Latin America

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So, are you really saving for your retirement? Don’t worry, you don’t have to answer. Nonetheless, today across the globe there is a significant (more like worrisome) percentage of the population NOT saving for their retirement. It is estimated that in a developed nation like the United States, more than 36% of the population has no savings for retirement.

Now, let’s put this into the context of developing countries across Latin America and the Caribbean – because the landscape is more severe. According to the Inter-American Development Bank’s book Better Pensions, Better Jobs, six out of ten people in the region are not currently saving for their retirement. Specifically, in Brazil, a nation of over 200 million people, a research study revealed that 64% of the population has never saved for retirement.

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According to the book Better Pensions, Better Jobs, published in 2013 by the IDB, in Latin America and the Caribbean (LAC) 130 million workers are not saving towards their pensions. It also states that only 4 out of 10 workers currently contribute to a pension system. This data points to how critical this issue currently is amongst the most vulnerable segments.

This is where lessons learned on inclusive savings play a relevant role and provide the basis for designing strategies that incorporate products focused on retirement savings. Nowadays we have greater information and evidence to support the fact that savings, more so than credit, contributes to reducing people’s vulnerability. Therefore, promoting access to and use of savings supports the fight against poverty.

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Photo by Marcin Wichary / CC BY

According to our new report on the economic situation and remittance behavior of Latin American and Caribbean migrants in the United States, 60% of migrants hold a bank account in the U.S. Banking rates among migrants appear to have steadily increased in the last decade; for example, in 2005, 29% of Mexican migrants in the United States held bank accounts, and in 2013, that number had grown to 54%. That is good news. Financial institutions are clearly making inroads within remittance sending communities, though it’s hard to point to one specific reason this is happening.

Financial journalist Felix Salmon wrote a provocative piece for Reuters last month about how U.S. banks no longer see the same potential in remittance senders as they did ten years ago, and might be quietly pulling back from this market. However, employers and government entities are increasingly shifting to direct deposit for payroll, public benefits disbursements, and tax refunds, all of which might contribute to an increase in account ownership. Latin American governments have also made large pushes to provide secure identification to their citizens living in the United States, allowing them to meet the necessary requirements for bank account ownership.

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The market for better financial services is vast. More than two billion people worldwide could benefit from a better way to save and borrow. Institutional microfinance has made an important dent in that demand; outreach has grown to 200 million borrowers in just thirty years. Except in a handful of countries, however, eight of ten of the poorest are not using banks, microfinance institutions and credit unions, even in Latin America. They are villagers and slum dwellers whose needs for saving and borrowing are too small for financial institutions to make a profit.  They need a safe convenient place to save more than they need a loan, and their needs focus more on meeting their daily expenses than on business development.

Savings groups present a game changing alternative to institutional financial services, one that already reaches millions of those whose needs are too small for institutions to make a profit, by sidestepping financial institution building altogether. Instead, freestanding savings and borrowing groups of about twenty are trained to lend to each other the money they have collectively saved. Four hundred thousand savings groups in 69 countries with almost 9 million members are already in place with recent research from Uganda showing that each group trained by staff has spawned another two groups at no further cost.  Viral replication lowers the already low cost of training and supporting groups even further.

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In a recent blog, we discussed the role of mobile money in the financial system and whether mobile money should be considered a substitute for a bank account or for cash. We also discussed the role of prepaid cards, which in many ways function like mobile money and have similar reserve deposit requirements according to financial regulations in Latin America and the Caribbean.

In the US, mobile money has not taken off. However, reloadable prepaid cards, a similar stored-value instrument, have been very successful. They have been used to pay social benefits for quite some time, are now becoming a normal instrument for paying wages. Nonetheless, their growing use is raising concerns about client protection which is lacking for prepaid card users, as opposed to bank account holders and debit and/or credit card users. Another major concern is the high cost of using these reloadable prepaid cards. A recent article in the New York Times lays out the situation in detail. 

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PayPal wants to help you send remittances from outer space, but the real opportunity for remittance product innovation is here on earth.

On June 27th, electronic payment leader PayPal announced the creation of PayPal Galactic, an initiative that claims to be the first step towards making intergalactic payments a reality. According to PayPal President David Marcus, “…one thing is clear; we won’t be using cash in space. PayPal has already pushed payments onto the Internet, onto mobile phones and across terrestrial borders. We now look forward to pushing payments from our world to the next, and beyond.”  While the idea of receiving a remittance from an aunt living on Mars certainly seems like science fiction, PayPal deserves credit for pushing the envelope on new markets for money transfer products.

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At first glance, a strip mall in East San Jose, California doesn’t seem to have anything to do with the MIF’s financial inclusion agenda in Latin America and the Caribbean. However, nestled between the storefronts and neon signs is Community Trust Prospera, a hybrid check casher/credit union model which may hold a key to promoting savings among remittance clients in Latin America.

Last year the FDIC reported that nearly 26% of California households are either unbanked or underbanked, with these populations relying heavily on check cashing stores to turn their checks into cash. The experience of a check cashing customer is similar to that of a remittance recipient: the client approaches a check cashing store with an ID and a check, and moments later walks out with cash - minus a small fee, of course. In both cases, these cash payouts do little to incentivize savings behaviors.

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The boundaries of the concept of planned savings, also known as programmed or contractual savings, are vague. However, evidence has demonstrated that certain savings product models can help people reach a higher level of commitment in their willingness to save1. Therefore, a better understanding of the different planned savings models targeting the low-income population of Latin America and the Caribbean, is essential for evaluating the benefits and limitations of these kinds of products; and thus, for designing policies that increase savings mobilization amongst this segment of the population.

 

In Latin America and the Caribbean there are over 2.000 financial institutions regulated by the central banks or banking superintendencies that are authorized to capture deposits. These include public and private banks, credit unions, savings banks, and over 30 different typologies of financial entities authorized to capture and promote savings amongst the population. Furthermore, there are over 3.000 credit unions that capture savings with little to no prudential regulation. Many of these entities promote savings through a wide array of product offerings. Beyond traditional savings accounts and fixed-term deposits, there is a series of products that incorporate different mechanisms that help clients save frequently by offering incentives and restricting the use of funds according to previously established terms...

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