Industry experts forecast that Latin America will be home to 605 million smartphones by 2020, a figure that will be exceeded only by the Asia-Pacific region. This represents a robust business opportunity for YellowPepper, a mobile banking, payments and commerce startup. The Miami-based company said it now generates 30 million transactions on average each month in the region.

YellowPepper’s strategy is to forge partnerships with financial services and other incumbents in the region instead of disrupting them as is generally the style of digital startups in the U.S. While much larger competitors such as Apple Pay, Android Pay and Samsung Pay have come in, YellowPepper believes that its relationships with entrenched Latin American companies gives it an advantage in the market.  

Knowledge at Wharton sat down with YellowPepper’s co-founder and CEO Serge Elkiner to ask him about the market dynamics of Latin America’s mobile payments market and his strategy to make YellowPepper a major player in mobile commerce in the long run.

An edited transcript of the conversation appears below.

Knowledge at Wharton: Let’s begin by talking about the mobile payment market in Latin America. What’s the main business opportunity there?

Serge Elkiner: There are two different markets to look at: mobile and banking. Let’s start with mobile. We started the company 8 1/2 years ago and we focused on financial services. At the time, mobile phone penetration in Latin America was about 84%, on average. Today, it is more than 100% in every market where we operate [as phones outnumber people]. Mobile is a de facto tool people are using. And now smartphones are growing in popularity, which allows us to deploy a more sophisticated system. People are increasingly connecting to the Web using their smartphones instead of their computers.

Knowledge at Wharton: Latin America is a big market. Can you talk about the different segments of the market and which areas are more developed than others?

Elkiner: Chile, in general, tends to be more developed. For example, in Chile, smartphone penetration has reached 56%, which is the highest in Latin America. Brazil is nearing a 50% smartphone penetration, but that doesn’t necessarily mean that all these customers have a data plan on their smartphones since they operate as aspirational tools for some people. Mexico has about a 25% smartphone penetration, while the rate in Colombia and Ecuador is around 25% to 30%. The least penetrated market may be Bolivia, around 15% to 20%.

“Mobile is, in my mind, the most transformational channel that can have the most impact with the lowest operational costs.”

Now let’s look at the so-called “bankerization,” which describes the population of a country that has a bank account and uses it. Chile has a bankerization rate of 60%. Mexico has a rate around 30%, Colombia is around 30% to 40%.

And there can be overlaps between smartphone penetration and bankerization. About 80% to 90% of people who have a smartphone also have a bank account and also perhaps a credit card. But not everyone automatically uses phones for banking.

Many people who have bank accounts in Latin America do not use their accounts as much as we do in the United States or Europe because of access difficulties. There is a shortage of bank branches in these countries and the banks are trying to develop new channels to reach people. Mobile is, in my mind, the most transformational channel that can have the most impact with the lowest operational costs. There is a good argument to be made to connect mobile and banking to unlock different value-added services such as traditional mobile banking and mobile payments, which allows you to make point-of-sale purchases with your phone. Mobile is unlocking huge opportunities for consumers, banks, retailers and tech companies like ours.

Knowledge at Wharton: In Africa mobile banking is all the rage, especially in countries like Kenya. Services like M-PESA have become dominant. How do you see the growth of mobile and mobile payments in Latin America developing? What are some of the challenges to growth in the mobile market?

Elkiner: To make a comparison, Africa was less developed in terms of its financial ecosystem, infrastructure, hardware, software, point-of-sale systems and credit card issuance, etc. Therefore, M-PESA-type systems became dominant because they grew faster than the banking system and they switched the country over to a new payment system.

Latin America is slightly different because even though we are not as developed as the U.S. and Europe, the Latin American banks are bigger and the infrastructure is larger than in Africa. In Mexico, for instance, you have roughly 2.5 million retail locations and 600,000 of those locations have a point-of-sale system that allows the stores to accept credit card or debit card payments. About 20% to 30% of retailers can accept card payments, indicating there is significant infrastructure that has been deployed in these countries.

This is beneficial because we can use that infrastructure. But it is also a challenge because using that infrastructure requires that we forge partnerships within the financial system, including the payment processors and the banks. It was always our plan at YellowPepper to create those partnerships. It has taken us nearly three years to build these relationships, sign the contracts, integrate our services with the hardware and software systems, etc. We are now live and using the infrastructure in Mexico, Colombia and Ecuador. In Africa, M-PESA and similar services were able to become dominant without integrating into the current system.

Knowledge at Wharton: You often see an interesting dynamic in these markets. It’s almost like a tug of war between the banks and the telecom companies over which side should ‘own’ the customer. You see this very dramatically taking place in Africa. How is it playing out in Latin America?

Elkiner: Two things impact that tug of war: regulation and technology. The African business landscape favored the telecom side, but in Latin America the banks are in a more favorable position. In Latin America, you always need a bank, no matter what. But technology is changing the tug of war. Systems like M-PESA and Tigo Cash in Africa, Easypaisa in Pakistan, and Airtel Money all depend on technology that is controlled by telecom operators. But since the introduction of the iPhone and Android smartphone, you don’t have to depend anymore on a specific carrier for a specific technology within your mobile phone. Smartphones unlock new capabilities for banks, retailers and companies like ours to run programs and build new systems that do not depend on telecom companies.

