José Carlos Aguilar
Co-Founder & Co-CEO
Expert Contributor

Payroll data holds potential for financial inclusion

By José Carlos Aguilar | Tue, 01/25/2022 - 09:06

Recently, I was in the US for the holidays. To prepare for my trip, I went to an ATM to withdraw pesos and then change them into dollars. When I arrived in the US, I was surprised by how hard it was to pay with cash; there were signs everywhere that businesses were operating cash-free, especially in pandemic times. As a matter of fact, only 26 percent of the transactions in the US were done in cash last year and the number is decreasing year over year.

For this reason, the availability of data in developed regions, such as the US and Europe, is incredible. It unlocks almost all financial, transactional information from the consumer (for example, recurring payments and net income) and it is used to empower any institution, especially the financial sector, to build better products. But what about emerging economies?  What is happening in Latin America?

As a Mexican, it was normal for me to carry cash on a trip abroad. If you live in Mexico, you have probably seen long lines at ATMs in what we call viernes de quincena, payday for most workers, where almost all of them withdraw their money to pay the rent, bills and for food. According to Mastercard, 70 percent of workers withdraw all their money from ATMs as soon as they get paid. Compared to the US, Latin America poses a big challenge in terms of data availability as the vast majority of financial and employee information can’t be accessed through the banking system.
For instance, if a person connects their bank account with a fintech company, the majority of transactions observed will be related to cashing in and cashing out. Access to transactional information is not the only problem; an inaccurate picture of earnings exists as well. For example, in certain types of work, such as the gig economy, 50 percent of total earnings are in cash. As a result, if a gig worker were to apply for a loan today, only half of the earnings would be considered in the decision process of granting a loan or not.
Basically, there is little financial information about anyone. Hence, financial institutions can’t serve the majority of the working population. This is one of the reasons countries like Mexico encounter poor credit penetration, with only 20 percent of the population having access to formal credit. The vast majority of existing options for the underserved population are predatory loans that can charge you up to an interest rate of up to 400 percent a year, or not grant a loan altogether.
So what’s the alternative? There’s a lot of valuable data that lives in fragmented ways, such as payroll systems – think of gig economy platforms. For instance, platforms like Uber gather all the employment information about a worker, such as income and time working. The same is true for all employers at Walmart or Starbucks. However, this information is inaccessible and closed. The biggest challenge is to open this information through technology.
What’s really exciting about the information that comes directly from the employer is that you can access other types of valuable information, such as position, reputation, identity, when, where and how often people work and the list goes on. There are many digital services that this information could potentially unlock, and the most obvious is applying for a loan; however, use cases go beyond financial services and can include renting an apartment or applying for a new job.

Open banking is inevitable worldwide but Latin America is not there yet and probably won't be in the near future. There are many issues that need to be solved for this technology to work, including trust in the financial system, informality, regulation and adoption. In the meantime, I will exchange my dollars again and I'll buy my favorite tacos on the street.

Photo by:   José Carlos Aguilar