Fintech companies are increasingly targeting the vast Latin American remittance market as increased digitization across the region paves the way for more affordable electronic money transfers.
Remittances into the region continue to break records. They topped some $128 billion in 2021 alone, as the job market recovered in the United States and Europe, and many communities from outside of the region sought to support their relatives in financial stress.
In Latin America, remittances are a critical lifeline for millions of households. More so during the pandemic. Last year, they booked the most significant yearly increase in over 20 years, a report by the Inter-American Development Bank shows, up from $101.7 billion a year before. Compared to 2001, the market has more than quintupled in size and is growing consistently yearly.
Despite record-highs, the number of fintechs that cater cross-border services to Latin Americans is still embryonic. The competition of well-established providers such as Western Union or regular bank transfers makes it difficult to tap into a highly attractive market.
Cash is king
Also, a clear preference among Latin Americans for cash.
“Today, more than 90% of all remittances in Mexico are paid out in physical establishments and in cash,” Ulises Téllez, CEO at Pagaphone, a fintech firm that offers cross-border payments from the United States into Mexico, said in an interview. “Almost half of those are paid out by a single retailer.”
With the accelerated pace of digitization amid the pandemic, some argue that the convenience of a digital transaction could finally prevail and offer an opportunity for fintechs to set foot in the market.
“Digital remittances payments as offered by fintechs are the best option,” Téllez said. “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.”
To be sure, the remittance market in Mexico is colossal on its own, let alone in the rest of Latin America. It is the largest recipient: remittances from the United States amounted to over $50 billion last year. It is also a crucial bloodline for its economy, representing roughly 4% of its GDP.
But despite growing transactions, Latin Americans living abroad continue to face costly fees. Cross-border payments can add up to 6% in expenses, or even higher in some cases.
Cost reduction attractive
For many, fintech can be a solution to drive down costs. In a report, the International Monetary Fund said that “greater reliance on newer fintech options” may help reduce the costs of such transactions. The study found that even though Latin America holds a significant share of remittances worldwide, the use of mobile money to both send and receive payments is still “relatively low.”
“Fintech advances and further digitalization in the remittance industry can be expected to expand this source of revenue to migrants’ families,” the IMF said. “The evidence suggests that greater competition could further decrease remittances fees.”
To that end, some regional fintech players have emerged with the overarching goal of slashing costs down with fully digital products.
Global66, a regional company inspired by Revolut and Wise in Europe, launched a remittance product that would connect money routes between Chile and neighboring Peru. Its CEO says it has grown its ecosystem to over 600,000 users as it helps Latin Americans make cross-border payments in most Latin American countries, the United States and Spain.
Half of LatAm underbanked
“Latin America has over 600 million citizens, of which 300 million are underbanked,” Tomas Bercovich, CEO and founder, said. “This is because fewer than 300 banks in the entire region can meet their needs, as opposed to over 5,000 in the United States. There is a huge supply deficit.”
Its commission can be as low as 1% in some cases, according to its online simulator.
Some in the crypto space have also explored cross-border transactions through cryptocurrency vehicles. Remittances using such assets have more than doubled in Latin America over two years, a study by blockchain firm Chainalysis found.
“People can live, study and work anywhere in the world, so they need a financial ecosystem that allows them to send or receive money as easily as they do from within their countries,” Bercovich said.