Knowledge at Wharton: Let us turn now to YellowPepper and your growth strategy for Latin America. What was your strategy when you started and has this changed?

Elkiner: I originally founded my company in the United States and offered value-added services. I was not doing anything in Latin America. I hadn’t set foot in Latin America until 10 years ago. But when we went to Latin America, we went to Ecuador and we continued offering value-added services to businesses such as TV stations and newspapers. For example, we helped run some of their services via text message.

Then we identified an opportunity around 2007 for mobile banking in the financial services sector because the lines at the banks were so long. We figured there had to be a better way, since the majority of people were lining up at the banks simply to check their bank balances. At this point, 95% of transactions were done at bank branches and very few transactions were made via Internet banking.

“In this consolidated environment in Latin America, it’s difficult to get in, but once you’re in you know it is very difficult for competitors to get in.”

We thought mobile would be good for bank customers and help them avoid the lines. That is how we got into the mobile banking world and we quickly shut down anything that was not focused on financial services. We focused 100% on Latin America and shut down any business we had in the United States. We started working with the banks to build different services, first on text messages, then other channels. Within the last four or five years, we have worked with the banks on smartphone app development and we’re seeing hyper-growth for mobile banking apps.

Then three years ago we decided to expand our capabilities and get into payments with our banks. Our mobile banking system already touched 500 million users every month and generated approximately 30 million transactions on a monthly basis. We wanted to offer mobile payments to that audience so we began integrating all of the systems.

Our strategy over the past three years has not changed, but it has evolved. The world is clearly changing into a digital world and that is affecting every aspect of our lives and our ‘digital selves.’ Banks, retailers and payment processors in our industry are not specifically ready for that transformation, which leaves space for new entrants to start disrupting the system. The newest entrant is Apple with the launch of Apple Pay, alongside Google’s Android Pay and Samsung Pay.

Our strategy over the last three years has involved working with banks, payment processors and retailers in Latin America to build a new digital age for commerce, shopping, banking and payments. We told them, “Let’s do it together. If you don’t do it, you will be displaced. If we do it together, we will help you and you can remain an important part of the conversation. Other competitors may still enter, but you will remain an important part of the conversation.”

Knowledge at Wharton: As a start-up, why did you work with the banks instead of disrupting the system? And how receptive were the banks to your warnings about the new digital landscape?

“Instead of trying to work as an independent start-up and annoy the industry leaders, we figured we would try to work with them.”

Elkiner: Unlike the U.S. and Europe, the Latin American banking industry is extremely consolidated, and two or three players can dominate 70% of the market. You have a total of roughly 15 relevant banks in each market and two processors that are owned by the banks. Meanwhile, the U.S. has 10,000 banks and 2,500 accredited processers through Visa and MasterCard. So in this consolidated environment in Latin America, it’s difficult to get in, but once you’re in you know it is very difficult for competitors to get in.

Instead of trying to work as an independent start-up and annoy the industry leaders, we figured we would try to work with them. We thought, “If the leading institutions are receptive, we can build a dominant position over the next few years and we can defend ourselves from new entrants. If they are unreceptive, we will go our own way.”

That brings me to your second question: How receptive were the banks, payment processers and retailers? They were not always receptive. Some banks were won over by a PowerPoint presentation. Other banks had egos that got in the way. And sometimes you can meet the wrong person within an organization. You need to find one or two ‘champions’ in each country that share your vision. The CEO may be the right person with the right vision, but you can’t always reach him. Furthermore, some of these banks are global banks and the employees can’t make strategic decisions at a local level, which means you have to go to the headquarters for a meeting, which could be in Madrid, New York, Barcelona, etc.

We were able to forge relationships with Banamex in Mexico, Grupo Aval in Colombia and Diners Club in Ecuador. Then others followed suit. It has been a long journey. This is a marathon, not a sprint. We have deployed a lot of capital for operations, investments and systems integration with our partners. Now we are in a strong position because anyone that may want to launch mobile payment operations in these Latin American countries will want to come to us first because it is much easier than doing it on their own.

Knowledge at Wharton: What is the main business opportunity you see for YellowPepper in Latin America over the next two or three years?

“You need to find one or two ‘champions’ in each country that share your vision.”

Elkiner: I believe mobile will unlock capabilities that do not exist today. The biggest opportunity I see is being able to bring a face and a name to the consumer who is shopping. Banks don’t have these purchasing insights yet. Our technology combined with the mobile platform presents an opportunity to jumpstart engagement with consumers, which could help generate additional revenue for retailers and banks. We will be able to take a piece of these additional revenues that we unlock.

Knowledge at Wharton: What are the biggest challenges you see in grabbing the opportunity that you describe? How do you plan to overcome those challenges?

