The rise in e-commerce throughout Latin America has caused their online payment ecosystems to evolve. We look at the top four trends to shape these markets.
In 2013, the World Bank announced that Latin America had more mobile phones than people. Indeed, it represents the third largest regional mobile market by volume. However, Latin America also holds one of the highest rates of financial exclusion. Almost half of LatAm’s population remains unbanked, according to the World Bank. Put together, these two facts should spell trouble for local e-commerce.
However, it seems that the figures tell a different story. E-commerce growth hit 13.1% for LATAM in 2018. But how? Four key financial innovations are opening up the e-commerce market for the unbanked and the poorly connected. We take a look at all four, and their likely impact for the international e-commerce merchant.
E-Wallets and the rise of digital currency
A lack of a bank account presents a problem when shopping online. How can you pay for items without a financial institution to manage the transaction? Enter the digital wallet. This ‘virtual’ wallet does not require a bank account with a physical company or branch. Thus opening up online payments to the unbanked population in LATAM. It is easy to set up and top up and is designed to be smoothly integrated into the online checkout process.
The popularity of mobile phones in LATAM has in turn led to a rise in popularity for e-wallets. A recent study found that two in three online shoppers intended to use e-wallets in 2018/2019. It also found that Mexico and Argentina both showed the highest regional use in-store of this payment method. International e-commerce merchants should look to integrate the region’s most popular types to maximize success. These include PagSeguro, PayPal and Payvalida.
E-Money is changing the way LATAM operates
International e-commerce merchants in Europe or the US will already be aware of the shift towards digital banking institutions. Many countries are now issuing different forms of banking license. This could be an Authorized Payment Institution (API) or an E-Money Institution (EMI). These licenses allow financial institutions to effect online payments into and out of virtual accounts. They also allow these institutions to issue virtual money. Importantly, they do not allow these institutions to offer credit. As such, these licenses are less difficult to obtain, opening up the banking market.
This rise in e-money is beginning to be felt in LATAM. Particularly in countries like Mexico, where brick-and-mortar banks can be inaccessible. Brazil, Bolivia and Peru have been leading the LATAM charge in embracing e-money. All three have legislation in place allowing non-banks to issue digital currency and manage online transactions. With other countries following this trend, it is likely to grow in 2019.
The digital bank
The rise in e-money is in turn feeding a second phenomenon. The digital bank. Given the geographic complexity of LATAM, brick-and-mortar banking institutions have limitations. A digital bank offers the same services as a traditional bank but in the online sphere.
Pagbank of Brazil is a key player in this market. They offer current account services with greater control and convenience in the hands of their customers. In Argentina, neobank Ualá (which offers a hybrid between digital and physical presence) is gaining traction.
While digital banks are still less popular than their traditional counterparts in LATAM, this could change in the coming years. As digital banking becomes more accepted and more accessible, international e-commerce merchants will need to embrace them in their checkout process.
Open banking and financial competition
Naturally, the rise in digital banks, digital currencies and digital wallets has had a knock-on effect on the banking industry in LATAM. Open Banking is a practice which has been embraced in the UK, Europe, Australia, Singapore and soon Canada. Open banking refers to the creation of common interfaces between banks to increase competition. In short, it motivates financial institutions to offer ‘unbundled’ services. These can be much more specialized than the one-size-fits-all approach of big banks.
It is an important trend because it also changes the ownership of financial data. Essentially, it hands ownership of the data back to the individual, instead of the institution. In turn, this is likely to lead to a rise in third party developed financial apps as they no longer need to work with larger banks.
Mexico implemented a FinTech Law in March of 2018, calling for standardized APIs within the next 24 months. Argentina has developed its own Open Banking Initiative, with legislation likely to follow soon. The Central Bank of Brazil has also released its own guidelines for Open Banking implementation. Clearly, there is some momentum.
What this means for international e-commerce merchants
The most important takeaway for the international e-commerce merchant is that change is coming to LATAM. With an opening of regulations, and a move to the digital space, banking is likely to evolve. This means more checkout localization and more available payment methods. By partnering with a local expert, like BoaCompra, you can remove much of the stress of this process. They can advise you on the most important payment methods for your customers. Most importantly, they can also keep you up to date on the changes coming to your key markets before they affect your business.