For years now, card networks, banks, and governments have agreed on one thing: cash is the enemy. Governments want to shrink the informal economy to increase their tax base. Banks want to reduce the cost of handling massive cash volumes. And credit card companies like Visa and MasterCard see cash as their biggest competitor. As such, these parties have labored tirelessly to loosen the grip of cash on Latin American economies.
In theory, e-commerce is an area in which credit cards have an advantage; you can’t feed cash into a computer and click ‘Buy.’ However, in Latin America, only 27% of consumers have credit cards and even fewer are willing to put their credit card information online.
Started several years ago, LatAm e-commerce sites began accepting payment by coded vouchers paid for with cash in banks or affiliated agents. Boleto bancario in Brazil, Oxxo in Mexico, Efecty in Colombia, and PagoEfectivo in Peru are among the cash payment market leaders. Considering the low penetration of credit cards, cash has an astounding presence in Latin American e-commerce, reaching up to 40% of sales in some markets. Below is a quick look at key LatAm markets where cash is an important e-commerce payment method and the major payment service providers (PSP) in each one.
To the chagrin of card networks and banks, e-commerce cash payments in Latin America will grow in the short term—not decline, for a few different reasons:
1. E-commerce is growing faster among non-credit card holders than credit-card holders
2. Cash payment providers are innovating to improve their service
3. International merchants are able to offer cash payment methods by integrating with local PSPs
#1 Faster E-Commerce Growth among Non-Credit Card Holders
Traditionally, Latin American e-shoppers represented the strata of the wealthiest consumers, including the upper classes, the professionals and the early technology adopters. These folks have been happily buying online for the past 10+ years and are catered to by banks and international merchants like Amazon and eBay. E-commerce has reached substantial penetration among this population.However, while this segment will continue to buy steadily online…their numbers are not growing. As part of our market research work for LatAm, at Americas Market Intelligence we commonly use smartphone owners in Latin America as a loose proxy for Internet users. This is because smartphone owners are online, are connected to social media and they consume digital content. However, while in 2017, 50% of Latin American smartphone owners have a credit card…50% of them do not.
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More importantly, the latter group is growing faster than the former, since there are far fewer barriers to smartphone adoption than there are to credit card adoption. These consumers use cash as their main payment method for e-commerce, and as awareness spreads and savvy merchants market toward them, these cardless consumers are driving cash payment growth. So it is not surprising that payment service providers (PSPs) in Mexico report that cash payments grew between 40-50% in 2016, compared to around 30% growth for credit card payments.
#2 Cash Payment Providers Are Innovating to Improve Their Service
Compared to a card payment, cash payments are inconvenient for consumers and merchants. Knowing this, cash payment providers are working to improve the customer experience. Oxxo, Mexico’s leading cash collector for e-commerce purchases, announced in February 2017 the launch of its product Oxxo Pay in collaboration with PSP Conketa. Oxxo Pay includes improvements to its cash payment service such as incorporating a reference number (compatible with mobile) instead of barcode, real-time reporting to merchants when a payment is made, customizable expiration dates, and plans to launch recurring payments in the near future. With a network of 15,500 branches in Mexico, Oxxo is in a preferential position to harness the huge potential of cash payments within e-commerce. Today, Oxxo accounts for an estimated 20% of all e-commerce payments in the country.
Others also see the opportunity. PayPal in Brazil will purportedly enable boleto bancario as a payment method in 2017. This would be the company’s first incursion into cash payments in the region and it’s not unfathomable that PayPal Mexico would soon follow suit. PagoEfectivo, Peru’s premier cash payment option, reported growth of 60% in 2016 as it evangelizes merchants and other P2Ps to its service. SafetyPay, another leading cash provider, is growing at close to 50% per year, far outpacing overall e-commerce growth in the region.
#3 International Merchants Offer More Cash Payment Options via Local PSPs
Until recently, global merchants who wanted to integrate with local payment providers were obliged to set up a legal entity in each country, a costly exercise in most LatAm markets. However, a growing group of PSPs are offering global merchants a new model of payment collection in which they can accept local payment methods without ever stepping foot in the local market.
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This model began with Latin American startups AstroPay (now dLocal) and EBANX in 2009 and 2011 respectively, and both companies have enjoyed triple digit growth per annum since. These companies process payments for merchants outside of Latin America but act as the local merchant of record. On average, 30% of funds collected by these payment providers are in cash.
This model is ideal for digital merchants who do not need a physical presence in Latin America to manage product distribution but who want to access the region’s hungry online population. Following in their footsteps are other regional PSPs such as PayU and allpago. All four PSPs recently opened sales offices in San Francisco to target the world’s largest digital product/service providers.
These days, merchants using this local PSPs model include tech giants like Airbnb, Spotify, AliExpress, Uber, GoDaddy, and Symantec. Their success will lead to others pursuing Latin American markets via local PSP partnerships at the end of 2016, dLocal announced its partnership with global payments company Digital River (DR), to enable local payments processing to DR’s portfolio of global merchants. Merchants are becoming wise to the fact that enabling cash payments for e-commerce is a winning strategy, and with the right payment partners, doing so is feasible and affordable. The dLocal-Digital River partnership is a strong indication that e-commerce merchants are embracing cash payments.
So Is Cash King of LatAm E-commerce?
Not exactly. Cash will not cannibalize the easier to transact credit card when it comes to e-commerce.
But e-commerce merchants are an impatient group and are unwilling to wait for the Latin American mass market to be issued a credit card. They know that to penetrate the market, they need solutions that facilitate cash payments. Now those solutions exist, for both domestic and cross-border e-commerce. A major hurdle to future growth in LatAm ecommerce has been lifted.
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Credit card companies can also look at cash in e-commerce as an opportunity. Generally speaking, merchants prefer card payments because they are automatic, more efficient, and offer co-branding opportunities. In the long term, as Latin America continues to digitize, electronic payment options will slowly cannibalize cash. Getting cash-toting customers online enables card networks to step into the fray, track their purchases via merchant partnerships and offer pre-paid cards for e-commerce, a baby step to building a future credit profile and issuing a credit card. For card networks, perhaps it’s time to think of cash as the “frenemy.”
Contact Americas Market Intelligence to obtain strategic insights into the payments market in Latin America that will drive your business decisions successfully in areas such as e-commerce, affluent business or consumer cards, mobile money, digital wallets, POS systems and more.