Cash is still king, but digital payments are on the rise and are gaining ground. This forces banks to modernize and provide innovative, 100% digital solutions. By Marcelo Fondacaro, CCO at Veritran Cash continues to be the preferred method of payment for Latin Americans. But this truth hides the fact that customers use cash because—in most cases—they haven’t found a better alternative. Financial institutions still have a long way to go to provide digital solutions on a scale that truly meets the region's demand, especially for people at the bottom of the pyramid and small and medium-sized enterprises. Previously, we outlined how the habits of the new generations coupled with the pandemic have altered people's relationship with their finances and how virtual alternatives are being increasingly sought and adopted. With that in mind, it’s important to understand the opportunities that the decline of cash and the prominence of payment digitalization present the banking industry.
In order to expand their presence, entities must build and strengthen payment ecosystems, i.e., the circuit where money is exchanged digitally for products and services. This starts with the massification of digital wallet usage. Wallets allow us to be, literally, in the customer's hands, and at the same time, the repeated use of these applications to pay taxes or utility bills (such as electricity or water) starts to leave its mark and generate transactional tracking that enriches the customer's profile. As people's access to smartphones grows, banks increase their ability to reach out to their customers with a wider range of savings, credit and investment products and services. While a bank's mobile application can potentially become a super app, it should start with a simple and functional wallet for all age groups and use that as a base to build a solid payments ecosystem. Person-to-person (P2P) transactions at no cost are already a reality. But a major push for zero-cost digital payments for small businesses and entrepreneurs is still pending. Another feature that requires further development is the interoperability of wallets. Banks shouldn’t close doors to their products; on the contrary, they should open them and support the broadening of the ecosystem.
Unlike a fintech, banks have a greater burden to comply with regulators. However, far from being perceived as a limitation, making innovations that benefit users within a regulatory framework brings with it an immeasurable asset: trust and confidence. Customers are more willing to use solutions supported by large institutions, from 100% digital onboarding processes to electronic payments. In this regard, attractive initiatives stand out, such as the Transfers 3.0 system that Argentina’s central bank is implementing to promote the interoperability of digital wallets through QR codes; or CoDi from Banco de México, which allows immediate virtual payments at no cost, also using QR codes. Furthermore, the rate of adoption achieved in the first year of Pix in Brazil, where 62% of the adult population has "made a pix," demonstrates the potential of these systems where regulators and private institutions join forces. Supporting these types of policies helps regulators upgrade their metrics, while increasing access to new technologies contributes to the expansion of banking penetration in the region.
The digitalization of payments generates data that benefits both the customer and the financial players, as users learn to recognize as their own every operation recorded in digital channels, while the bank can use this information to get to know them better. However, this requires the different players to share technological infrastructure and information, hence the push for open banking implementation in countries such as Mexico and Brazil. Initially, sharing data doesn’t sound attractive to banks, but the truth is it’s been proven that each space that is opened generates more business, all the more when banking penetration remains limited, with 69% of adults globally owning a bank or fintech account, according to the World Bank. There are opportunities for everyone, and banks will specialize in providing technology to various players focused on incorporating financial services, such as personal loans or mortgages, to their platforms.
Simplifying payments helps create a better user experience (UX) and encourages the utilization of digital channels; however, reducing friction requires more technological development. Invisible payments are those where the user is not aware of a specific action to make a purchase. This has already been developed by big tech companies, such as Uber and Amazon, but the banking industry has yet to take the lead in expanding this system and leaving manual processes behind. A final thought: the decline of cash and the preference for digital channels is not the death of the former and the victory of the latter. When checking appeared, people said that cash was going to disappear, and when cards appeared, that cash and checking were going to disappear. Now mobile payments and digital wallets have appeared and coexistence continues—even with bitcoin. Banks must be prepared to meet all these current and future payment needs.
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