CASH IS KING IN LATIN AMERICA: Using Plastic Is Like Losing The Lottery

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In Latin America cash is king. It is used to pay housing expenses and debts, but credit cards are threatening to enslave its inhabitants.

Latin America is also known to contain some of the poorest people in the world, but that alone doesn’t tell the whole story about those individuals and the financial industry interest in them. In 2012, the World Bank reported that regionally approximately “5 percent of account holders say that their primary mode of withdrawal or deposit is ‘over the counter at a retail store’ or ‘from some other person who is associated with [their] bank.’” http://blogs.worldbank.org/latinamerica/latin-america-most-still-keep-their-money-under-the-mattress. Most of those individuals receive government assistance payments via a debit card that is associated with a local bank, which has helped drive the use of electronic payments throughout Latin America.

Because poorer Latin Americans use cash to pay almost all of their expenses, the amount of debt that they carry is minimal. On the contrary, it is Latin America’s middle class and affluent who carries vast sum of consumer debt. A 2015 Council on Foreign Relations’ report evidenced that “many [Latin Americans] live paycheck to paycheck, and are deeply indebted. In Brazil, average household debt—mostly high interest consumer credit—now stands at 46 percent of disposable income. One study estimates that 14 percent will fall back into poverty in the coming decade.” https://www.cfr.org/blog/latin-americas-middle-class

Realizing that poorer Latin Americans carry less debt than their well to do counterparts, credit card companies have begun to target them with the assistance of Latin American governments via government assistance payments. The fact that there are approximately 250 million people living in Latin America and the Caribbean and that over 60 percent of Latin American adults don’t use banks to transact business, there is no speculation as to why those individuals would be on Credit Card companies’ radar. http://blogs.worldbank.org/latinamerica/latin-america-most-still-keep-their-money-under-the-mattress.

Latin American Governments have assisted in that endeavor by employing “electronic payment products, encouraging or mandating the use of payroll cards, creating disincentives for cheque use, offering value- added tax (VAT) discounts and [by] promoting emerging technologies that support the payments infrastructure.” http://graphics.eiu.com/files/ad_pdfs/eiu_visa_eng_wp.pdf.

In 2006, Columbia’s largest bank, Bancolombia, teamed up with Master Card to target the lower-income segment of that State’s population, specifically those that made between 408,000-1.2mn pesos per month, which is equivalent to $175-436 U.S. dollars. http://www.bnamericas.com/en/news/banking/Bancolombia_launches_MasterCard_for_lower-income_segment?position=1&aut=true&idioma=en. That announcement also bolster that automatic debit of payroll accounts, savings accounts or checking account was possible, http://www.dinero.com/edicion-impresa/negocios/articulo/bancolombia-ofrece-mayor-facilidad-credito-tarjeta-mastercard-ideal/37748, which is good for the Bank because it doesn’t have to wait for the cardholder to mail in his/her monthly payment. That’s not good for the cardholder because the more that the cardholder spends per month the more money will be debited from that cardholder’s account. As the credit card balance increases each month the cardholder may not be sophisticated enough to understand that the monthly payment will also increase.

I believe that Credit Card companies’ effort to convince Latin Americans to switch from cash to credit will have a devastating affect on the targeted individuals because it may lead to them becoming indebted to the credit card companies as opposed to them being responsible stewards of their family’s limited assets.

As with most industrialized economies, which utilizes credit cards Latin American citizenry will get into a situation where they are working to pay off credit card debt as opposed to working to save for what they can afford.

What I’m afraid will happen is what transpired in Brazil, which saw its domestic growth rely on consumer debt with private consumption accounting for 50% of its GDP. Private consumption consumer debt also accounted for 50% of Mexico, Chile, Argentina, Peru and Columbia GDP. Moreover, in 2013, approximately 25% of a Brazilian household income went to paying consumer debt with 5% of Brazilians being 90 days late repaying loans. https://www.slideshare.net/AmericasMarketIntelligence/latin-america-cards-and-payment-trends-whitepaper.

Cash is king and is solid as gold for a reason and should not be dethroned by the likes of plastic.

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Allen Thomas