HED: Real issues, creative solutions
Latin America needs more blue-sky thinking if fintechs are to boost economic development.
Necessity is the mother of invention, goes the saying. In Africa, where bank branches and ATMs are often rarer than a white rhino, that is certainly the case. When people had no reliable and cost-effective way to sending money, they began trading pay-as-you-go mobile credits in the early 2000s. Vodafone’s Kenyan subsidiary Safaricom adapted the idea, introducing Africa’s first mobile transaction platform in 2007.
The rest is history. Today, over 40% of all adults in Gabon, Ghana, Kenya, Namibia, Tanzania, Uganda and Zimbabwe regularly use mobile-based money transfer services. With some 227 million active accounts, there are now more MMO accounts in the Sub-Sahara region than traditional bank accounts.
In Latin America, technology is taking a different route to reach the underbanked. Mobile money rules were first introduced in Bolivia in 2011; Brazil, Peru and other nations followed. But uptake has been less impressive. Latin America has just 33 million registered MMO accounts, roughly the same as Middle Africa, which has one quarter of Latin America’s population.
Still, Latin America’s fintech entrepreneurs are betting the smartphone will let them leapfrog non-internet connected technology. That should boost e-commerce and the wider economy.
Latin Americans love their phones. There are 350 million mobile internet users already, more than in the US. Crucially, smartphone adoption rates will hit 71% by 2020, ahead of the global average.
GSMA Intelligence calculates that the mobile ‘ecosystem’–including direct investment, jobs, productivity gains, and indirect jobs and services created–already accounts for 5% of Latin America’s Gross Domestic Product (GDP). With Brazilians, Argentinians and Mexicans spending more than 3½ hours per day using their phones to access the internet, the appetite for new services is growing fast.
Online smartphone solutions to everyday retail and small business banking problems are multiplying. According to Finnovista, which helps Latin American innovators establish their businesses, the most active area of fintech activity is in payment services and lending. Both are likely to become the ‘gatekeepers’ to a broader range of digital financial services in the future. The 4 Cs–cash, commerce, chargebacks and credit–are the reason why.
Better than cash
When Hector Cardenas and two university friends from Canada moved to Mexico to build websites for businesses that want to sell online, they hit a brick wall. Eighty two percent of Mexicans do not have credit cards, making online sales all but impossible.
Poor card payment infrastructure is holding back e-commerce in a big way. Mexico should be one of the biggest markets for MercadoLibre, the region’s eBay- and Amazon-beater: it is not. The Mexican unit is losing money, with total revenues around one tenth of those in Brazil and only just ahead of profitable Venezuela, the region’s economic basket case.
Conekta originally set out to build ecommerce websites for merchants. But when they discovered that transacting doesn’t work online, they instead concentrated on mending the system. “We had to build something to fix payments; it had to be a bit more vertical. It had to be multi-channel, with credit and debit cards, monthly payment plans, cash and bank transfers,” says Mr Cardenas.
Ironically, a chain of physical convenience stores has been key to Conekta’s success.
OXXO is Mexico’s largest chain of its type, with 16,000 stores. Conekta users can order goods from any e-tailer, then visit their local OXXO to pay–in cash if they prefer. A quick swipe of a barcode on their mobile phone links the payment and purchase. Vendors get real-time notification of payment so that goods can be dispatched earlier and with greater certainty.
OXXO is so impressed with Conekta that it became a strategic investor in its last funding round in late 2016.
Even card-present transactions remain tricky. Cardholders cannot be sure that a shop will have a point-of-sale (POS) terminal. Although Mexicans have 170 million debit and credit cards between them, there are just 900,000 POS machines across the country.
“There are 11 million businesses that could take cards; only half a million do. People have no place to use their cards except on pay day when ATMs run out of money when they withdraw cash,” says Adolfo Babatz of Clip, a merchant acquirer.
Handling cash is risky, dirty and a drain on business costs. Merchants would rather do without, but are hampered by Mexico’s unique card market. Elsewhere, Visa and Mastercard set the rules on how cards are issued and how transactions are handled. México es diferente: banks write the rulebook as card issuers, merchant acquirers and the only payment processors.