Elkiner: Consumer adoption is one challenge. You need to wean people off cash, credit cards and debit cards. You have to start incentivizing them to make the move and make them feel comfortable. A promotion or loyalty points are potential options. You have to appeal to the consumers and their wallets.

Secondly, there’s the technical challenge of integrating many moving parts. This takes time. For example, Apple Pay launched with millions of merchants and thousands of locations in the U.S. But I still can’t use Apple Pay everywhere I go shopping. The challenge is continuously integrating new systems and locations.

The third challenge occurs when banks and retailers don’t share your vision. They may be confused or want to see where the market is going before making a move. This delays progress. But over the next three to five years, everything will fall into place. We have been a big first mover in this industry and I believe we will be part of this discussion in five years time as well.

“It has been a long journey. This is a marathon, not a sprint.”

Knowledge at Wharton: What are some of the steps that you are taking today to make sure you will overcome these challenges?

Elkiner: We always try to find banks that are large enough to support the program. We were lucky in Colombia to sign up eight banks immediately. We were lucky in Mexico to work with Banamex. This same philosophy is valid with retailers. We are looking for large retailers to start embracing the system, which will give consumers confidence. We just launched a campaign with McDonald’s in the last few weeks and we are starting work with Circle K convenience stores in Mexico. Different retailers that have vision and signed up early will help us create trust in the system and bring confidence to the end user.

Knowledge at Wharton: This is a personal question. You referred to the digital transformation, which is changing almost every industry that it touches. This digital transformation seems to be creating a corresponding challenge for individuals, who may be undergoing a personal transformation as they look to succeed in this new digital world. In your case, what have you done to bring about some personal transformation? What are you doing differently so that you succeed, not just in the previous analog world, but also in the new digital world?

Elkiner: It’s good that I am young enough that I grew up in the digital transformation, but I am not so young that I only knew digital. There was no Internet when I was born. I had my first Apple Macintosh in 1994. But when I see my children, they are born with iPads in their hands. Their world is digital: books, school activities, writing, etc. Things have changed. You have to learn from the younger generation. I am trying to always go out and learn from everyday life. When you sit in Starbucks in Mexico for three hours a day, you start seeing how younger people are interacting.

Knowledge at Wharton: What are some of the things you have seen?

Elkiner: There’s more and more communication on cell phones, such as instant messaging, like WhatsApp and Facebook Messenger. Communication between people has changed drastically.

When I was 15 years old and I started dating a girl, we had phone conversations on a fixed phone line. There was no WhatsApp. Cell phones existed but they were way too expensive back then. Today, 15 year olds have cell phones, Facebook Messenger, Snapchat, WhatsApp, etc.

This technology creates two different tones in our conversations: the digital conversation tone and the live conversation tone. I have realized people are more rude in digital conversations. They say things that they would never say in person because looking someone in the eyes is not the same as looking through a screen. I pay a lot of attention to avoid this tone. My tone in the digital format or in-person is the same.

I also place great value on human interaction, which is perhaps not as valued by younger generations. I travel extensively because I want to meet the people that I do business with. I want to shake their hands and negotiate the terms of our deals over lunch or dinner. People tend to forget about human interaction these days. There’s nothing wrong with Skype meetings and we do a lot of Skype conversations in our work, but you can never read a person or get to know a person in the same way. I think this is changing too much in the world so I personally hold back a little bit. I believe human interaction is critical in all relationships, personal or professional.

“I became co-founder and CEO when I was 25 years old … You make a lot of mistakes when you are young. You are bullish and don’t think through some decisions.”

Knowledge at Wharton: In your role as co-founder and CEO of YellowPepper, what is the biggest leadership challenge you have faced? How did you overcome it and what did you learn?

Elkiner: I became co-founder and CEO when I was 25 years old. I was young and stupid. You make a lot of mistakes when you are young. You are bullish and don’t think through some decisions. Now, 11 years later, I think through decisions and analyze the issues. But I don’t like ‘analysis paralysis’ – we analyze and then take a position.

But my biggest challenge involved investing in people. I had to build a team so I hired a bunch of people, but I eventually realized that I wasn’t always hiring the right people. We didn’t pay attention to the hiring process and how people would fit into the organization. On top of that, we run a multi-country operation. Integrating the countries and dealing with the cultural differences can be a challenge. So in the last couple of years we have put a lot more attention into human resources, recruitment and talent development to ensure the team fits together. We see higher productivity at the end of the day. I think that has been the biggest lesson and the most challenging one, because it is difficult to recruit good talent.

Knowledge at Wharton: Where do you see YellowPepper going in the next four or five years?

Elkiner: I see us as a dominant player in our industry in Latin America. I don’t have plans to expand outside of the region. There is a lot of work to be done and I am very passionate about this region. Even though I was born and raised in Belgium, I fell in love with the region. Plus, my wife is from Ecuador. But honestly, the region has so much potential that needs to be unlocked and I think that four or five years from now, when you think of mobile payments or mobile banking in Latin America, you will think of YellowPepper.