As the world approaches the midpoint of the UN Sustainable Development Goals, the drive for greater financial inclusion has never been more critical. Latin America, a region rich in diversity and economic potential, stands at the forefront of this transformation. Technology, particularly digital innovations, is playing a pivotal role in accelerating financial inclusion, addressing longstanding disparities, and fostering economic growth.
Today, financial inclusion is a priority that goes beyond mere access. To be truly successful, financial services need to be widely utilised. Helping people and communities scale the financial inclusion ladder—from access to usage and beyond—is a critical component on the journey to new levels of economic prosperity. By focusing not just on access but also on the effective use of financial services, Latin America can unlock significant economic potential and enhance the quality of life for millions.
The State of Financial Inclusion in Latin America
Financial inclusion extends far beyond merely accessing banking services to include a broad range of financial products and educational resources that drive economic stability and growth. The World Bank's Global Findex Database 2023 shows that, despite a significant rise in global account ownership, 21% of Latin Americans remain excluded from the formal financial system. This trend is also evident in a recent Mastercard report, which notes that while 79% of Latin Americans gained access to basic financial products between 2020 and 2023, there are still significant gaps, particularly in more advanced financial services. The challenges are substantial: although 58% of Latin Americans own a credit card, only 30% have access to other credit options like loans, insurance, or investment products. Additionally, financial inclusion is not evenly distributed; only 59% of people with low incomes and 40% of those living in rural areas have access to banking services. Furthermore, 68% of Latin Americans have never received formal financial education, underscoring the urgent need for improved financial literacy and more targeted solutions to address these disparities.
The Digital Revolution in Financial Services
The rise of digital technology has significantly impacted the financial landscape in Latin America, driving greater inclusion through digital wallets, smartphones, and other fintech innovations.
- Digital Wallets: Digital wallets are reshaping the financial ecosystem:
PIX in Brazil: Launched by Brazil's Central Bank in 2020, PIX has become a dominant payment method, surpassing traditional methods with 364 million keys and over $700 billion in transactions in its first year. It highlights the transformative impact of digital solutions on financial interactions.
Yape and Plin in Peru: Yape (2017) and Plin (2019) have significantly reduced cash use in Peru. Yape, by Banco de Crédito del Perú, has over 10 million users and processes $3 billion annually, while Plin, by Interbank, serves 8 million users and handles $1.5 billion annually. Digital wallets now account for 52% of transactions in Peru, enhancing financial inclusion.
Nequi in Colombia: Operated by Bancolombia, Nequi serves 7 million users (as of 2023) and processes $2 billion annually. It offers various services like transfers and bill payments, integrating more Colombians into the formal financial system and expanding access to digital financial tools, particularly in underserved areas.
- Smartphones and Mobile Internet: In 2023, the Inter-American Development Bank (IDB) reported that smartphone penetration in Latin America has reached 80%, with 88% of Latin Americans utilizing their devices for financial transactions and 55% opening new accounts via mobile apps. This extensive connectivity is crucial for broadening access to financial services, as the increasing use of smartphones is significantly driving the growth of digital banking and financial management applications.
- Government and Private Sector Initiatives: Governments and private sectors have advanced financial inclusion through digitized assistance programs. For instance, the Dominican Republic used prepaid cards to distribute aid to 1.75 million families, demonstrating the effectiveness of technology in reaching underserved populations. Similarly, Argentina’s "Tarjeta Alimentar" program provides digital cards preloaded with funds to low-income families for food purchases. This initiative has benefited over 4 million people, facilitating access to essential goods and enhancing financial inclusion. These examples highlight the role of digital tools in addressing immediate financial needs and integrating more people into the financial system.
- The State of Digital Finance and Cash: While cash use for daily transactions has declined with the rise of digital payment methods, it remains prevalent, particularly among small businesses and in public transportation systems. Recent data highlights this shift: in 2023, cash transactions in Latin America represented approximately 48% of total payment volume, down from 60% in 2019. For instance, in countries like Brazil and Mexico, cash usage has decreased by around 12% and 10%, respectively, over the past four years. This reduction reflects a growing adoption of digital payments, but cash still plays a significant role in everyday transactions, especially in lower-income areas and informal sectors.
