Wallets Compete for Customers Through Micro-Investments

Over the past year, digital wallets have rapidly gained traction in Argentina, capturing a significant portion of the funds that were previously held in traditional financial systems.

This accelerated growth has been driven by the persistent inflation in the country and customers’ search for more lucrative investment options. As inflation soared to triple digits annually, fintech companies seized the opportunity, introducing attractive investment instruments like immediate liquidity mutual funds that generate daily returns on account balances.

According to the latest retail payments report from the Central Bank of Argentina, the balances in digital wallets, both invested and uninvested, skyrocketed to $2.87 trillion in July. This figure represents a substantial 5.06% of the total private sector deposits within the financial system. In simpler terms, for every $20 in the hands of the private sector, $1 now circulates through these platforms, indicating a dramatic shift from the previous year, when the ratio was $1 for every $50.

Expansion with Micro-investments

This increase is largely attributed to consumers perceiving digital wallets not just as payment tools but also as investment vehicles, even if the amounts they can invest are minimal.

The Argentine Fintech Chamber highlights a massive migration of Argentinians toward these platforms in search of greater financial benefits. To differentiate themselves from banks, fintech companies have introduced tools like money market funds, allowing users to earn returns on their available balances while retaining the flexibility to withdraw funds at any time, even overnight or on weekends.

In June, the funds invested through these wallets reached $2.5 trillion, reflecting a real increase of 112% compared to the previous year.

Currently, for every peso that remains uninvested, $6.76 is actively being invested, a significantly higher ratio compared to $2.14 the previous year. This phenomenon has been fueled by inflation and rising interest rates during the second half of 2023, when the Central Bank raised the nominal annual rate to 133% for fixed-term deposits, benefiting immediate liquidity funds.

Impact of rate reductions

However, the dynamics changed this year due to the Central Bank’s monetary policy, which has gradually reduced interest rates, reaching a nominal annual rate of 40% in May. This decrease has impacted the returns on digital wallets, although they remain an attractive option for users looking to generate income with their funds. Currently, industry leaders like Mercado Pago, Prex, and Personal Pay offer annual returns around 37%, translating to an approximate monthly return of 3%.

Additionally, some wallets have introduced interest-bearing accounts with higher rates. For example, Ualá allows users to choose between a money market fund with a 35.04% annual return or an interest-bearing account with a 45% rate for balances up to $500,000. Other options, like Naranja X, offer a 42% annual rate, positioning themselves as competitive alternatives against expected inflation.

Navigating inflation

With persistent inflation posing a challenge for the Argentine economy, fintech companies and digital wallets continue to position themselves as solutions for those looking to maximize the value of their money. While interest rates have decreased in 2024, the sector remains innovative and adaptable, offering investment and savings options that attract an increasingly larger user base. The consolidation of digital wallets as an alternative to the traditional financial system seems poised to continue in the coming years.