Latin American economies are experiencing the kind of growth that their European and US counterparts can only dream of. Once plagued by currency devaluations, debt defaults and the need for bailouts, Latin America is now seeing its strongest economic cycle in nearly 30 years. In addition, the region has taken great steps towards the consolidation of political democracy. However, frustration is growing among its citizens about the failure of this democracy to deliver tangible economic benefits to those at the bottom of the pyramid.
One glaring inadequacy is the lack of access to financial services, namely savings and credit products, especially for lower income households. Across the developed world, access to financial services is ubiquitous, with cash and credit products available on demand, from multiple locations and multiple channels, 24 hours a day.
In Latin America, it’s a different story. In the region as a whole only about 35% of adults have a bank account, compared to over 2 accounts per person in many developed countries. Although inequality in the region is falling due to government public policies such as conditional cash transfers to lower economic segments, the expansion of educational opportunities and better healthcare, this limited access to financial services places huge restrictions on the economic development of the region.
The minimum cost of opening a deposit account represents more than 5% of per capita GDP in Latin America. Ongoing fees to keep the deposit account open, on average, cost close to 2% of per capita GDP. For the poorest households, this figure is closer to 30% of the average income. Only Sub-Saharan Africa has higher costs. And while families with monthly incomes of $1000 in the United States are almost 100% bankarised, Latin America lags behind with just 60% of comparable families having access to financial services even in limited ways.
As a result of the poor penetration of financial services in the region, many people are forced to use services that are inefficient, inconvenient, costly, and at times dangerous, relying on high interest predatory lenders who take advantage of their situation, informal banking channels without government guarantees and old fashion stuffing cash under the mattresses.
Access to financial services is a decisive factor for promoting economic development and the well-being of society, according to the CAF (A Regional Latin American Development Bank) study, Financial Services for Development. On the one hand, such services give families access to savings and credit, which allows them to better manage their spending needs for durable goods, property, their children’s education or retirement.
For small companies, access to credit is key to financing working capital. Additionally both households and small firms need small value insurance products to manage unforeseeable events at a reasonable cost. These products are of particular need in countries like Haiti, where almost three quarters of private sector spending on health care takes the form of out-of-pocket expenditures due to lack of access to basic health insurance.
The access to payment technologies via credit or debit cards, checking accounts, and electronic transfers, among other mechanisms, is vital in terms of efficiency and physical security. The carrying or stashing large sums of cash by shopkeepers and individual households makes them easy targets for thefts, natural disasters and other calamities – yet another barrier to development.
Sustained economic growth in the region is impossible without the simultaneous development of universal access to financial services. Financial democracy is fundamental for achieving greater inclusiveness, improving social cohesion, and generating economic growth.
Latin American’s financial needs needs differ to those of other regions such as Africa, furthermore Latin Americans are not one homogenous mass. Each country’s population, and more often than not, each region’s has its own set of requirements and characteristics. Therefore, serving the financial requirements of the region’s economies means thinking up innovative and imaginative non traditional brick and mortar solutions financial solutions.
With 80% of Latin Americans in possession of a mobile device, and with that figure set to reach 117% by 2020, democratising financial access through mobile technology is the obvious choice. It’s not just the end users who will benefit – this technology represents an major opportunity for financial institutions to efficiently reach a currently inaccessible, and potentially very profitable, market at the bottom of the pyramid.
The current situation of low financial penetration in Latin America needs to change radically if the stability and long-term viability of its financial systems are to be guaranteed. If the benefits of economic growth fail to reach the majority, long term development of the region will be severely inhibited.
Bringing financial inclusion to the region could transform for the better the lives of hundreds of millions Latin Americans. The time is now to put mobile money into action by accelerating the development of innovative mobile financial networks and creating new low value credit and insurance programs. By democratising access to financial services and bringing financial inclusion to the continent, Latin America, long seen as the world’s most unequal region, will take major steps toward closing the divide between those at top of the pyramid and those at the bottom of the pyramid.