When you think of the word innovation, many different concepts and places come to mind. You might think of the bullet train in Japan or Elon Musk’s Hyperloop. But as the world focuses on these established regions, several countries across Latin America are driving significant change – particularly in payments and e-commerce.
Merriam-Webster defines innovation as “the introduction of a new idea, method or device”. This is happening right now in LATAM as changing consumer preferences have forced Latin America to develop new payment solutions to meet the needs of its consumers. These payment innovations are key for merchants to scale into the region, but only if they are able to navigate the intricacies of the market.
LATAM at a glance
The countries in Latin America are almost as diverse economically and culturally. LATAM’s e-commerce is on the rise. According to PPRO data, the region’s B2C e-commerce growth is 23% compared to a global average of 15%. In 2019, 155.5 million people in the region bought goods and services online, a dramatic increase from 126.8 million in 2016. However, many traders are unaware of the nuances of the region and the barriers to capitalizing on this booming market. Every country in Latin America has different cultural, regulatory and technical factors that influence the success of a trader expanding in LATAM.
Promote financial inclusion
Merchants need to consider the way the regions’ payment infrastructure is built and the specific payment preferences of LATAM consumers. Buyers only pay using methods they trust, some of which may seem alien to international merchants. Many consumers either have no or no bank details, which is reflected in the region’s payment breakdown 21% of ecommerce payments are made in cash. Payment methods such as Boleto Bancario in Brazil, Oxxo in Mexico or RapiPago in Argentina give LATAM consumers access to global e-commerce with cash. Consumers simply look for the goods they want to buy, place them in the shopping cart and print out a barcode for the order at the checkout. They take this barcode to their local supermarket or even bank branches where the consumer does not bank and pay the full value in cash. Payment is then confirmed and the item is shipped. These cash vouchers are the definition of innovation, customization and help fill in gaps in global e-commerce.
The power of local credit cards
In addition to cash vouchers, local credit card systems are a common method of payment in Latin American e-commerce that accounts for 62% of online payments. These local card payments have their own nuances that are different from many traditional methods. A main reason for this was the difficult economic development in LATAM during the 1970s and 1980s. The region was in a transition phase away from military occupation and state-run banks towards privatization. This change led to high inflation rates, depreciated currencies and a consolidation of the banking sector. Many state banks collapsed or were absorbed by private banks. This led to small credit limits and more far-reaching restrictions such as blocking international purchases.
Because of these factors and lower credit card limits, LATAM consumers have found it difficult to purchase many high-priced items. As a result, many merchants have offered rates to bypass card limit restrictions and combat low wages. These can range from your standard installment to extreme cases of 48-month loan installments in Chile on common goods such as groceries for a week. Longer rates on typical purchases may seem unnecessary to US merchants, but they are critical to how many LATAM consumers pay. It should also be noted that since most LATAM card payments are domestic, there are no costly fees for international cards such as Visa or Mastercard. In 2011, leading Brazilian issuers joined forces on a joint local card system called Elo, which today holds a significant market share. US retailers must provide access to these specific local card schemes or risk missing out on much of the LATAM market.
Overcoming barriers to entry
So it’s clear: Offering the preferred payment method is essential to converting customers to LATAM. But the diversity of each country’s markets makes this easier said than done. For example, It is an easy process to connect to a card acquirer in the US or EU, while it is improving in Brazil, but the process is still quite slow and inconvenient for overseas merchants. Another example can be seen in Peru, which connects to consumers where 43% of the population have banking transactions and only 12% have a credit card. In addition, traders must be based in Latin America in order to reach consumers in the market. This means that they set up businesses in the countries where they want to offer their products and services. Every market has its own rules, regulations and technical nuances that make it difficult to increase sales.
A combination of these factors can make it difficult, but not impossible, for merchants to enter this region. With the right Payment partner and local expertise, retailers in this region will see increased sales. LATAM consumers want to shop with global retailers, but only if they can meet their payment needs. This could be the offering of preferred local payment methods in the region. The opportunity is obvious, because payment innovations in the region will only continue to connect LATAM with the rest of the world. The question is: will merchants be ready to take advantage of the benefits?