In Argentina, digital lending is growing – for the first time, posing strong competition to conventional credit. The growth is being driven by embedded finance, a phenomenon which is proving its worth as lenders grow their virtual portfolios by attracting customers with promotions linked to retail sales.
Since its recent emergence in Latin America, the embedded finance model has catalyzed multiple businesses. Through partnerships, financial products such as payments or loans can be managed via third-party platforms across industries as varied as tourism, commerce or transportation.
In an example of the trend, banks and fintechs in Argentina are betting on embedded finance to drive new business lines. At the same time, they face obstacles in the form of streamlined risk models, which can quickly approve (or not) loans at the point of sale.
The Industrial and Commercial Bank of China (ICBC) offers financing for purchases in its own marketplace, ICBC Mall. Likewise, Banco Galicia and Mercado Pago offer buy now, pay later (BNPL) loans; the first partnering with retailers, the second taking advantage of the power of Mercado Libre.
“The digital channel is going to end up beating the physical channel,” Sebastián Martínez, leader of digital transformation, payments and business strategy at ICBC in Argentina, tells iupana.
“And within the digital channel we are going to begin to see two aspects: one, which is the personal loan, sold as a credit line. And then, the personal loan, as that thing that is behind what we want to buy.
“When we go to an online store, we don’t want to be sold a personal loan. We want the money to buy a 50-inch TV. What we are going to start seeing much more is the front end of retail products -a television, a blender, a coffee maker- and the credit product that goes behind it”, describes the executive.
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Loans at the point of sale
Based on this logic, ICBC offers installment and interest-free purchases on its cards, in addition to loyalty programs for purchases on its portal launched in 2019. It also has deals with third parties, such as the Despegar.com travel platform, to offer credit cards from there, or with an auto financing fintech, which drives leads for new borrowers.
It’s a formula tested by their Chinese parent company, says Martínez. To date, the marketplace sells about US$7 million a month, far above their initial aspirations.
“We provide the technology so that they can qualify the customer and offer them our products,” says Martínez.
Mercado Libre also leverages embedded finance to drive digital loans. For them, a key is to recognize latent interest in the user, and appear at that moment.
“This makes the offer timely and more attractive,” Facundo Cuppi, director of loan strategy and operations at Mercado Libre, told iupana.
Cuppi says that 80% of its borrowers don’t borrow through the traditional financial system – but they do take up offers through the Mercado Pago wallet. Mercado Libre relies on its own credit evaluation system, built across the reaches of its ecosystem -which includes an e-commerce platform, digital wallet and credit portfolio.
“An example of this are the credits for purchases in installments, without a card, on the Mercado Libre platform,” says Cuppi.
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Risk models for digital credits
Despite the opportunities, banks warn that to keep pace with the growth of digital lending, they will need to accelerate credit risk decision making. In Argentina, this comes in a context of very high inflation – something that inclines users to use financing for their purchases, but also increases the chances of non-payment.
Mercado Pago pre-approves lines of credit based on user behavior on its platform and using machine learning. But for banking in general, it hasn’t been that easy yet to capitalize on the data available.
ICBC has partnered with the delivery company Pedidos Ya, which will allow access to users’ consumption histories on the platform. With that, the bank estimates the user’s socioeconomic level, and their ability to pay. Without this step, its digital loan pre-approval system would be limited to credit bureaus and existing bank customers.
Martínez says that they are developing this strategy through their YoY digital wallet, aimed at generation Z and with which they intend to strengthen their personal loan products.
Meanwhile, Banco Galicia says that personal loans through digital channels have grown 30% since 2021. To reduce risks, the bank has focused on microcredits and has developed an evaluation system that draws on internal information as well as data from the Argentine financial system.
The bank offers solutions such as After Pay, which is a tool that allows for installment payments on prior transactions, as well as BNPL.
“It is a solution that is enabling both for businesses, allowing them to increase their sales, and for end users, who access goods through personal financing,” Banco Galicia said in a written statement.
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The cost of digital loans in Argentina
Although digital channels will continue to gain prominence for borrowing, Martínez from ICBC says that the channel is still in development.
“It is more of a pull channel than a push channel. The offer is available when you enter, […] but it does not have the same power as a phone call, that they are looking for you and proactively offering the product”, he considers.
Others are more bullish. Mercado Libre says it sees an upward trend in its portfolio. Argentine fintech Naranja X lent US$184 million through digital channels in the year to July 2022 – well above the total figure for 2021, which reached US$151.6 million – according to figures provided to iupana.
These figures follow indications by the Argentine Central Bank (BCRA), which reported in August that fintechs and non-bank entities lent 20% more, at constant prices, in the second half of 2021 compared to the same period the previous year.
“Many people turn to fintechs due to the lack of an alternative in the traditional financial system,” says Cuppi from Mercado Libre. “And fintechs have the ability to serve these people because they use alternative information to get to know users better and understand their behavior,” he adds.
However, Martínez also warns that lending to people without a credit history often translates into higher interest rates – something banks shy away from due to reputational concerns.
In fact, the BCRA added in its report on the second half of 2021 that fintechs charge average annual rates that are twice those of banks. Even so, more people (21%) contracted cards and credits in this way.
“How is it that Mercado Libre could offer some clients loans and we [ICBC] see it as something unfeasible? … They operate with annual nominal rates that no matter what you are assuming, they are so high that they allow you, at the portfolio level, to operate,” says Martínez.
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