Latin America and the Caribbean (LAC) financial institutions have significantly ramped up their adoption of fintech in recent years. The World Bank estimates that only 50 percent of Latin Americans over the age of 15 had bank accounts in 2017. In most LAC countries, cash transactions were the pre-pandemic norm.
Lockdowns, social distancing and the need for e-commerce during the COVID-19 pandemic pushed 40 million Latin Americans to enroll in banks and enabled them to use digital finance channels, e-commerce or credit for the first time in their lives.
LAC regions are joining the digital revolution, leading to unprecedented credit risk and fraud exposure for financial organizations. While manual approvals for onboarding new customers and assessing risk have been sufficient until now, the sudden volume and added demand outpaces legacy systems and human capacity.
In this post, we’ll discuss the economic and credit challenges in the LAC region, its history of limited financial inclusion, how COVID-19 highlighted the need for digitization, the e-commerce boom and how banks are turning to major trusted brands with proven AI technology to support the sudden digital shift. We’ll also hear from two FIs, Porto Seguro and Banco de Bogotá, that started their AI journeys in tandem with the pandemic and how they’ve already begun changing credit risk management in Latin America.
The credit risk challenge in LAC
As we move into a post-pandemic world, economic recovery is a priority for governments and FIs. The ability to support customers and extend more credit without added risk will help with recovery efforts; however, there are many complexities to the financial and economic landscapes of LAC regions. Negative Gross Domestic Product (GDP) growth, combined with political instability, increases the complexity of running operations in the region.
Business analysts at Evalueserve report the most extreme signs of pandemic-era economic distress and credit risk are evident in Argentina and Brazil, and recommend that Peru closely monitor nonperforming loans. They forecast Colombia will move into a recession in 2021 and cite Venezuela’s nine percent unemployment rate.
Fitch, global leaders in retail consulting, forecasts LAC region GDPs will expand by 4.1 percent in 2021 after contracting 7.3 percent in 2020. Its analysts believe recoveries in LAC will vary and depend on the successful containment of the coronavirus, re-opening of domestic economies and the size and effectiveness of support packages enacted this year.
Fitch reports an average debt increase of 15 percent of GDP in 2020, which will affect spending. They note, “higher unemployment and greater inequality and poverty stemming from the pandemic could hamper policy adjustments by increasing social and political tensions.”
Analysts at Evalueserve agree: “While economic growth may rebound in 2021 for many economies, the improving outlook could take some time to translate into a stronger banking system, as credit risk only gradually declines and bad debts are fully realized. Additional rounds of institutional support could be required in the near term.”
“In the credit card business, problems are very similar across the world,” says Carlos Zuluaga, Director, Product Management, LAC Cyber & Intelligence Services for Mastercard. “There will always be risk with credit, but in particular there is higher risk with credit cards, which is why we need credit risk and fraud models that opportunely predict the level of risk of an account or transaction, adapting automatically with updated data and staying ahead of trends.”
LAC’s history of limited financial inclusion
In a November 2020 study, Bank for International Settlements (BIS) posed a question: if Latin America has more mobile phone subscriptions than China, India or Kenya, why is financial inclusion much lower?
The answer is both complex and simple: poverty, low levels of financial education, geography, lack of trust in FIs and fear of technology. In 2019, more than half of Latin Americans didn’t have access to financial services or were unable to pay the fees.
BIS also reports that services for alternative finance and payment solutions account for about half of the services offered (30 percent alternative finance services, 30 percent payment services, 20 percent personal, enterprise or asset management and 10 percent trading and capital market services). Alternative finance describes financial systems and instruments outside of the traditional finance system, such as online banks and cryptocurrency.
Source: Bank for International Settlements, The dawn of fintech in Latin America: landscape, prospects and challenges, November 2020
COVID-19 accelerated LAC digitization
When the COVID-19 pandemic struck, LAC governments and FIs made it a priority to get financial services to as many people as possible to reduce the economic impact on citizens.
An important step is building digital highways, which was quickly undertaken by Costa Rica, Brazil and Peru to enable digital payments and money transfers.
Even with systems in place, however, the lack of a digital identity is a major obstacle for those wanting to access online financial services, including government relief funds. These citizens also can’t access other mobile services, including government-issued ID, vaccination records or motor vehicle insurance certificates.
World Bank reports that Argentina led the way by registering 45 million citizens (98 percent of the population) with digital identities in 2020, becoming LAC leaders in democratizing online access.
