Intense competition and disruptive challenges are likely to be the key developments in LatAm’s payments sector during 2019. However, whether these will be good, bad or ugly depend on your perspective as a company. For consumers, these developments should generally be favorable — it’s other factors outside Latin America that could bring negative consequences for various companies.
Two main technologies for in-store payments will be vying for the preferences — and pocketbooks — of LatAm consumers during 2019: contactless cards and QR codes from closed-looped networks.
Contactless cards use what’s known as near field communication (NFC), so there’s no need to swipe or insert a card with a chip into a terminal. For consumers, they’re easy to use, involving a quick wave at a contactless-enabled POS terminal. For financial institutions, contactless cards can allow them to access the nearly US$1 trillion in cash spent in the region in retail purchases. Another advantage is that contactless promotes both interoperable payments and cross-border spend.
Contactless card mandates from Visa, Mastercard and American Express will go into effect this year, which require banks in Latin America to issue contactless cards instead of contact chip or magnetic stripe cards. This should significantly increase penetration of contactless transactions from the current low levels of less than 1%, and there have been very compelling use cases when contactless cards have been trialed in markets, including PriceSmart’s successful efforts in Costa Rica. (If you want to dig further, we’ve written an in-depth whitepaper on contactless cards that you can access here.)
However, mobile payments with QR codes are also gaining ground in the region: MercadoPago had a successful launch in Argentina and Mexico’s Central Bank also launched is currently preparing its own QR code initiative called Cobro SPEI. And China’s Tencent —the owners of the famed WeChat and successful QR code payment network — recently invested $180 million with Brazilian fintech Nubank.
QR code payments have greater potential to promote more than contactless technology, which depends on consumers having credit or debit cards. Because many QR code platforms operate as stored value accounts themselves, consumers don’t necessarily need bank accounts or credit cards to make mobile payments using QR codes.
Besides this duel of competing technologies, LatAm’s 2019 payment landscape should also see commerce moving increasingly toward an on-demand model, fueled by apps. Latin American consumers are using their mobile phones as transactional channels more and more, as apps gain enormous ground in daily routines. While it’s not exactly news that ride-hailing apps like Uber, Cabify and Easy Taxi are popular in LatAm, the region’s consumers are also using apps for other services, including on-demand delivery (Rappi), restaurant delivery (Glovo), digital top-ups (RecargaPay) and Cornershop (supermarket delivery).
Both the competing technologies and the increased use of mobile apps/growth of mobile marketplaces have their downsides.
If mobile payments via QR codes manage to beat out contactless cards, they could end up sucking money out of the banking system in LatAm by offering higher interest rates for deposits of funds into their closed-loop systems, and then charging to withdraw them. In addition, closed-loop systems based on QR codes could potentially make the POS system obsolete.
If contactless cards win out, even though they could capture some of the cash used in retail payments in LatAm, they don’t do much to address financial inclusion in the region: their expansion won’t be necessarily helpful for the unbanked or for the ever-larger group of mobile consumers, since most smartphones in the region are not NFC-enabled.
While the growth of mobile marketplaces should be good for LatAm consumers in 2019, it may make things tougher for brands. Mobile marketplaces tend to blur the lines between the physical and the digital realms to the point where consumers remember the app, but not the brand. In other words, people can see the app as the main source for the goods or services, forgetting about the companies behind them. As a result, merchants are already feeling the pressure from the mobile marketplaces, and this likely played a role in Walmart acquiring Cornershop and in Falabella purchasing Linio. Moves like these may help brands avoid being forgotten by consumers, but there’s no question they are at risk of being overshadowed by digital upstarts in the mobile marketplace.
While competing technologies and mobile marketplaces have their disadvantages, neither will necessarily spur results that payments professionals would consider “ugly,” which we’d reserve for more systemic problems. While in 2018 there was the concern of Amazon and Alibaba impacting brick and mortar retail and homegrown e-commerce brands like MercadoLibre, current numbers don’t seem to support this. For example, Mercado Libre’s third quarter results showed a 58.3% increase in net revenues on an FX neutral basis. While Linio was sold to Falabella, this was a strategic acquisition to move into the Mexican market and in fact, the Chilean retailer saw its online sales go up 22% in Q3 2018, with US$32 million in sales in that quarter.
In more general terms, ECLAC forecasts 1.8% growth for LatAm in 2019, a marked improvement over the estimated 1.3% growth in 2018. Other projections are even rosier (2.1% from Fitch Ratings, 2.2% from Standard & Poor’s). As such, none of the current payments developments or macroeconomic trends suggest the potential of a highly negative outcomes for LatAm within the payments sector.
Contact us to gain a greater understanding of key payments trends in Latin America, including fintech disrupters, LatAm real-time payments, contactless cards in Latin America, e-commerce payments in Latin America, mobile payments in Latin America, opportunity benchmarking, evaluations of partner partners or acquisition targets, competitive intelligence and much more.