Ask yourself this simple question: are you more likely to buy a car once you´ve saved enough money to pay for it in full, or take out a loan to finance it?
The answer will help us to understand a key cultural difference in Latin America and the reason that savings and loan rates at formal financial institutions are so low in the region.
More on this in a minute.
According to the same study, here are the top three reasons that Latin Americans opt out of the formal financial sector.
55% Not enough money
40% Too expensive
21% Lack documentation
Having identified three key reasons deterring the unbanked from entering the formal financial sector, banks should be able to design a strategy that addresses these issues and bank the 360 million BOP consumers in the region. Afterall, m-pesa did this quite successfully in Kenya. However, for whatever reason, financial institutions haven´t attracted these consumers – the overall size of Latin America and the Caribbean’s BOP market is US$759 billion, representing about 10 percent of the regional economy.
Now, back to the question at hand. The other day I asked my wife – who is from Cali, Colombia – why Colombians are less likely to take out a loan to buy a car.
Her answer was simple: the job market is awful in Colombia and even if you have a great job today, you can very easily lose it tomorrow. So if you finance a car, lose your job and cannot make the payments, the bank will repo your car. What´s worse, if the value of your car is not enough to pay your debt, then the bank can also mortgage your home to cover the remaining debt. Simply put, why would you finance a car when it could result in losing both the car and your home?
If banks and payments companies don´t understand these cultural nuances and aversion to debt in LATAM´s markets, they´ll never be able to crack the code to unlock the potential revenue coming from the world´s 28th largest purchasing power nation: LATAM´s bottom of the pyramid consumers.
Greg Ritter is a strategist in the banking and financial payments industry in Latin America and author of the blog Beyond Cash. He earned his MBA and has spent the past two years working directly out of the Latin American markets. You can follow him on twitter @gregritter84.
This article was published previously – data has been updated with recent information.