Understanding local payment preferences in Latin America
Why alternative payments are key to succeeding in the region’s eCommerce space
An expanding middle class, rapid digitalisation, and COVID-19 restrictions have created the perfect environment for eCommerce in Latin America to thrive.
In 2020, online retail sales hit $84.95 billion — triple the amount forecast in Q4 2019. This has placed the region ahead of North America, Europe, and Asia-Pacific as the fastest growing e-commerce market in the world.
But where customers in more mature markets predominantly use credit and debit cards, and — particularly in Asia-Pacific — digital and mobile wallets, Latin America's economic, political, and cultural realities mean most consumers rely on a patchwork of alternative payment methods to pay for goods online.
Thanks, but no banks
Credit and debit cards aren't popular in Latin America because a large proportion of the region is unbanked. Research from Mastercard found that, in 2020, only 55% of adults had a bank account with a traditional financial institution. And, at 19%, even fewer had a credit card.
While there are many complex, multi-faceted reasons for this, the main one seems to be a deep-seated mistrust of financial institutions. In 2016, for instance, the Mexican government reckoned 97% of the population had access to banking facilities. But only 39% had a bank account.
Even today, about half of those who have a bank account and, so, are regarded as being 'financially included', report withdrawing their wages in cash as soon as they're paid into their accounts.
But economic barriers also play a part
Case in point, most cards in Latin America are either local — this means they can only be used domestically — or regional, which means they can only be used in neighbouring countries where the issuing bank also has a presence. This makes them unsuitable for eCommerce transactions.
Meanwhile, the privileged few who have international cards use them sparingly, because:
- Credit limits are generally low and, so, better saved for a large, essential purchase
- Fees and interest are eye-watering. Brazil, for instance, has some of the highest credit card APRs in the world
Cutting the middlemen
If most consumers in Latin America shun banks, they've embraced digital. 70% of the population owns a smartphone. And, by 2025, it's thought 80% of internet connections across the region will be from a mobile device.
This has encouraged fintechs to enter the market and develop digital financial products that bridge the gap. At last count, there were over 1,000 fintechs operating in the region.
Because so many customers are unbanked, these fintechs have tried to encourage adoption by designing products that do not require access to a bank account.
But the results were hit and miss, until the COVID-19 pandemic hit.
The payments landscape in Latin America today
It's no overstatement to say that COVID-19 has transformed Latin America's payments landscape.
Many economic relief packages — Brazil's coronavoucher, Colombia's Ingreso Solidario, and Argentina's Ingreso Familiar de Emergencia, for instance — were delivered exclusively through digital means. This has introduced digital financial services to large sections of the population who were previously unfamiliar with or unwilling to use them.
Lockdowns and other social restrictions have also had a huge impact. With brick-and-mortar stores shut, customers were forced to go online. Which meant using digital payment methods.
So what are the main ways consumers in Latin America are paying for online purchases today?
While adoption of eWallets and other digital payment products is on the rise, cash remains king in Latin America.
In 2019, 85% of transactions involved notes and coins. And if the COVID-19 pandemic has exponentially increased interest in eCommerce, it hasn't lowered the appetite for paying in cash.
In many Latin American countries, the solution has been the use of cash vouchers.
In Brazil, for instance, over 20% of eCommerce transactions are paid using Boleto Bancário — literally 'bank ticket'.
The boleto has a unique barcode with the customer's personal details included. The customer can pay it with a bank transfer. Or they can present it at an authorized processor — a bank branch, the post office, or even the local supermarket — and pay in cash.
Brazilians have been using the scheme, which is backed by the central bank, since 1994. Crucially, though, it allows anyone to access eCommerce transactions. Even people who don't have a bank account.
Similar schemes exist across the region. In Mexico, for instance, millions of customers — including those with bank accounts and credit cards — have turned to OXXO Pay, a voucher-based payment system that's traditionally been used to pay bills.
And, in Chile, consumers can make digital cash payments using Multicaja.
COVID-19 government initiatives may have lowered the percentage of unbanked customers in Latin America, but it hasn't increased trust in the traditional financial system.
The region also has a history of being systematically targeted by persistent phishing attacks. As a result, when they pay from their bank accounts, customers prefer doing so using payment providers that facilitate direct bank transfer. This is more convenient and, more importantly, safer than entering card details online.
Rapid Transfer, for instance, lets customers pay without having to leave the website they're on.
More to the point, the bank confirms the transaction's validity. Which eliminates the risk of fraud and the hassle and expense of chargebacks.
This is where COVID-19 brought about the most sweeping changes.
Mastercard notes that, in the space of a few months, around 10 million people went from being cash-only customers to cash-preferrers — consumers who'd rather pay in cash but have access to at least one financial product.
More significantly, those 'willing to try' digital products rose from 10% to 25%.
That said, while international digital wallets are available in some Latin American countries, most customers prefer homegrown options. Case in point, Nubank has amassed 20 million customers in Brazil alone.
Similarly, MercadoPago handles over 4.6 billion payments a year, mainly because it's integrated into MercadoLibre, 'the Amazon of Latin America'.
A huge, untapped market awaits... but you need to offer the right payment methods
With as many as 10.8 million people having made their first ever online purchase only in 2020, and exponential growth set to continue in 2021 and beyond, there's never been a better time to start serving this exciting and largely untapped market.
But you need to approach it the right way.
Like customers in other regions, consumers in Latin America have unique attitudes and preferences. By offering a wide mix of local payment options at the checkout, you'll reach a broader range of customers and be better placed to make the most of this unmissable opportunity.