Publish in Perspectives - Wednesday, January 4, 2017
With more than 14,000 outlets, Oxxo is the leading Mexican player for offline payments for online purchases. (Photo: Oxxo)
Offline payments remain attractive option for many consumers.
BY AMANDA BOURLIER
A number of factors have contributed to an underdevelopment of e-commerce across Latin America relative to global levels, including limited company investment in the channel, low levels of connectivity in some countries, and lack of habit of shopping online. One of the most often-cited barriers to e-commerce is the issue of payments in markets with low levels of financial card access coupled with an unusually burdensome fraud environment. Lack of access to secure, card-based methods of payment is one of several drags on growth of e-commerce across Latin America, giving non-card payments an important role in Latin American online sales that e-commerce companies cannot afford to ignore.
CARD PAYMENTS: STATUS QUO AND SHORTCOMINGS
Access to card payments varies significantly depending on the country, with wealthier countries in the region like Argentina and Chile generally having higher levels of card ownership. The percentage of the population that can be considered underserved by financial institutions ranges from about 20 percent of the population in Brazil to 59 percent in Mexico. As a result, cash is by far the most important method of payment in most countries in Latin America for consumer transactions of all varieties, and is expected to remain so in most markets through the next five years.
Considering online transactions specifically, credit is the preferred card-based method of payment across much of the region. The Banco de México, for example, reports that from October to December 2015, there were approximately 60 percent more e-commerce transactions done by credit cards than by debit. According to the Banco Central de la República Dominicana, there were 5.2 million credit card e-commerce transactions compared to just 1.8 million debit e-commerce transactions. The Cámara Colombiana de Comercio Electronico reports that in 2015 there were 22 percent more e-commerce transactions completed by credit than banking account debits.
For consumers that can access them, there are numerous benefits to credit cards when paying online. Credit is perceived as being more secure than debit cards due to the fact that credit cards offer an additional level of protection: a fraudulent transaction does not immediately withdraw funds from a consumer’s account, the way it would for a debit transaction. The financing capabilities associated with credit cards and the opportunity to distribute repayment over a span of several months are also attractive qualities, as is points-based rewards programs associated with card spending. Debit cards, despite being more accessible to consumers, are generally less popular for online payments due to these factors as well as in some cases government regulation limiting use of debit cards for international transactions (in many countries in the region, cross-border purchases are an important component of e-commerce).
Retailers in the region, acknowledging the difficulties presented by limited access to payment methods, have introduced several innovations over the past years to facilitate greater ability to make online transactions. Falabella, for example, has been a leader in issuing store and co-branded credit cards across Latin America. This access to financing and the loyalty program associated with the cards are widely credited with the department store chain’s success in internet retailing: Falabella was the store-based retailer with the biggest online sales in Latin America outside of Brazil in 2016. Internet retailing pure-player MercadoLibre faces the challenges of low card ownership acutely in Mexico, its third largest market behind Brazil and Argentina. In addition to the company’s MercadoPago payment platform, designed to offer a highly secure online transaction, MercadoLibre announced the launch of a MercadoPago-branded pre-paid card in Mexico in 2015. The pre-paid card facilitates e-commerce for unbanked consumers as well as providing another option for banked consumers. Other e-commerce players without brick and mortar locations, including Netflix and Uber, have launched similar pre-paid card initiatives in Mexico.
A final card-based emerging payment that shows promise for boosting consumers’ ability to buy online via a card are transportation pre-paid cards in Argentina in Chile. In 2016, transportation systems in both countries (VIP in Chile and SUBE in Argentina) introduced cards that can be used to pay for mass transit journeys and managed at public transportation locations that may also be used as a pre-paid card in retail contexts. This move effectively gives every public transportation user, regardless of income or creditworthiness, a method of payment accepted online.
