Uruguay's financial inclusion legislation: Conflicting opinions

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Friday, May 23, 2014

Uruguay passed landmark financial inclusion legislation in April that aims to incentivize the use of electronic payment technology as a means of widening access to financial services throughout the country.

Under the legislation, employees must be given the option to receive salary payments directly into a bank account, tax cuts will be applied to transactions carried out with debit cards, and new forms of payroll credit for workers must be introduced.

Additionally, citizens will not have to assume directly any of the costs associated with accessing such services.

To get the banking sector's take on the new legislation, BNamericas spoke to banking association Aebu president Gustavo Pérez.

BNamericas: How does the banking sector view the legislation?

Pérez: It has conflicting opinions. On the one hand, the reforms are welcome, there's a necessity in the country for instruments to boost inclusion; it recognizes that we're very behind compared to other countries in the region. But they [banks] also object to certain points such as the costs involved.

BNamericas: When will it enter into force?

Pérez: It will enter into force progressively. The first item, the reduction of value added tax for certain electronic transactions, will enter into force on August 1.

For others, such as requirements for salaries to be paid into bank accounts, the law gives authorities a more flexible timeframe for implementation.

Also, this year is an electoral year. The new government will take power next March, so certain points could be left until after then, at the latest the second half of next year.

BNamericas: Which specific points does the banking sector object to?

Pérez: One of the main objections regards costs. Today, banks deal with companies, which pay workers salaries into bank accounts. Banks establish the charges for opening accounts with the employer.

The law, however, says that accounts linked to salary payments must be offered free of charge, and up to five cash movements must be free, and at the same time interbank transfers have to be free.

These are services that must be mandatory and free but that banks charge for today.

Other smaller sectors such as savings cooperatives have also objected, saying the law could cause them to lose ground.

BNamericas: Will it affect asset quality?

Pérez: Banks will have to offer credit under certain circumstances but on the other hand deposits will grow, which will increase liquidity.

Also, loan repayments will be made through payroll deduction, so as long as the worker keeps his job it's practically zero risk, as long as the economy remains stable, and unemployment doesn't rise.

BNamericas: How will banks implement the necessary technological changes?

Pérez: The technology, such as homebanking and cellphone technology, has started to be developed in the banking sector but very slowly, and this is one of the great challenges associated with the law.

The law requires the development of card-payment technology in all stores, including medium-sized and small stores, so consumers can benefit from the tax breaks.

So the government has committed to collaborate in terms of tax breaks et cetera, for the importation of equipment and software, but this is still being negotiated to some degree.

The state wants this to be developed and has ways that it can contribute.

BNamericas: What opportunities will the law generate?

Pérez: Opportunities will come from the expansion of the market. It will also boost competition.

At the moment the employer makes a deal with a bank and the worker deposits his salary where the company tells him. The law now gives that choice to the worker.

The worker will choose the bank that gives him additional benefits and services. So the development and sale of additional products is where business opportunities will come from.

So we'll see whether it generates consolidation in the sector as banks try to achieve scale. There will probably be some repositioning in the market.

Also, bear in mind that state bank Banco de la Republica, which is a commercial bank, has 60-70% of the market in some segments, and no less than 50% of any given segment.