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Interviews

Selling digital goods in LATAM – exclusive interview with Philipp Bock, allpago

Wednesday 3 April 2019 | 08:46 AM CET

“Ecommerce in Latin America is growing at an incredible pace, making this region an attractive opportunity for global merchants” Philipp Bock, allpago Founder and CEO

What is the size of the digital goods market in LATAM and what are the most interesting markets in this region? What is the expected growth for 2019 and beyond?

We refer to the digital goods market as reaching roughly USD 70 billion without travel services, and USD 100 billion with travel services in LATAM in 2018.

The top two markets in the region are Brazil and Mexico, which make up approximately 65% of the entire market; depending on different statistics: Brazil makes up 40-45%, while Mexico – around 20%. Then, there are about 25% for the other top four markets, which are, by size, Argentina, Chile, Colombia, and Peru; and then, there are the remaining 10%, which are roughly covered by countries like Venezuela and the rest of the LATAM countries.

Global companies usually look at the top six markets when expanding in the region. In 2018, we saw big companies such as Google, Spotify, and Netflix interested for the first-time in expanding into smaller markets, and other companies that are finally entering LATAM and they would always enter through Mexico and Brazil.

Brazil and Mexico are mature markets, making up for the big chunk of the volume (65%), but there is a lot of competition in the region, especially in terms of regulations, which stirred a lot of debate in the past month in the other top four markets. For example, in Argentina, the third market by size, the only two acquirers now process Visa and Mastercard. Considering this was not possible before, the country saw some bad times for payments as there was no competition. In Chile, in 2018, for the first time ever, the only acquirer opened up to business processing, meaning that one needn’t have to redirect 3-D Secure type of authentication process, which makes it possible for digital merchants to also operate with recurring transactions without the need for TPPs to get authorisations in real time; for them, it was not possible before.

Therefore, I believe that in these other top four markets, Argentina, Chile, Peru, and Colombia, we can say that the market de-regulation and the local economic environment only made it possible for merchants to strategically consider them, which is a sign for a lot of growth expected in the next two to three years in these markets.

What are the most promising segments within the digital goods market?

We see a lot going on around marketplaces (transportation, shared economy etc.). E-learning is also rising due to the growing middle class. Brazil, for example, is in the top three global markets for e-learning. Gaming and gambling are also promising segments, even though gambling is still not allowed in LATAM. Once this opens, there is going to be a huge growth segment.

What regulatory or other challenges does a seller of digital goods face when expanding into these growth markets?

The biggest challenge is acceptance, because there is a problem with payment methods. There is a huge lack of transparency in the market for merchants that want to understand which provider offers the best product/service. Right now, the two most relevant things for a seller are to be directly integrated and to be aware of taxes, as many digital merchants are evading taxes on behalf of their clients, without them knowing it.

In Brazil, for example, the Brazilian Central Bank has shut down a major part of the payment operations for the first time. For several ecommerce merchants and institutional providers, it was no longer possible to process Boleto Bancário. If one looks at the specific provider, the entire body of the operation was shut down, which led the customers to lose 20 to 60% of their revenue from one day to the other. What we always recommend is to have a legal opinion before entering any market.

Could you elaborate on what payment methods should be offered to increase conversion in Brazil?

In Brazil, for example, around 80% of the volume is processed through local cards: Visa, Mastercard, AMEX, Elo, or HiperCard. Then, there are alternative payments and other payment methods for unbanked people, like Boleto Bancário, for those who don’t have credit cards or for those who simply prefer to pay in cash than with card. For digital subscriptions or SaaS companies, this should roughly make up for 20% of the entire processing volume, as we see at our clients. Therefore, the challenges that these merchants need to overcome are related to local cards and alternative payment methods.

What are the key challenges regarding fraud when selling digital goods in LATAM? How can sellers best protect their business?

According to a study conducted by Visa, merchants in LATAM report a chargeback rate of 1.7%, a manual review rate of 28%, and a rejection rate of 9.2%. This means that businesses are potentially sacrificing a significant portion of valid orders, thereby alienating good customers and reducing potential revenue.

We see a lot of fraud activity happening in the region. 3-D Secure is also not working in a way that we would expect it to, as many merchants prefer not to use it and rely on manual reviews instead. In the digital space, this is not possible because of real time authorisation. The main challenge, especially for our client base, is that subscription model-based business often experiences a lot of friendly fraud. This is the real problem for subscription clients, specifically when they don’t have resalable goods.

This interview was first published in the Monetisation of Digital Business Models 2019 – Insights into Billing and Recurring Payments Report. The Report presents the key trends and developments in monetisation of business models, subscription economy, and billing and recurring payments.

About Philipp Bock

Philipp studied at the Technical University of Berlin, at the ESCP Europe in Madrid, Oxford, and Paris, as well as at the INSEAD in Fontainebleau. He holds a Master of Science in Finance, a German Diplom Kaufmann and a French Diplôme de Grande École. He is fluent in German, English, French, Portuguese, and Spanish.

 

About allpago

allpago is the leading payment service provider for Latin America, enabling ecommerce merchants and payment providers to accept all relevant local payment methods through a single platform and API in over 90% of the Latin American Market.

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