The pandemic has accelerated Latin America’s shift to a digital economy as a growing majority of consumers choose to shop and access financial services online.
A study has predicted that 84 million consumers in the region will engage in e-commerce by the first quarter of 2022, 70% more than in the absence of a pandemic. This corresponds to an 18% jump in e-commerce penetration, which rose from 45% to 63% of the total population of Latin America.
A steady increase in mobile penetration has fueled this transformation. One study estimated that 373 million Latin Americans owned smartphones as of 2020, while other research also found that 360 million consumers, or 57% of the region’s population, have internet connections. mobile devices by the end of 2020. This figure is expected to increase to 423 million Latin Americans – or 64% – by 2025.
However, the region also faces unique challenges. The following Deep Dive examines the rapidly evolving payments ecosystem in Latin America, starting with two key obstacles that payment service providers (PSPs) face when designing their services for the region: country-by-country fragmentation. countries and low penetration of payment cards and digital payments. . It also reviews two unusual features of the region, namely the importance of vouchers and installment plans, and how PSPs can meet the unique demands of the region.
Fragmentation of countries presents a major challenge
The payments landscape in Latin America is highly fragmented between countries despite the relatively high level of economic and trade integration in the region. The region is home to four of the top 10 countries in the world with the highest unbanked populations, and there is a lack of payment standardization across the continent. Cultural, financial and regulatory differences, compounded by preferred payment methods and licensing requirements that vary from country to country, present significant barriers for businesses trying to expand their services across borders in the region.
In addition to regulatory issues, these cultural and data infrastructure issues explain why Buy Now, Pay Later (BNPL) providers struggle to cross borders. It is also one of the main reasons why card acceptance is low and varies from country to country and why credit card adoption is low. Most issuing banks in Latin America do not use international payment networks such as Visa or Mastercard. Instead, they use their own networks, which may be limited to a few neighboring countries or even just their home markets. This means that they may be of little use as cross-border payment options.
The Bank for International Settlements (BIS) released a report in December indicating that in Latin America, “cross-border payments are generally slow, opaque and expensive.” International transfer fees through banks are particularly prohibitive, typically costing 10% of the transaction value. The BIS said FinTechs can help solve this problem. Another major obstacle identified by the organization is the lack of legal and regulatory infrastructure in Latin America to support cross-border payments, although some progress has been made, such as the guiding principles for FinTech regulations agreed by countries. of the Pacific Alliance (Chile, Colombia, Mexico and Peru).
Penetration of cards and digital payments is low but growing rapidly
Digital payments are surprisingly far behind in Latin America, despite the growth of e-commerce, smartphones and the mobile internet. Only 120 million Latin American consumers – 18% – use a FinTech, digital wallet or neo-bank account, compared to 46% of consumers in Asia-Pacific, a region considered to be at the forefront of the transition to cashless payments . Only 41% of consumers in Argentina, 59% in Brazil, and 25% in Mexico had debit cards in March, compared to 80% in the United States, and only 19% of Latin Americans have credit cards.
However, the region is quickly catching up. Digital payments doubled as a percentage of total payments in the region between the start of the pandemic and the end of 2020, according to a report from Mastercard. Other research found that 40 million Latin American consumers started using banking services for the first time during this period, with many using digital banking solutions. Government support payments have largely encouraged this change. Colombian authorities have allowed consumers to receive emergency pandemic payments through digital wallets, for example, and the Brazilian government recently used a state-sponsored banking app to distribute welfare payments to 36 million beneficiaries who previously did not have a bank account.
Vouchers and installment payments are key variables
Alternative payment methods are also a big part of the Latin American payment ecosystem. Various forms of vouchers are common throughout the region, such as those offered by the Colombian company Baloto. Buyers can pay for their purchases online by generating a digital Baloto certificate and paying for it in cash at any of the company’s physical stores. Consumers opt for voucher payments for a variety of reasons, including lack of access to a charge card or digital wallet, the seller not accepting the methods available to the buyer, and concerns about the security of transactions. fully digital.
Another unique feature is the predominance of installment payments, which dominate e-commerce sales in Latin America, accounting for over 60% of transactions. The lack of credit cards in the region might help explain this, as many consumers looking to pay for larger purchases over time don’t need a card to do so. However, this is not just because buyers are strapped for cash. In economies with high inflation rates or rapidly depreciating currencies, it can be very beneficial to delay paying for purchases, especially if it is associated with parking funds in a high interest account or in a bankruptcy. more stable currency. Argentina is an extreme example, with inflation recently exceeding 50% per year.
How PSPs Can Respond to Consumer Payment Requests
PSPs shouldn’t confuse the current state of payments with what consumers prefer. The rigidity of cash and the penetration of credit and debit cards and digital payments does not mean that Latin American consumers are happy with existing solutions. Research indicates that the opposite is in fact true.
A report found that 83% of Latin American consumers are open to using more advanced payment methods and technologies, such as cryptocurrencies, QR codes and transactions based on biometric authentication, and that 72% tried a new form of payment as a result. of the pandemic. Fifty-nine percent agreed that they would rather not buy from merchants that do not accept electronic payments, and these demands from consumers increase their expectations for a wider variety of advanced payment options. The market opportunity in Latin America is therefore huge for PSPs, which can help boost the use of digital and mobile payments for more satisfying shopping experiences.