Alternative Lending in Latin America: A Model to Engage the UnbankedSabrina Tharani |
The practice of finding credit availability from non-bank lenders is entrenched in Latin America— four out of the top 10 alternative lending markets globally (Mexico, Brazil, Argentina and Chile) are in the region. This is partly because of the cost of funds—the interest rate in Argentina is 15.2 percent and 7.5 percent in Brazil compared to 0.25 percent in the US—but also because of Latin American consumers’ own attitudes toward financial services.
Although trust in banks is rising overall in Latin America (41 percent of Latin American’s were more confident about the banking industry in the past twelve months), 24 percent of consumers still had decreased trust levels. Many consumers find the process of formally applying for credit tedious and complicated, so they resort to non-traditional lenders who promise quicker approval and issuance.
In Mexico, Brazil, Argentina and Chile consumer credit issued by alternative providers accounted for more than 20 percent of all lending volume in 2012, compared to less than 4 percent in developed markets such as the UK, France and Japan. This number peaks in Mexico, where 40 percent of all loans are from non-traditional channels. Payday lending is particularly popular in Mexico, where millions of consumers have little or no interaction with financial services.
Source: Euromonitor, December 2012
Banks can regain equity in this space by taking a play out of alternative lender’s playbook. One example is merchants in Latin America, who have been successful in reaching under- and un-banked consumers through store-issued or co-branded cards. These cards alleviate the perception of a costly and complicated application process through banks, granting consumers instant gratification and spending power. In Brazil, installment cards based off of the “carnês de loja” system (repayment plans with specific dates and amounts), have become a common credit product for lower-income consumers and are expected to increase by as much as 90 percent between 2011 and 2015.
Moving forward into 2013, banks must remain vigilant in the credit space or risk becoming irrelevant to Latin America’s growing consumer class. They can do this by streamlining the process of accessing credit, making it simpler, swifter and at lower rates for consumers.
Topics: Payments Strategy