Given market trends like the 19% CAGR in the Latin American e-commerce market over the next couple of years, potential new legislation and the expansion of major online retail players in the region, 2018 is poised to offer significant growth—though some existing market lags could slow things down or cause significant disruptions.
Between 46% to 50% of the population in key markets like Argentina, Brazil, Chile, Colombia, Mexico, and Peru are aged 20-35, very favorable demographics that could spur growth in tech-driven payments just through increased adoption of online buying. Added to this is that the number of smartphone users in Latin America will jump to 245 million by 2019—a 35% increase compared to the 2016 total. A similar amount of growth (36%) is projected for tablet users between 2016 and 2020, further advancing the tech framework for mobile purchases and thus driving the growth of the LatAm payment industry.
And while the majority e-commerce transactions in Latin America are still done with desktops, these are growing as well, according to a selection of the latest available data:
• Argentina: e-commerce sales went up by 57% during the first half of 2017, with a 20% increase in transactions
• Brazil: e-commerce sales went up by 7.5% during the first half of 2017
• Chile: e-commerce sales went up by 30.3% during the first half of 2017
• Mexico: While 2017 e-commerce sales data isn’t yet available, e-commerce purchases with credit cards and debit cards went up by 120% during the first half of 2017
• Peru: A recent Ipsos report forecast 11% growth in e-commerce for all of 2017
Despite the low penetration rate for credit cards in the region, cash payment and prepayment continues to grow. In fact, cash payment penetration ranges from 25% in Brazil to as much as 40% in Argentina.
In addition to growing online sales, the shifting acquiring landscape will usher in a new wave of payments technology and increased competition. The imminent sale of Prisma—a near-monopoly acquirer based in Argentina—will force that country’s payments market to open up new processing networks, models and aggregators, including fintech companies. The entrance of PagoGo, a JV between FirstData and Bancolombia in Colombia, will rival incumbent processing networks Credibanco and Redeban. And in Peru, pressure from regulators in Peru is compelling VisaNet, with ~70% market share, to adopt new acquiring models adequate for longtail merchants, including dual-brand processing. These developments are all positive in that they will encourage competition, put downward pressure on pricing and improve the customer experience.
Finally, while the expansion of Amazon and Alibaba in Latin America presents a threat for traditional retail stores, it also offers partnering opportunities for the payments sector. It is too early to tell how this will play out, but what is certain is that both these firms have their eyes on the payments sector. Partnership with leading online payment enablers, or acquisition of them, is a near certainty.
While the growth of cash payments is helpful to continue to grow the e-commerce market, many countries still have not allowed debit cards to be enabled for e-commerce purchases, which is a hindrance to growth. This is combined with the fact that most credit cards in LAC are not enabled for international transactions, which limits cross-border transactions significantly. Much work is still to be done to enable 100% of Latin America’s online population to purchase in the e-commerce channel.
Banks’ approach to digital wallets is also holding back this product’s potential. Many banks are pushing their own closed-loop wallets, many of which are based on QR codes, which make for a clunky user experience. The lack of interoperability of these closed products will severely inhibit their ability to scale and frankly, will confuse consumers and merchants. The lack of value added to these products is also a problem; today, most wallets do not offer an enhanced experience over cash or EMV cards. Thus, contactless digital wallets still must evolve in the region to be disruptive.
The expansion of huge e-commerce players like Amazon and Alibaba could have a significant impact on brick and mortar retail, leading to store closings and job losses that increased e-commerce sales may not be able to offset. The giants may also threaten homegrown brands like MercadoLibre, Linio and Cnova, hurting local economies in the process.