications: ACKNOWLEDGMENTS [email protected] The work of the Alliance for Financial Inclusion in Latin America and the Caribbean region and development of this publication are supported with funds from Canada’s International Development Research Centre (IDRC). As part of the research process for this project, in-depth interviews were conducted with policymakers and experts from central banks, regional banks and other financial services operators. We would like to express our thanks to all of the experts for their advice and input. The research programme was overseen by Stefano Scuratti (project director) and led by Vaibhav Sahgal (project manager). The following researchers, country analysts and specialists contributed to this study: Eileen Gavin, Anna Gilmour, Jose Manuel Gomez, Steven Leslie, and Kate Parker (lead editor). AFI acknowledges contribution by Sergio Campillo in outlining and developing the research of this report. The AFI project team was led by Luis Trevino. Carlos Moya and Nicolas Morales from the AFI Regional Office provided overall guidance to the project development. © 2019 (July), Alliance for Financial Inclusion. All rights reserved. 3 THE DIGITAL FINANCIAL SERVICES ECOSYSTEM IN LATIN AMERICA AND THE CARIBBEAN FOREWORD BY THE ALLIANCE FOR FINANCIAL INCLUSION The Alliance for Financial Inclusion (AFI), a policy leadership alliance, owned and driven by members with the common objective of scaling up financial inclusion at country level, has been able to facilitate the implementation of impactful policy changes through its cooperative model that imbeds peer learning, knowledge exchange and peer transformation. It has been a decade since AFI began this quest to address the global challenge of financial exclusion. We have witnessed tremendous achievements in financial inclusion from our membership, driven by practical policy solutions that draw on lessons across the Network. It is imperative that such lessons are highlighted from each member’s perspective on how AFI’s peer learning approach has been instrumental in enabling transformation. Therefore, AFI commissioned The Economist Intelligence Unit (The EIU) to document the state of practice of digital financial services from AFI members in Latin America and the Caribbean. Key policy lessons and challenges highlighted in the report are expected to enhance the design and implementation of smart policies and regulatory reforms at the country level to create an enabling digital ecosystem – both at the supply and demand side – and foster financial inclusion in the region. We appreciate The EIU team’s effort and our AFI members’ collaboration to make this report possible, trusting that the results will contribute to policy guidance among the Latin American and the Caribbean regulators and enable impactful change in the digital financial services (DFS) ecosystem. Dr. Alfred Hannig Executive Director Alliance for Financial Inclusion 4 THE DIGITAL FINANCIAL SERVICES ECOSYSTEM IN LATIN AMERICA AND THE CARIBBEAN In most cases these are based on tiered Know Your EXECUTIVE SUMMARY Customer (KYC) requirements, particularly in the banking sector and to some extent in non-banking financial service providers. Interoperability of systems There is a broad-based consensus on is generally improving. Standards are more mixed across non-bank providers of DFS, with low levels of electronic the part of governments and regulatory payments that might be explained by authentication authorities in Latin America and the and identification challenges. Some providers are Caribbean (LAC) about the importance overcoming these issues through greater reliance on of boosting provision and uptake of biometric technology. digital financial services (DFS). SUPPORTING INFRASTRUCTURE IS SET TO IMPROVE, BUT ONLY GRADUALLY This forms part of a broader strategy to lift financial inclusion and, through pass-through effects, potentially Most governments are planning to address weak to improve underlying economic conditions. The DFS infrastructure, but the pace of improvement will sector in the region has seen rapid growth in recent be hampered by a variety of country-specific years, albeit from a low base. This has incorporated factors, including domestic contexts and the legacy both digital financial provision from traditional banks of damage inflicted by natural disasters, as well as and also services from non-bank providers, including the limited fiscal space for governments to increase retailers, mobile money transfer firms and public- spending (which hampers increased investment in sector agencies. telecommunications). This research programme identified a number of key A PRONOUNCED RURAL-URBAN DIVIDE HAS CURBED DFS-related regional trends, including: THE EXPANSION OF DFS IN SOME AREAS Mobile penetration rates are high, but smartphone AN OVERALL CONSENSUS EXISTS ON THE LINK BETWEEN EXPANDING DFS AND BOOSTING ownership is comparatively low by global comparison, FINANCIAL INCLUSION reflecting high retail costs relative to income levels. Fourth-generation (4G) coverage is rising but is again Reforms to regulation have fostered the growth of fairly low by global comparison. Particularly poor DFS by providing legal certainty surrounding the use coverage in rural areas, partly reflecting a history of electronic money. National financial inclusion of weak profitability, has curbed investment. strategies specifically target the use of DFS as a way of encouraging people to move out of a cash-based POPULATION READINESS, IN PARTICULAR, economy and enter the formal financial system. IS CHALLENGING However, striking the right balance between introducing regulation to facilitate financial inclusion, while Weak digital literacy impedes take-up, while a long- maintaining adequate safeguards to prevent fraud, standing reliance on cash transactions means that some remains a challenge. people do not see the benefit of moving to DFS unless pushed to do so. The fact that some investments in REGULATORY AGENCIES NEED TO RESPOND promoting mobile financial services for the previously TO THE NEW CHALLENGES OF AN EVOLVING unbanked sectors have not yet proven profitable – DFS ECOSYSTEM prompting some players to leave the market

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