In Latin America, overall banked levels as reported by governments are reaching surprising levels. Colombia, considered one of the most cash-dependent economies in the region, claims that 75% of its citizens have a bank account. In Peru, the number is 66%.
While these cheery numbers appear optimistic, they don’t tell the whole story. To calculate these figures, governments consider people ‘financially included’ if they have any type of formal financial product, regardless of type or usage. For example, millions of Colombians have basic savings accounts and are thus considered ‘financially included,’ even if their accounts have zero balance and sit inactive for months or years. What’s more, a bank account is not tantamount to a payment card, and having a payment card is not tantamount to using it. For example, around 500,000 Peruvians own a savings account with affiliated debit card where they receive government benefits. However, 95% of these funds are withdrawn in cash within 24 hours of them being deposited, inside a bank branch from a teller. Certainly, the term ‘financial inclusion’ is misleading at best and downright deceitful at worst, considering the complex levels of access and barriers to banking that still exist in the region.
Debit Card Growth Not Helpful for E-Commerce
While most often we conceive of financial inclusion in terms of access to payment methods, it is often a function of merchants’ ability to accept them. Nowhere is this more apparent than in e-commerce. Credit card penetration in the region is still low, since banks lack the tools to properly evaluate creditworthiness and expand issuing to the middle class and young people. Debit card penetration, however, has climbed at a decent pace in the past three to four years, in large part thanks to banks pushing out payroll cards.
Here’s a look at credit card penetration versus debit card penetration in key Latin American markets:
There’s some interesting potential here for e-commerce…except for enablement issues. Most debit cards in Latin America lack a CVV code and are thus not enabled for e-commerce purchases. Traditionally, banks have been concerned about fraud on debit cards, because fraudulent transactions result in the theft of customers’ actual funds. This is opposed to credit card fraud, in which banks have the ability to deny chargebacks and transfer liability to the merchant. As such, while an estimated 230 million Latin Americans have debit cards, only the 113 million who also have credit cards can consistently make purchases online.
Changing over from CashThis is part of the reason why cash payment methods are so prevalent in Latin American e-commerce. Lacking an acceptable payment card to buy online, many Latin Americans use vouchers that must be printed and paid for in cash at affiliated agents, sometimes up to 72 hours after the order was made. Once printed, only about 30% of all vouchers are actually paid for, creating uncertainty and inventory problems for merchants. As a result, cash is still king in LatAm e-commerce:
But cash’s reign may soon end. Even though the risk of fraud is higher, online merchants across the board prefer payment cards for their convenience and efficiency and have been leading the charge to get banks to become less strict about debit—and banks are slowly coming around. In 2015, BCP, Peru’s largest bank, began the slow process of migrating its seven million debit cards to make them e-commerce-ready. Banco de Bogotá in Colombia started this process only at the end of 2016. In Mexico, banks have been particularly stern; in response, both payment processors and merchants have gone knocking on doors, convincing issuers to enable debit cards for their customers specifically. But Brazil is the market where most work needs to be done. While only 30% of Brazilians have a credit card, a whopping 70% have a debit card. Yet the use of debit cards in Brazilians e-commerce is negligible, barely reaching 2% of transactions, as banks apply additional security measures that decimate conversion rates. This in part explains the success of the boleto bancario, Brazil’s famed cash-payment voucher. However, a regulatory change in 2016 will add a cost for merchants that issue boletos, so there could well be a decline in the use of them this year. As such, this will leave many Brazilians out of luck when it comes to buying online.
Some forward thinkers in Brazil see the missed opportunity in debit and are developing solutions. Payzen, a French payment gateway operating in Brazil, has developed a merchant plug-in for debit, which helps bypass bank authentication measures for selected cards and increase conversion. Payment processors, banks and merchants are likely to follow suit this year.However, enabling debit for e-commerce is only the first step in achieving widespread usage. Once banks decide to enable debit, they then need educate consumers. This should be a collective effort between banks, card networks, processors, and merchants. Certainly Visa and MasterCard stand to benefit from increased use of debit in e-commerce, but they have done little to advertise this capability to consumers. Co-branding debit cards with digital merchants, as Bankaool, MasterCard and Uber have done in Mexico, is a brilliant strategy to this end.
Despite payments and logistics challenges, e-commerce in Latin America still has many years of robust growth ahead, thanks to the millions of Latin America who will come to the channel for the first time in coming years. Debit cards will be at the head of this growth trend, as credit card usage in the channel begins to mature. As such, payment players waging a war on cash must first enable and then incentivize debit to lure the middle class away from their beloved boletos and Oxxo payments. Banks who do not get on board for fear of fraud risk will missing the boat altogether for these opportunities.
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