Imagine you open your Venmo balance on a Friday night to move $500 to your bank account. You tap the Transfer Balance button: It could be either “instant” (within 30 minutes) with a 1.75 percent fee, or a free transaction that will take one to three business days if you’re lucky. The “instant” option travels via credit card networks, while the free deposit will travel via ACH rails—that's Automated Clearing House, a computer system developed in the 1970s that still serves as the default for most people and businesses who bank today.
ACH is notoriously slow. People are so accustomed to this system that it affects the way we imagine banks work, and it shapes our relationship with money in the United States. Overhauling this system to bring it into the 21st century, however, has been an uphill battle.
Yet in emerging markets that have historically been viewed as less developed, fintech startups have sparked a rapid reshaping of people’s relationship with money. These companies are eager to prove the value of their innovations, and eager for new, sometimes less regulated markets full of potential customers. With larger unbanked and underserved populations, startups and established fintech companies in Latin America and Africa have had to adapt in ways that we can learn from in North America and Europe to better serve our communities.
An entire series of sessions at the Money 20/20 conference this year focused entirely on startups and firms interested in expanding their services to Latin America. Two additional sessions were on African markets, focusing on the African fintech divide as well as solutions to the remittance economy. While not entirely new, the growth in physical presence and focus reflects changes in the industry, says Scarlett Sieber, chief content strategist of Money 20/20. For comparison, the 2021 conference agenda included one session on digital payments in Latin America and Asia, and the 2019 conference had one session on Africa.
“Everything has to be built from scratch, and there is a high need for very simple tools,” says Sergio Almaguer, the CEO and cofounder of Yaydoo, a Mexico City-based B2B software and payments company. Building a solution to automate payments and invoicing between companies was predicated on the Mexican government’s implementation of an electronic invoicing system in 2004 called CFDi (Comprobante Fiscal Digital pro internet) for its federal tax code, following in the footsteps of Chile. By 2014, digitizing important payments to the government became mandatory. In contrast, many American businesses still use paper checks and PDF attachments in emails that have to be printed, hand-completed, and rescanned, only to be printed out again. American financial services company Intuit attempted to enter the Mexican market, but it is shutting up shop at the end of this year. The US Federal Reserve and the Business Payments Coalition just announced an e-invoice exchange market pilot in May 2022.
“When you have something that is, let's say bad, but not extremely bad, you lose this urge or this need to innovate,” adds Almaguer. He described this phenomenon where in developed markets, things already “kind of work”—innovation would just be two or three steps forward on top of an established system or service. But startups in emerging markets have to start from scratch or create new infrastructure. Almaguer explains that startups also then have to either contend with or seek support through legal changes by governments eager to modernize. “In the end, the innovators will react to those changes. Without even realizing, what they create is a place better than maybe anywhere else in the world.”
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This rings true for a country like Brazil. In 2019 the Central Bank of Brazil created Pix, an instant payment ecosystem that allows people, companies, and government entities to send and receive payments in a matter of seconds, 24/7 and 365. In an attempt to move the population away from cash, this government-backed standardization led to more financial inclusion and efficiency across the board. Brazilian financial services companies and fintech startups began working with the system, and its introduction meant a lot to local Brazilians, especially for those unbanked or in the informal economy, who use their unique chave, or key, to receive payments.
Meanwhile in Nigeria, because of the BVN, or bank verification number—a unique 11-digit number that is uniform for an account holder across all institutions—identity theft is much more difficult. In Kenya, where traditional banking was challenging due to geographical distances, Vodafone and Safaricom launched M-Pesa, an SMS mobile-phone-based payment system that also has branchless banking and helped secure finances for millions of unbanked citizens. The rapid adoption of M-Pesa across East Africa, combined with the popularity of transportation methods like motorcycles and scooters, spurred the development of new super-apps like Jumia and Glovo that make shopping and business interactions faster and more seamless.
“If I order eggs for my wife off of Glovo while she is baking, there will be a knock on her door before she puts her pan in the oven. This is the speed and efficiency that I'm talking about that is very hard to encapsulate, because I don't think Americans—or people shopping in general—are used to that efficiency,” says David Wachira, the cofounder and CEO of Waya, a digital payments and banking app for Africans abroad. He also argues that M-Pesa may have reduced corruption and the plague of kickbacks in developing nations, because it is tied to individual mobile numbers.
Since America and its financial institutions and infrastructures have served in an “incumbent” and hegemonic position for so long, this legacy has continued to plague relationships with money for the underserved, especially in cross-border transactions and remittance payments. Africa remains one of the most expensive regions of the world to send money to, and many fintech startups are trying to resolve these challenges. However, the infrastructure that would allow us to facilitate low-cost, cross-border remittances to those destinations just doesn't exist yet, says Wiza Jalakasi, the vice president of merchant business at ChipperCash.
“When you go to a bank in South Africa, and you've got your South African rands, and you ask them for Ugandan shillings, they'll tell you that we don't have those because the Ugandan shilling in South Africa is an exotic currency. The only currency that you can get with your South African rand is either the US dollar, the euro, or the pound,” Jalakasi says. The US dollar plays an intermediary role in the intra-African financial world. That means that for now, inefficiency, slow transfers, and losing money in multiple currency conversions only further exacerbates historical global inequalities. With the right buy-in, however, these new players may be able to break some of them down.