- Fintech innovation: Digital technology is transforming financial services in Latin America, with fintech innovations playing a crucial role. Nubank leads this shift with its fully digital banking platform, serving over 40 million customers across the region. Mercado Pago, another key player, provides comprehensive financial services including payments, loans, and investment options through its e-commerce ecosystem, reaching millions of users. These fintech advancements are making financial services more accessible and tailored to the needs of underserved communities.
- Artificial General Intelligence (AGI): Although AGI is still emerging, its potential to transform financial inclusion is significant. AGI could enable highly personalized financial services by analyzing extensive data to tailor solutions for underserved populations. For instance, AGI could help design financial products that meet the specific needs of individuals in low-income or remote areas. For example, Tala, operating in Kenya and the Philippines, uses machine learning to provide microloans to individuals without traditional credit histories by analyzing mobile phone data. This approach allows Tala to offer credit to those who might otherwise be excluded from financial services. These advancements illustrate how evolving AI technologies are setting the stage for future AGI applications that could further enhance financial inclusion.
- International Remittances: The digital revolution has transformed international remittances, essential for many Latin American families. In 2023, the region received about $130 billion in remittances. For instance, in Mexico, remittances represented 4.3% of GDP. Digital platforms like Remitly, Wise, and Revolut have streamlined the process, reducing the cost of sending $200 to around 2%, down from 6% a decade ago. These services enhance accessibility and affordability, helping to integrate remittance funds into the formal financial system and support financial inclusion.
Key Lessons and Future Directions
Based on recent developments, several lessons emerge for enhancing financial inclusion in Latin America:
- Reimagining Financial Education: Reimagining financial education is another crucial area. Adopting gamified and interactive educational tools can make learning about finance more engaging and effective. In the U.S., Kiva’s financial education app uses interactive modules and simulations to enhance financial literacy. Research indicates that such interactive tools can increase financial literacy scores by up to 25%. Educational institutions, fintech companies, and non-profits should work together to create and distribute these resources, making financial education more accessible and impactful.
- Fostering Innovation through Public-Private Partnerships: Collaboration between the public and private sectors can drive innovation and scale financial inclusion efforts. For example, Mexico's partnership with private fintechs through the 'CoDi' (Digital Collection) platform showcases how governments can work with companies to promote digital payments. Latin American governments should engage with fintech companies, NGOs, and international organizations to leverage resources, share expertise, and implement scalable solutions that advance financial inclusion.
- Expanding Digital Identity Solutions: Effective digital identity verification can facilitate financial inclusion by streamlining KYC processes. Latin America should explore similar solutions to simplify account opening and reduce barriers for underserved populations. Implementing secure and accessible digital identity systems will be key to integrating more individuals into the financial system.
- Harmonizing Regulations Across Countries: The fragmented regulatory landscape across Latin American countries can impede the scaling of fintech innovations. For instance, Chile’s open banking regulations stand out as a model. Chile has been pioneering open banking regulations that promote data sharing among financial institutions while ensuring consumer protection. This approach fosters innovation by allowing fintech companies to access data and create new financial products. Latin American countries can benefit from harmonizing their regulations to facilitate cross-border fintech operations and reduce compliance costs.
The Road Ahead: Continuing the Journey to Financial Inclusion
The technological advancements driving financial inclusion in Latin America represent a significant shift towards a more inclusive and equitable financial system. By embracing digital wallets, smartphones, innovative financial products, and the evolving potential of Artificial General Intelligence, the region is making strides in integrating the unbanked into the economic system and promoting economic development.
However, the journey is ongoing, and addressing the remaining challenges will be crucial in ensuring that the benefits of financial inclusion reach all segments of society. As Latin America continues to harness the power of technology, it not only paves the way for greater financial inclusion but also sets a precedent for other regions striving to overcome similar barriers. The future of financial inclusion in Latin America will depend on continued innovation, effective policy implementation, and collaborative efforts to build a more inclusive financial ecosystem.
About The Writer
Jason Pareja Jauregui is a systems engineer with a proven track record in developing and delivering digital, customer-centric solutions across the technology, telecommunications, and banking industries. He currently serves at Mastercard in the Consulting Services team for Latin America and the Caribbean, and he is also Community Engagement Lead for One Young World.
An MBA graduate from the University of Oxford, Jason has honed his leadership abilities and global business acumen. Driven by his passion for using technology as a force for social impact, he founded "Vive Tu Futuro," a platform that empowers young professionals to mentor and guide public school students in Peru, fostering growth and opportunities for the next generation.