Merchants—Not Banks—Are Driving LatAm Payment Innovation
Payment innovation in Latin America, or the lack thereof, has traditionally been driven by banks. Credit cards, achieving huge success in the region, became the principal electronic payment method, with banks lazily pushing out other products, such as debit and prepaid cards. Flush with cash, facing little competition, and enjoying a growing middle class, they have had little incentive to innovate. As such, banks have categorically failed at banking the middle and lower-middle classes or delivering creative ways to pay.
Around 2012, mobile operators in the region thought they might play a role in determining how people pay via mobile money platforms for the unbanked. Fast forward four years later, however, and mobile money penetration has reached only about 3% of the total population.
Similarly, the fintech revolution is expected to alter payments in Latin America. Online lending, branchless banking, and contactless payments are areas in which fintech has thrived, forcing banks to think seriously about innovation. Banks have responded by creating their own startup accelerators, including Banco do Brasil, BBVA, Scotiabank, Bancolombia and many others.
Additionally, in 2015, banks across the region finally starting releasing their own iterations of payment technologies, including digital wallets for mobile payments, e-commerce wallets, and payment wearables. In Mexico and Colombia, there are upwards of a dozen of such products, each fighting tooth and nail for market share. But volumes remain tiny; consumers are skeptical of digital payments for fear of theft of their personal information and none provide a better user experience than credit cards or cash.
Thus, since 2012, traditional payment methods have remained agonizingly sticky in Latin America and a huge chunk of the population still does not have any digital payment method. Some estimates say 90% of payments in Latin America are still made in cash. When will the digitization revolution in the region occur? And who will make it happen?
It turns out that merchants are leading the way when it comes to moving the needle on financial inclusion and digital payments—and in many cases they’re doing it by using cash. Here are some examples of how merchants are changing the payments game.
LATAM Airlines Leverages Cash
In Peru, where banking penetration is only 30% and the culture of online payments is still underdeveloped, LATAM Airlines (formerly known as LAN) built its own cash-based payment system for its website while completely excluding the national banks. On its proprietary online platform, customers purchase an airline ticket, print out a voucher, and pay for it in cash at a large network of supermarkets that LATAM Airlines itself developed. This approach has been so successful that LATAM Airlines is widely recognized by every player in the market as the leading e-commerce merchant nationwide. Effectively, LATAM Airlines alone captures 10%+ of Peru’s total e-commerce market.
Netflix Doubles Its Market with Debit Cards
Until only recently, banks in Latin America refused to enable debit cards for use in e-commerce. Throughout Latin America, banks are acutely concerned about fraud on debit cards, because fraudulent transactions result in the theft of customers’ actual funds. This is in contrast to credit card fraud, in which banks have the ability to deny chargebacks, and liability falls to the merchant.
However, only 18% of the population has a credit card in Mexico, meaning Netflix was not reaching its full audience in the country, due to the simple fact that would-be customers did not have a way to pay. Netflix thus went knocking on the doors of Mexican banks to convince them to enable debit cards for payments to Netflix. This had two main results. The immediate impact was that Netflix’s addressable market size nearly doubled. It also began a process of portraying debit cards as a safe and viable payment method for e-commerce, a trend that will continue to develop in the immediate future.
Uber, Linio and Facebook Also Get Creative with Cash
In October 2016 the ride-sharing app launched a co-branded debit card in partnership with online-only bank Bankaool, precisely to cater to non-credit cardholders in Mexico. Uber also accepts cash in Mexico and Peru, as do Cabify and Easy Taxi. Facebook in Brazil altered its payments model for purchasing advertising credit by switching from a post-paid to pre-paid model in order to enable cash payments via boleto bancario. Linio, a large regional marketplace, has been the pioneer of promoting cash-on-delivery for e-commerce across Latin America.
Driving the Markets
In Latin America, merchants have a simple motivation for innovation when it comes to payments: increasing sales. And this simple fact is often overlooked by payments executives. The fact is, bank-driven payments innovation such as contactless wearables and NFC wallets is not what the market is asking for. Instead of pushing newfangled (and unwanted) ways to pay into the market, a wiser approach may break down to two simple steps:
- Identify who wants to buy what
- Give them the mechanism to do it
Winning Hearts, Minds…and Money
The influence of merchants on LatAm’s payments and e-commerce industries is likely to keep growing strongly. Besides winning over the hearts of consumers, these global merchants like Netflix have the leverage to influence banks. They amass huge groups of customers, many of whom are new to e-commerce and represent incremental income to banks. They also have the resources to tolerate a high level of risk than small merchants and so are more willing to try new things. And they are not going anywhere; Uber has shown resilience in the face of brutal regulatory crackdown in the region. Netflix is rolling out new original and local content like their life depends on it, including the first Argentinian series to air in 2017.
Moreover, merchants like Netflix and Uber have become household must-haves, and users are thus willing to adopt banking products to access them despite the deep-seated distaste that many Latin Americans have for banks in a region traumatized by financial crises. So as these new users become accustomed to e-commerce, they will use their digital payment methods to buy on other websites, and grow the pie overall. Thus, banks have a large incentive to work with popular digital merchants and indulge their desires.
Can Merchants Solve the Mobile Wallet Mystery in LatAm?
One of the persistent challenges in Latin America is convincing the unbanked to keep funds stored in mobile wallets, as opposed to withdrawing it all in cash. Our prediction is that it will be merchants who solve this conundrum—not banks, telcos, or fintech startups. Increasingly, the bottom of the pyramid wants to consume digital goods—be it ringtones, taxi rides, or online education. So if popular digital merchants—whose services can’t be purchased with cash—integrate with mobile wallets, this would provide a direct incentive to keep mobile money in digital form. Popular digital merchants have unprecedented reach and influence and therefore the ability to motivate those who are outside of banks’ reach. Going forward, banks will lose their grip on the control of payment methods and merchants’ influence will grow. As such, banks in Latin America must embrace collaboration with merchants and welcome the newly banked into their community.
Contact Americas Market Intelligence to obtain strategic insights into the payments market in Latin America that will drive your business decisions successfully in areas such as e-commerce, affluent business or consumer cards, mobile money, digital wallets, POS systems and more.