Why Digital Wallets Aren’t Working in Latin America—and How to Fix Them
3 Major E-Wallet TypesContactless Mobile Wallet: An actual digital replica of a consumer’s wallet, i.e. it tokenizes and stores credit cards in digital format for use on a mobile device or wearable, in contactless payments at physical merchants, i.e. Samsung Pay. The chart below breaks down several types and the countries they’re used in.
Digital E-Commerce Wallet: A card-on-file online tool that tokenizes and stores a customer’s payment card information, for use in e-commerce, i.e. Visa Checkout and MasterPass. The chart below breaks down several types and the countries they’re used in.
Stored Value Wallet: A digital account accessed through a mobile phone that stores electronic funds, meant to be used in lieu of a bank account. These fall into two sub-categories: those designed for feature phones and smartphone apps. The chart below breaks down several types and the countries they’re used in.
Banks, telcos, e-commerce platforms, fintech startups and scores of others have delved into this industry. But after a decade of development and some 50 companies competing in a frenetic rat race, no product has yet to scale. There are no clear leaders. What is going on?
The issue is that digital wallet providers in Latin America have failed to create a compelling value proposition to consumers—because they are focusing on the wrong things.
3 MAJOR PROBLEMS WITH E-WALLETS BEING OFFERED TODAY IN LATIN AMERICA
#1: They Are Enabling the Wrong Types of PaymentsNearly every bank in the region is toiling to develop its own contactless mobile wallet for physical purchases. This is the wrong type of payment to enable. Competition from credit cards and cash is fierce; credit cards work well in Latin America and provide miles, points and interest-free installments. Cash is accepted everywhere and presents no risk of fraud. Without a compelling reason to use contactless POS technologies, consumers simply won’t.
The low penetration of NFC-enabled smartphones and POS terminals (save Brazil) is another problem; to cope, some e-wallets offer users a contactless-enabled sticker to adhere to the back of their smartphone–hardly an attractive look. Why would a shopper bumble around with a new app simply to make a payment she could do easily with cash?
The only reason is for the simple novelty of it. But in Latin America there is a serious demographic mismatch here. Contactless mobile wallets depend on credit cards and are thus only available only to credit card holders, who tend to be older (30+ years). These consumers are less likely to adopt new technologies than younger ones. Young adults are the ones most excited about using their smartphone to make merchant payments; alas, in Latin America they are much less likely to own a credit card, as the chart below demonstrates.
Stored value wallets made for the under-banked also try to compete with cash, which is seriously foolhardy. Peru’s Bim and Tu Dinero Móvil and Colombia’s Daviplata all broadcast their capabilities for mobile payments at physical merchants. Yet, their platforms provide no convincing reason to use these e-wallets instead of cash, which is accepted everywhere and is much more straightforward.
>>>So what are the right types of payments to enable?Those that cannot be made with cash, or those for which paying in cash causes serious bottlenecks. Mobile top-ups are by far the most successful e-wallet use case in the region, accounting for 50% of volume in stored value wallets made for feature phones [Source: GSMA]. This seems intuitive; mobile reloads are digital goods to be consumed immediately on the user’s mobile device, they are low ticket, and in high demand. What else might fall in this category? Online streaming, taxi rides, music, gaming and apps, to name a few.
In the physical world, e-wallets should be implemented at merchants who experience long lines or where the mobile phone can facilitate the whole transaction, from purchase to receipt of goods. Latin Americans spend hours in line at banks waiting to pay utility bills; stored value wallet apps like BillMo and PadeMobile want to ease this pain point. Movie tickets and Groupon-style coupons that can be received and redeemed on a mobile device are also logical choices.
The low-hanging fruit in e-wallets in Latin America are payments for which no handling of physical goods is necessary and paying in cash is not possible or very inconvenient. Unfortunately, many e-wallets are focused on merchant purchases where cash or card payments are already present and difficult to usurp.
#2: They Are Focusing on the Wrong Types of CustomersOver the past ten years, investment in e-wallets focused first on the unbanked and poor. This group is the least likely to adopt new payment technology even if they have the most critical need for it. The second wave of investment came in the form of contactless mobile payments that were aimed at affluent credit card holders. As discussed above, this demographic does not need or want a new way to pay.
Ironically, the demographic most likely to adopt mobile payments is that least attended to: the young, middle-class and under-banked consumers. This group is under 40 years old, probably has a bank account and definitely has a smartphone. But because they do not have credit cards, many digital wallets are futile to them. Until recently, stored-value wallets developed for the underbanked were created for feature phone users and marketed toward the rural, poor and excluded.
In some ways, Latin America is prime for the adoption of mobile payments, as demographic trends and smartphone penetration converge favorably. In Mexico, 18% of the population is aged 15-24, compared to 13% in the US and 16% worldwide. A solid 25% of its population is aged 15-40, prime smartphone usage age. Simultaneously, smartphone penetration across Latin America has reached 50%+, while credit card penetration is only around 30%. Here emerges a clear unmet need: a mobile payment option developed for smartphone holders that is not dependent upon a credit card. Some wallets are providing this option: Nequi in Colombia, Yape in Peru, BillMo in Mexico. These wallets store prepaid digital funds and/or otherwise enable payments via a bank account. However, this type of product is few and far between and only began appearing on the map in the past year.
#3: They Are Providing the Wrong (Or No) Incentives
Finally, e-wallet providers in Latin America have not solved customers’ daily problems. Banks and others must consider what Latin American consumers need in their day-to-day—what pain points do they experience in their daily lives that wallets could help solve?
Appealing to Latin Americans’ desire for credit is a surefire way to earn loyal customers. Miami-based mobile payments company YellowPepper understands this well and partnered with Banco Davivienda in Colombia to implement e-wallet payments in the Apple Store. Apple customers apply for a virtual credit card with the store cashier; if approved, a virtual MasterCard is issued and automatically connected to the customer’s Davivienda e-wallet. The customer then receives a text message containing a seven digit dynamic code, which he provides to the cashier, and the purchase is charged to the newly issued virtual card. The results of this pilot have been impressive: in the first month of launch, Davivienda issued more than 10,000 cards, with total monthly volume exceeding $10 million. This program has enabled thousands of Colombians with first-time credit and to access Apple products that would otherwise be out of reach.
Case studies such as this one are also rare in the region. More creative thinking about the practical needs and potential solutions for Latin American consumers is needed in the e-wallet space.
To recap, e-wallets in Latin America are still emergent and in an experimental phase. The region is entering into a demographic and technological era, however, which supports the adoption of e-wallets. But for this to occur on a large scale, e-wallets should:
1. Avoid competing with cash. Enable payments for which cash has a clear disadvantage, i.e. digital goods, bill payments.
2. Be built for young, urban, underbanked smartphone users. Enable non-credit card payment methods.
3. Offer the correct incentives, such as: credit, significant time savings, or access to new types of goods (i.e. digital goods typically only available to credit card holders).
With the amount of investment being dumped into e-wallets in the region, e-wallets will catch on sooner or later in Latin America; considering the rapid growth of smartphones usage, wide-scale adoption could be imminent. This is dependent upon, however, e-wallet providers understanding the unique conditions facing Latin American consumers and not repeating the same mistakes twice.