Access to credit in Latin America remains disparate, despite gains in recent years. But the growing availability of digital customer data offers lenders new ways to assess the risk of potential borrowers and grow the market.
One in three Latin Americans has no access to credit and the situation for micro, small and medium-sized enterprises — the backbone of the region’s economies — isn’t any better. Only 45% of companies have sought financing at some point, according to the World Bank.
Technology has the potential to transform this reality.
“For many years, traditional financial institutions in particular have been limited by the information they have and can analyze to see up to what point they can say ‘yes, I think you can pay me,’” said Gustavo Méndez, financial services industry leader at Deloitte Mexico.
“But in the last couple of years we’ve seen there’s more data and with more data comes the possibility of better evaluations,” he said during iupana‘s recent Master Class on the future of credit in Latin America.
Alternative data in particular will make a big difference: where does a person go? What consumption habits does their wallet show? Do they pay their utility bills on time?
This will be especially important considering the high percentage of the population that operates in the informal economy and is unbanked, which prevents them from building credit history. While the pandemic led millions of people to open bank accounts or digital wallets, there’s still a long way to go in terms of financial inclusion.
“It’s amazing how much information can be obtained via mobile devices. Only 30% have credit history but 97% have a cell phone,” said Gabriela Herrera, senior sales executive at Provenir, a provider of cloud-based software for credit products.
“We are coming out of this bombshell that is Covid. Traditional credit risk information has become outdated,” she said.
In this context, data science and artificial intelligence tools, including machine learning, will be essential to capture information (with the user’s permission), organize it and turn it into an effective resource with which to score consumption and payment habits, Herrera said.
Even banks with complex legacy structures are migrating to new instruments and business models to offer customers more agile products. They also need to respond to the competition coming from all quarters, including fintechs and the large retailers determinedly exploring the financial arena.
“Legacy […] should not be an impediment to having the agility to compete with the new fintechs and new retailers, which are a latent threat because they have a lot of information available. They have a wealth of data,” said Lorenzo Blesa Sánchez, head of risk and financial engineering at BBVA in Madrid.
The bank uses a “decoupling” strategy that allows it to separate critical processes from the traditional banking core in order to have a much simpler onboarding process, and the ability to use real-time data.
Buy now, pay later
Among the fastest-growing digital credit alternatives is payment via installment or buy now, pay later (BNPL).
“It’s a trend that’s here to stay,” said José Vargas, executive vice president and general manager of Provenir Latin America.
Consumers in the United States, one of the markets where the practice is gaining most ground, are expected to make nearly US$100 billion in retail purchases using BNPL programs in 2021, up from US$24 billion in 2020, according to Cornerstone Advisors, a banking services consultancy.
In Latin America, the vertical is growing, attracting investors as well as customers in stores.
“For BNPL to permeate the Latin American market […] an end-to-end digital process is needed, and with that you can give an online and practically immediate authorization at the point of sale,” Blesa said.
To be successful, these models also have to put up minimum friction, offer a good user experience and balance that with a powerful credit and anti-fraud analysis, added Herrera.
“In Latin America, it’s possible for users to start creating their credit [history] with very small tickets,” she said.
“Fintechs in particular are evaluating [credit risk] based on the product being purchased because buying lipstick is not the same as buying a computer: they clearly have different uses and this can also be used for risk assessment.”
Credit for SMEs
Small and medium-sized companies generate up to 50% of Latin America’s gross domestic product but it’s a diverse and informal sector and remains largely underserved financially, said Deloitte’s Méndez.
SMEs also face the same barrier to access as consumers — a lack of credit history — so alternative data is crucial to reaching customers and delivering credit efficiently so businesses can grow.
“Credit for SMEs is one of the most needed products in the region,” said Vargas.
The process of granting credit to this segment still often relies on manual procedures and even visits to business owners by microfinance firms. But little by little, the process is becoming digital.
“Today we have a hybrid model: a little bit digital, a little bit manual. But I think we are going to have a model like the one we see in the United States and Europe, which is 100% digital” and allows credits to be disbursed in just 20 minutes, he said.
Increasing credit penetration may help improve the low survival rate of small businesses. Only 45% of SMEs in Latin America survive the first two years, according to data from the Business Council of the Pacific Alliance (CEAP).
The experts agreed the prerequisites for growth of banking models targeting this segment are similar to those for personal loans: rewarding user experiences; reduced friction; measures to help customers reach their objectives; and even financial education services and operational support for business owners, such as accounting and tax platforms.
Customization and flexibility will also be crucial.
“Many SMEs are very cyclical, they don’t have a fixed income. The traditional credit package, with fixed payments every month or every fortnight, doesn’t work. You have to tailor-make a suit for them,” said Méndez.