According to the Latin America Online Payment Methods Report 2019 by Research and Markets, more than half of online shoppers in Latin America said they prefer using cards to make their payments. Cash on delivery also remains widespread, and some people still pay for their internet purchases at brick-and-mortar locations like convenience stores and supermarkets 1.
That’s because the payments landscape in Latin America varies significantly from country to country and even within a single country. In Argentina, Brazil, Chile and Mexico where there are larger middle classes – there are more traditional rails in place and use of sophisticated payment methods like credit cards. Most Latin American countries, however, still have large underbanked or unbanked populations. The World Bank’s Global Findex Database 2017 reports that nearly half of the world’s unbanked population can be found in just seven countries, one of which is Mexico2. Even in Brazil, the region’s largest market, many people in rural areas do not have bank accounts or credit cards.
Much like consumers, merchants fall into these categories as well. Medium-sized merchants may be accepting credit cards, but for smaller and micro-merchants it may not be cost effective. The key is to deliver low-cost solutions that work toward financial inclusion – enabling all merchants to accept electronic payments at the point of sale while also making it easy for consumers to make purchases even if they don’t have bank accounts or credit cards.
In a recent panel discussion, Navigating the global fintech maze, at the HSBC Global Emerging Markets Investor Forum, participants shared their thoughts on how banks, card providers and fintechs are tackling the issue of financial inclusion in Latin America.
Consumer Payment Trends Across Latin America
In Mexico, government regulators have created a fast ACH system, explains David Glaser, Senior Vice President of Mastercard. “They are building a quick response – or QR code-based – system for payments on top of this banking platform.” Consumers quickly scan a QR code at merchant locations, and the ACH system transfers the funds from their bank account to the merchant’s. The goal is to reduce reliance on cash and increase the use of bank accounts while also making corruption such as money laundering and tax evasion more difficult 3.
Brazil’s largest lender is also creating a new QR code-based payment system that will connect consumers and merchants via a mobile app. It’s designed specifically for all consumers, regardless of their income level or whether they have a bank account. Plus, with a 1 per cent transaction fee and no need to purchase a card reader, it will allow micro-merchants to accept electronic payments affordably4.
The challenge with QR code-based systems is that they are typically closed-loop. That means there is no interoperability and can’t be used by people outside their own countries or by those traveling into the country.
“Interoperability is key,” says Mr. Glaser. “The goal is to make sure whatever payment methods folks are using and merchants are interacting with through their payment platforms can be used as people travel or move from country to country.” For other parts of Latin America, where there are carded markets – including Brazil and Mexico – the answer might be contactless.
The trick with contactless solutions, however, is that issuance and acceptance need to happen at the same time. “If issuing banks and credit card providers moved faster to offer contactless – consumers would adopt the technology much faster, potentially eliminating the need for QR code-based payments” explains Mr. Glaser. “We’ve seen that when contactless reaches a tipping point in certain markets, like transportation in the UK, it quickly becomes the universal payment method.”
Value-Add Services for Consumers and Micro-merchants
Neha Agarwala, CFA, LatAm Financial Analyst for HSBC Global Research says that in Brazil – where the payments landscape has changed quickly – the most successful fintechs have been those who found a niche, something lacking from the incumbents’ offering that led them to establishing their own. “PagSeguro opened a new merchant segment for online and mobile payments,” says Ms. Agarwala. “Stone, a credit card processor, found there was a gap in service so focused on establishing close relationships with SMEs.”
David Nangle, CEO of Vostok Emerging Finance, agrees that this is a sound strategy for fintechs. “PagSeguro and Stone are massive success stories,” he says. “In markets like Brazil, people are generally more digital and financial product savvy. They don’t need to be educated on a product because they likely already have something similar. Fintechs just need to deliver it at a better price with a better user experience.”
There are other gaps that fintechs could exploit as well, says Ms. Agarwala, particularly in the area of providing value-added services. “There’s not much margin in traditional payment processing, which makes it difficult to work with small and micro-merchants,” says Mr. Glaser. That’s why once these merchants have been on-boarded, it makes sense to offer them value-added services to build loyalty and potentially create new revenue streams. “It’s increasingly important to provide targeted solutions to merchants that help them grow their businesses,” Ms. Agarwala says.
That’s what Mercardo Libre – an online marketplace – did, explains Ravi Jain, Senior LatAm Consumer & Retail Analyst for HSBC Global Research. “They started with data processing on their platform for merchants,” he says. “Then they moved to smaller merchants who were selling online but didn’t have a payments system.” They saw an opportunity when it came to providing credit and cash advances to merchants. “They could see in real-time how much the merchant was selling, so they could price credit well based on that knowledge while also helping them process payments.”
There is a big opportunity in Latin America for providing credit, not just to micro-merchants but also to the unbanked population. Mr. Jain says that traditional retailers might charge Brazilians as much as 12 per cent interest a month. “There’s a lot of incentive for e-commerce companies and fintechs to use the data they gather on consumers and price credit in a better way.”
3“Mexico pilots national NFC and QR mobile payments system,” NFC World, May 16, 2019, https://www.nfcworld.com/2019/05/16/362713/mexico-pilots-national-nfc-and-qr-mobile-payments-system/
4“Brazilian Bank to Launch Instant Payment Method,” Fintech News, May 17, 2019, https://www.fintechnews.org/brazilian-bank-to-launch-instant-payment-method/