The term “cross-border” elicits excitement from players all across the payments value chain; for merchants, it represents incremental sales potential. For consumers, it means access to products not available at home. For issuing banks, acquirers, and card networks, it represents higher fee revenue and interchange. As such, pursuing cross-border business is a top priority for global payment companies.
How It Works
From a payments perspective, a cross-border transaction is one in which the processing bank is in a different country from the issuing bank. To manage the extra burden caused by currency conversion and international settlement, banks charge extra fees. But by focusing on cross-border payments, banks and others may be overlooking a large opportunity.
Merchants Losing 80% of Potential E-Commerce Sales in LatAm
For merchants, a cross-border payments strategy is limiting because it does not allow consumers to use local payment methods—usually domestic-only credit cards or a cash payment. These represent around 80% of all e-commerce spend in Latin America. Thus, in a region where e-commerce sales total $50 billion, merchants processing with a bank outside of Latin America forfeit access to as much as $40 billion in potential sales.
The Local Limiting Factors in Latin American Payments
Why is this? Because local payment ecosystems differ from country to country, and in emerging markets, domestic payment methods rule. For example, in Brazil, only 20% of credit cards are enabled for international purchases by the issuing bank. This means that 80% of Visa or MasterCard credit card holders cannot make purchases at merchants outside of Brazil.
Additionally, on average, 25% of all e-commerce purchases in Latin America are made using cash, via a voucher that is printed and then paid for at an affiliated agent.
Sources: E-bit, AMIPCI, PayU, Adyen, The Paypers, AMI
Going Local to Leverage LatAm E-commerce Sales
Thus, to truly access 100% of Latin American online shoppers, merchants must integrate with local acquirers in each country. Up until recently, this has simply not been feasible. To do so requires that merchants have a local entity in each country, complete with a local address, bank account, tax ID number, etc. The investment and rigmarole involved in this makes deploying a local strategy for Latin America cost-prohibitive and impractical. What most international merchants have done in the region is go local in only one or two strategic markets (usually Brazil or Mexico) and resign themselves to a cross-border approach for the rest of the region.
In the face of barriers international borders place on e-commerce, technology companies are innovating to break them down. A subset of payment service providers is now enabling merchants to access local Latin American acquirers without ever setting foot on the ground there.
Examples of How to Go Local
EBANX, a Brazilian startup founded in 2011, was the first to achieve recognition for this model. EBANX enables international merchants to process payments locally in Brazil and other markets without ever stepping foot in Latin America. dLocal, formerly AstroPay, is perhaps the fastest-growing payment service provider (PSP) offering this model. It has positioned itself as the leading PSP for emerging markets, offering connections to local acquirers in seven Latin America markets as well as Turkey, China, and soon India. PayU, a well-recognized PSP in Latin America founded in Colombia, has newly adopted this capability, as well as allpago, which offers service in Brazil, Mexico and Colombia. PagBrasil and PrimeiroPay are small players in this category servicing Brazil.
How do these companies differ from their competitors? ‘Go local’ PSPs have honed in on the fact that merchants need to focus on emerging markets to grow in e-commerce, which represent the next frontier in the digital economy. As such, their business model aims to blur the borders between countries from a payment perspective. dLocal, EBANX and PayU act as the merchant of record in emerging markets, collect funds on the merchant’s behalf and remit funds to the merchant in their local currency. Performing essentially an international remittance instead of a sale of goods or services, in many cases this system saves the merchant from expensive income and withholding tax, which can exceed 30%. Upon adopting this model—and gaining the ability to accept local payment methods—merchants report astounding results, including triple digit sales growth in some cases.
This model is particularly appealing to digital goods providers. Without needing to distribute a physical good, collecting payment remains the last major obstacle for digital goods merchants selling internationally. To date, tech giants AirBnb, Symantec, Spotify, Sony, and GoDaddy have all integrated with these innovative PSPs. Interesting to note is the fact that allpago, PayU and dLocal all opened sales offices in San Francisco in 2016.
So far, these companies are small and have tiny penetration of the overall e-commerce market in LatAm. They have many obstacles to overcome, including merchant anxiety about collecting payment locally without a local entity. Some worry that by doing so, they operate within a legal gray area or are pushing the limits of tax compliancy. But merchants need not worry—not only have these PSPs been operating in Latin America for more than five years with no trouble, but global payment giants such as Digital River, WorldPay and Adyen are seeking ways to integrate with these PSPs. The fact that payment companies of such caliber are pursuing the ‘go local’ model should give merchants peace of mind.
A Cross-Border Landscape under Transformation
PSPs that enable local payments without a merchant local presence will soon come to forefront of e-commerce in Latin America. This is evidenced by their rapid triple-digit yearly growth, their aggressive sales efforts in Silicon Valley, as well as mega partnerships with both global merchants and payment companies. While ‘cross-border’ has traditionally been the golden ticket, ‘going local’ is rapidly becoming an e-commerce catchphrase.
What does this mean for players across the value chain? For banks and card networks, this means re-conceptualizing cross-border. While cross-border payments are lucrative, they limit overall e-commerce volume. By enabling local payments, PSPs expand access to e-commerce and as a result bring incremental revenue to Latin America.
Although acquirers and card networks resist this model in order to preserve their cross-border business, like anything, consumer demand combined with enabling technology is an unstoppable force. Banks ought to embrace the local model by cooperating with PSPs. Card networks should relax their rules about local processing and instead, partner with merchants investing in this model to become top of wallet among their customers. There are potentially billions of dollars on the table to be captured by payment providers willing to adapt.
However, for competing e-commerce enablers, the emergence of the local model means trouble. Now that smartphone penetration has reached 50% in Latin America, tech companies want to target southern markets more than ever, and the ‘go local’ model has them giddy. PSPs who do not offer local payment solutions regionally will thus be shut out of this incremental growth. PayPal, notably, falls into this category, offering local payments in only Brazil and Mexico and requiring merchants to be physically present in each country. This global giant is likely scheming to learn how to compete against the likes of dLocal and others; if not, their market share will come under threat. MercadoPago—one of Latin America’s leading regional PSPs—is in the same camp.
Merchants have the most exciting opportunity of all. Technology is enabling unprecedented access to Latin American consumers, since approximately 60% of them do not have a bank account. Considering the prominence of cash in Latin America’s e-commerce economy, enabling consumers to use non-card payment methods will be of paramount importance to compete. Developing a regional payments strategy is complicated and requires significant due diligence, but considering ‘cross-border’ in a new light will be important to compete doing forward. ‘Going local’ is the way of the future.