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Central Bank's resolution threatens digital wallets sustainability in Argentina

A decision that came into force this January determines that 100% of digital wallet balances must be immobilized with the monetary authority, which puts these companies' "zero-fee" style operation at risk.

Photo: Piotr Swat/Shutterstock
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On December 30th, the Central Bank of Argentina (BCRA) determined that starting this January, banks must establish a reserve of 100% of the funds deposited by fintechs that offer digital accounts in the country, more specifically digital wallets, to supposedly “prevent contingencies and ensure that these funds are available” to their users.

This means that instead of the money staying in the accounts of local banks it will be immobilized at the Central Bank, which puts these companies’ “zero-fee” style operation at risk.

In a statement, the Argentine Chamber of Fintech, an entity that represents the sector, said that the measure makes no sense, since, in practice, the resources of the payment accounts have always been available to users, deposited in full in local bank accounts. When deposited in local banks, these balances yield interest rates (extra earnings) for the fintechs, which helps to support the entire business logic.

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The entity recalled that, in the last four years, 25 million digital accounts were created in the country, with this amount doubling every year.

In Argentina, there are just over 30 fintechs covered by the new resolution. Mercado Pago, or the financial arm of the e-commerce behemoth Mercado Libre, and Ualá are the largest and tend to suffer a drop in revenue, but what about the impacts on the others? This is the question of Ignacio Carballo, economist, professor, director of the Fintech Ecosystem at the Catholic University of Buenos Aires, and an affiliate of the Southern Cone of AMI (Americas Market Intelligence).

A report by Nau Securities, a British company that provides consulting and stock research services specializing in Latin American markets, pointed out that, based on the company’s results in the third quarter of last year, Mercado Pago could lose between $40 million and $50 million annually if the measure persists.

That’s the estimated amount that Mercado Pago would receive in interest rates of 15%-20% on the $270 million it had in deposited balances with local banks in the third quarter of last year, according to Nau Securities.

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The balances that are invested in basic investments integrated into the accounts are not part of the new requirement, that is, they do not need to be retained with the monetary authority. Mercado Pago is one of the fintechs that offers this type of product as a way to attract more users and make them effectively use the account.

“The study points out that MeLi can handle this loss, but other digital wallets probably cannot. The measure could lead to a greater concentration of the main players: MeLi and Ualá, which is awaiting approval to buy the banking license from Willobank. The report also indicates that this loss in Argentina may imply a greater emphasis on the Mercado Pago strategy in other economies: Brazil, where it already has a license and can receive goods and issue credit cards, Chile and Mexico,” says Carballo.

So far, the Central Bank of Argentina has not withdrawn from the measure and fintechs continue to demand dialogue.

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