NON-CARD PAYMENTS: OFFLINE OPTIONS AND OPPORTUNITIES
Access to financial cards is just half of the challenge for e-commerce companies, however. Many banked consumers are reluctant to use their cards for online purchases given the risk of fraud, whose rates remain higher in Latin America than in more developed regions. Additionally, consumers in Latin America often face greater burdens of proof to demonstrate that a transaction was fraudulent than do consumers in developed markets. In Mexico, for example, according to consumer protection agency CONDUSEF, just 43 percent of value reported as fraudulently spent is ultimately accepted as fraud and reimbursed to consumers. As a result, platforms such as PayPal, MercadoPago, and PagueSeguro, which create a more secure and convenient payment platform, are popular with consumers. For example, the Mexican Association of Internet (AMIPCI) found that in 2016, PayPal was the most commonly used method of payment for online transactions with 62 percent of survey respondents indicating they had used this method within the last 3 months. Still, many shoppers still hesitate to provide their payment information if an alternative (such as purchasing in-person at a store instead of via e-commerce) is available.
Thus, while cards work well for some people, especially high-income consumers that easily qualify for credit cards and have the resources to not be financially vulnerable in the event of fraud, many questions remain for many consumers in Latin America surrounding access, fraud, and the habit of using cards to pay online. As a result, ways to pay offline for a purchase ordered online have emerged across the region.
In Brazil, paying offline for online purchases generally takes the form of bank slips. Upon completing a purchase, a consumer will print a bank slip with a bar code. The consumer then takes this bar code to an ATM or a bank outlet, where the value of the purchase is deducted from the consumer’s bank account and the payment transaction is completed. This form of payment feels more secure to many consumers because they have a direct role in its completion and their financial information is not transmitted via the internet. Bank slips are less common for high ticket value purchases such as electronics or travel purchases, where the option to pay in installments through a credit card would be attractive.
In contrast to Brazil’s bank-centric offline payment system, offline payments for online purchases in Mexico generally revolve around convenience stores. Convenience store chain Oxxo is the leading player in this space, with the Mexican Association of Internet reporting that in 2015 30 percent of respondents indicated they had made a payment for an online purchase at an Oxxo in the last 3 months. Oxxo has more than 14,000 outlets in Mexico, which represents more locations than any bank in Mexico, and accepts payments on behalf of over a thousand companies selling online in Mexico, ranging from retailers such as Walmart to travel companies including American Airlines. AMIPCI reports that 10 percent of respondents reported making a payment at 7-Eleven, and 9 percent at a pharmacy location.
Like in Mexico, Argentina’s offline e-commerce payments landscape is centered around retailers. As in Brazil, Argentinian consumers paying offline receive a bar code upon completing the online purchase. Consumers then bring the bar code to an affiliated store-based retail location, such as Pago Facil’s network of store partners, where the payment is processed. As in Brazil and Mexico, this process facilitates e-commerce purchases for the unbanked as well as providing a greater sense of security for banked consumers that are reluctant to risk their personal information online.
An important characteristic of these payment options is that they are distinct from click and collect programs, in which a consumer places an order online and then picks up the purchase in-store, and also more successful. Click and collect requires consumers to visit a specific outlet that may not be convenient for them to visit. Bank outlets, Oxxo stores, and PagoFacil and similarly affiliated locations are much more likely to exist in close proximity to where consumers live and work, making stopping in to make a payment convenient. In all cases described above, offline payments for online purchases must take place before an item will be shipped to the consumer.
BROAD PAYMENT STRATEGY BEST
Euromonitor projects that internet retailing in Latin America will grow at a CAGR of 13 percent through 2021, but by 2021 will still only account for 5 percent of total retailing in the region. In markets where internet retailing is most developed, e-commerce is a mainstream activity accessible to the majority of consumers.
For many consumers in Latin America, payments create friction that limit the likelihood that a consumer will shop online. Limiting payment options to cards thus means missing out on sales by consumers that are underserved by financial institutions or that view paying online as risky.
Retailers and other e-commerce players should be aware of the limitations of card-based payments and open-minded about incorporating in-person, offline payments as options to appeal to a wide variety of consumers. To find the most success with consumers, retailers should develop a payment strategy that encompasses a range of payment options to meet the security and convenience concerns of consumers.
Amanda Bourlier is a Senior Research Analyst at Euromonitor International. This article was written for Latinvex.
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