Accordingly, point-of-sale (POS) terminals are expensive to install, rent and use. If anyone can design a better, affordable system, merchants would be happy.
“It is not about us being really good, it’s that what is out there is so bad,” says Mr Babatz.
Clip’s cheap card reader attaches to a smartphone. Whilst transaction commissions are slightly higher than via bank-supplied terminals, Mr Babatz says his base of smaller merchants are happy with a simple fee structure that suits low volumes and low transaction values.
“95% of our new merchants have never accepted cards before. It has to be simple like WhatsApp or Google,” insists Mr Babatz.
Conekta and Clip are both growing fast. Adoption could be even faster, if it were not for Mexico’s archaic chargeback rules.
Rules on chargebacks (a refund when goods or services are disputed by the customer) are stacked in the cardholder’s favour. If a business wants to challenge a chargeback, it must produce a signed receipt, something that e-tailers (and many physical stores) cannot provide. Even a signature of proof of delivery is insufficient, says Conekta’s Hector Cardenas.
Mischievous card users know how to play the rules. Genuine cardholders may never intend to pay for what they buy. Thieves love using stolen cards, knowing that wrongly charged customers can get their money back. Not surprisingly, payment processors are hyper cautious–online purchases are routinely blocked to avoid the risk entirely.
Instore POS terminals now rely on chip and pin technology, so stolen card use can be more easily contained. Clip also sends customers a one-time code to validate each transaction.
Making the chargeback rules more balanced would be a huge boost to e-commerce and may encourage more non-users to get a card.
Obtaining credit across Latin America can be difficult, for individuals and the region’s micro, small and medium-sized enterprises (MSMEs). Few have sufficient credit histories for traditional underwriting procedures. Interest rates are high by international standards.
The lack of access to credit means millions cannot invest in a new venture and many existing businesses cannot scale up.
Kueski is one of many new online lenders appearing across the continent. As is often the case, inspiration had an usual source. Adalberto Flores previously worked at Ooyala, an online video platform. When one corporate customer wanted to create an over-the-top video service, a Mexican Netflix, Mr Flores’s team hit a familiar barrier. Few Mexicans have payments cards to pay for subscriptions or credit histories on which to extend credit.
“We applied our machine learning technicians and techniques to solve the problem of a country with no access to capital,” says Mr Flores.
The rollout of Kueski’s first microloans would have caused uproar in traditional risk departments. With venture capital funding secured, Mr Flores and Leonardo De La Cerda offered some 2,000 small loans over 60 to 90 days to establish data patterns, but with only the most rudimentary risk processes in place.
“We told our seed investors we would lose money. We lost more than we thought,” admits Mr Flores.
The level of ‘hard fraud’, where identities are stolen, was higher than expected. So too were levels of ‘soft fraud’, where customers have little intention of paying back their loans. The lack of social security numbers and address verification infrastructure did not help.
Nevertheless the lessons learned from the first 2,000 loans were enough to establish an underwriting framework.
Kueski’s data technicians have been gleefully trying new algorithms ever since on a constantly growing mountain of client data. The team steers clear of risk-profiling religious or ethnic identity, both of which could be deemed unethical. Kueski is already moving away from scraping social media data–just at a point when traditional players are investigating Facebook and Twitter for clues about customer trustworthiness.
The whole company is invited to partake in Kueski’s regular data testing competition. Any member of staff can suggest a theme. Sadly, your horoscope sign reveals little about your willingness to pay.
And don’t worry if you were born under a full moon, either. Kueski’s data scientists did not find a link that suggests you will not pay off your loan. Werewolves will be relieved.
Online business lending is gaining ground too. Latin America is home to 52 million MSMEs. Over 70% of those companies are classified as ‘informal’, so few can get overdrafts or loans. A number of online peer-to-peer lenders, including Afluenta of Argentina and Konfio of Brazil, use proprietary algorithms to assess MSME applicants.
Other players may soon appear; a number of fintechs offer business and cash flow management tools, which can then be used to build alternative scoring systems.
Governments are also helping to close the credit gap. Argentina, Brazil, Chile, Ecuador and Mexico now require all businesses to register invoices electronically with tax authorities. Such e-invoices are generating a huge pool of transaction data that will help the whole industry make better lending decisions. Data scientists are diving in.