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Accepting alternative payment methods: the key to expand in Latin America

Wednesday 9 August 2017 | 09:02 AM CET

Sebastián Kanovich, dLocal: By offering all the locally-relevant payment methods, merchants can reach all the potential buyers in Latin American markets

dLocal enables global ecommerce merchants to accept hundreds of locally-relevant payment methods in Latin America and other emerging markets.

Why is it important for ecommerce companies to offer alternative payment methods in Latin American markets?

Accepting alternative payment methods is key to unlock the full potential in Latin America and other emerging markets where penetration of credit cards remains low.

At USD 23 billion in online annual transactions, Brazil is the largest ecommerce market and the strongest economy in Latin America. Yet, only 32% of Brazilians have credit cards. In Mexico, the second largest economy in LATAM, only 18% of adults have access to credit cards. Argentina and Chile hover around 28%, while Colombia and Peru are around 13% for credit card penetration.

The continent’s reliance on alternative payment instruments is well documented. Bank transfers, cash vouchers and local cards – that is how consumers pay for their rent, phone bills, and utilities. That is also how most of them pay for online services and goods purchased on regional ecommerce websites such as OLX, TiendaMia, and MercadoLibre. Because these payment methods are the norm in LATAM, at dLocal, we refer to them as locally-relevant payment methods.

By offering all the locally-relevant payment methods, merchants can reach all the potential buyers in Latin American markets rather than just a fraction of them.

What are the types of credit cards in Latin America and how do they differ from instalments?

In Latin America, there are three categories of credit cards – international, regional, and local. Some of these cards are branded as Visa or Mastercard, however, they come with a different set of restrictions.
Local credit cards are issued by the local banks and are the most accessible to the local population. They are provisioned for domestic transactions in the country and are not enabled for international or cross-border purchases. As such, they cannot be used for online purchases on international ecommerce websites.

Regional cards are similar to local cards, with the exception that they are enabled for use in several neighbouring countries where the issuing bank has a presence. Thus, local consumers can also use them on regional ecommerce purchases.

International cards are the least restrictive and can be used anywhere in the world, as well as for online purchases from international merchants. However, only a sliver of the population has access to international credit cards – typically, the most affluent. In Brazil, for example, only 20% of consumers have international credit cards.

Even the privileged few who carry international cards are selective about how and where they use them. One of the reasons is that international cards carry a variety of fees such as monthly maintenance and subscription fee, as well as fees on international transactions and additional VAT that applies to the fee itself. Another reason is that cross-border purchases of physical or digital goods are often considered as imports by the local authorities, and as such, are subjected to additional fees and taxes. In Brazil, for example, there is the IOF – a 6.38% tax that is automatically added to the person’s card statement for all cross-border transactions. In Uruguay, consumers can import up to four packages annually with the cost of goods not exceeding USD 200 for each package; otherwise, they will be charged a 60% import tax.

In general, people in Latin America are not relying on credit cards for day-to-day expenses and instead preserve their credit limits for big purchases such as appliances, renovations, or emergencies. Low credit lines and high interest rates are two of the main reasons for this.

Instalments are a much more popular alternative for accessing the credit line on credit cards issued by the local banks. They are facilitated by the local banks in agreement with local merchants and are offered to consumers at the point of purchase allowing them to choose the number of payments they desire – typically, from 2 to 12. Instalments carry low interest rates, often much lower than inflation or the credit card’s APR (annual percentage rate). During many promotional periods, they carry no interest at all, which makes them very popular. LATAM consumers buy their clothes, groceries, and even restaurant meals with instalments.

How can international merchants achieve high conversion rates in Latin America?

Achieving high conversion rates in LATAM is possible but it requires work. Many of dLocal’s merchant customers grew their conversions above 80% by implementing the following best practices:

1. Process in local currency.
2. Maximise reach by accepting most if not all the locally-relevant payment options.
3. Connect to multiple acquirers in each country and implement routing engines to route each transaction through the best converting processor based on factors such as card BIN, card brand, token, currency, or processor.
4. Ensure your system can direct shoppers to pay with a bank transfer or a cash voucher when their card is declined.
5. Minimise the number of intermediary connections. Direct connections to local acquirers always win.
6. Implement detailed, unified reporting across all markets.
7. Optimise payment pages and checkout flows for mobile.
8. Become an expert in local payment landscape or find a trusted partner who has the expertise, the local acquirer relationships, and the technology stack designed to handle the many nuances that are unique to Latin America and other emerging markets.

About Sebastián Kanovich

Sebastián Kanovich is the Chief Executive Officer at dLocal. He spun off dLocal from AstroPay in January 2016, creating a payments technology company, which eliminates operational hurdles that hinder ecommerce expansion into emerging markets. As the CEO of AstroPay, he grew the company into a premier payment-card provider that processed millions of transactions daily.

 About dLocal

dlocal is the only 360 payments technology platform designed to handle mass online payments in emerging markets. With dLocal, global merchants have no need to manage separate pay in and payout processors, set-up local entities, integrate dozens of isolated payment methods, or worry about stranded funds overseas. 

For similar stories and more insights into the global payments landscape, please check our 2017 Payment Methods Report.

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