E-commerce (and credit risk) boomed during COVID-19
A survey conducted in 13 LAC regions by Mastercard and Americas Market Intelligence (AMI) revealed changing consumer habits and how companies are adapting to a digital ecosystem “generated by the pandemic.”
Social distancing and concerns about COVID-19 contamination influenced the move from cash. The data revealed more than 40 million people entered the banking system. AMI predicts 50 million users will make their first online purchases in 2021.
COVID-19 forced consumers in Argentina, Brazil, Chile, Costa Rica, Colombia, Dominican Republic, Ecuador, Guatemala, Jamaica, Mexico, Panama, Peru and Puerto Rico to reconsider their relationship with banks and technology. Survey respondents indicated e-commerce transactions almost doubled from 45 to 83 percent usage during COVID, including:
- 59 percent increased e-commerce expenditures
- Chile (57%), Puerto Rico (48%), Peru and Argentina (44%), Colombia and Mexico (42%) and Brazil (41%) had the highest increases in online shopping
- 17 percent made their first online purchases
- Panama (16%), Guatemala (13%), Ecuador (12%), Peru and Jamaica (10%) reported the most first-time online purchases
Rapid growth amongst contracting or stalled economies is cause for concern. FIs are seeking help with managing credit risk and reducing fraud and other losses. The challenge is to gain insight into financial transactions while managing customer relationships and optimizing profits.
AI is changing credit risk management in LAC
Using AI solutions to meet these challenges is a relatively new concept in LAC.
“Most of our clients are not looking specifically for AI since this is new territory for them,” says Mastercard’s Zuluaga. “In many cases, our LAC customers have approached us to conduct a portfolio review.
“They want to reduce risks related to credit delinquency and fraud while keeping functions like anti-money laundering and counter-terrorism financing in mind,” Zuluaga says. “ They ask for help from Mastercard’s advisory team because they trust us and are confident in Mastercard solutions and our recommendations to address their concerns.”
He uses the example of credit risk scores, a relatively new concept in some LAC regions, where customers receive the scores from personalized AI models tailored to their specific needs. “With our self-learning models, Brighterion AI continually updates the model to meet changing standards and evolving trends.”
Porto Seguro is one such institution that sought help to improve their outcomes over vast geography and different regions.
Porto Seguro and Banco de Bogotá: substantial modernization and ROI
Porto Seguro, one of the largest insurance companies in Brazil, employs 14,000 people in Brazil and Uruguay. They also offer pension, savings bonds and other financial services, including credit cards. They deployed Mastercard’s Brighterion AI to improve the customer experience, identify credit risk earlier in the customer lifecycle and offer higher limits to good customers.
“This AI model could be run on transactions from any card network,” says Ricardo Kaoru Inada, Executive Director of Porto Seguro. “Almost 50 percent of potential defaults were identified 70 days in advance in the pilot phase of the project, which helps us increase credit limits for our customers through a more assertive analysis.”
The AI model enables Porto Seguro to manage credit risk more effectively while improving the customer experience. Porto Seguro is the first Brazilian company to deploy Brighterion AI for credit risk management, although it is used widely around the world where global customers report reduced losses up to 32 percent.
In Colombia, Banco de Bogotá is the oldest commercial banking institution with approximately 650 branches, five corporate service centers and a banking attention center.
“Banco de Bogotá is leveraging Mastercard’s AI capabilities through its AI Express product to improve the customer experience, increase our profitability and identify further opportunities for operational excellence,” reports Banco de Bogotá.
Well known in LAC financial services as an industry leader, Banco de Bogotá is stepping ahead by adopting AI to modernize its business operations.
Jaime Parra of Banco de Bogotá discusses how real-time data has helped to transform the customer experience while mitigating credit risk in this short webinar.
LAC and rapid change: exactly what AI is made for
Latin America’s rapid digitization offers financial inclusion to millions of citizens, giving them access to bank accounts, payment and credit cards, e-commerce and more. Yet, with explosive growth comes increased exposure to credit delinquency or abuse, fraud and other financial crimes.
Financial institutions are turning to trusted brands with proven AI technology to support the sudden digital shift. Mastercard’s Brighterion AI is taking FIs from legacy processes to self-learning environments.
Learn more about how Brighterion AI improves credit risk management throughout the customer lifecycle.