US and European e-merchants are keen to enter the fast-growing Latin American e-commerce market. But they need to be able to accept a multiplicity of online payment methods and cope with complex local tax regulations. Robin Arnfield reports.
According to an AméricaEconomía Intelligence study commissioned by Visa, the Latin American and Caribbean (LAC) B2C e-commerce market grew from $21.77bn in 2009 to $30.26bn in 2010 and $43.23bn in 2011. The Latin American consultancy predicts that the market will grow from an estimated $54.47bn in 2012 to $69.99bn in 2013.
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AméricaEconomía says that in 2011 Brazil accounted for 59.1% of the LAC B2C e-commerce market, followed by Mexico with 14.2%, Argentina with 6.2%, and Chile with 3.5%. Central America and the Caribbean respectively accounted for 2.4% and 6.4% of the LAC B2C e-commerce market in 2011.
According to AméricaEconomía, 67.4% of the Argentine population had Internet access in 2011, giving Argentina the highest online penetration rate in Latin America. In Brazil, 43% of the population was connected to the Internet in 2011, with 47.3% using the Internet in Colombia, and 29.4% in Mexico.
A February 2012 online shopper survey by UK-based payment processor WorldPay found that 38% of Argentinians shopped on foreign websites in 2011, compared to 43% of Brazilians and 50% of Mexicans.
New entrants
Latin America’s e-commerce market is attracting the attention of large US and European e-merchants. The Brazilian e-commerce market, which is growing at 25% a year according to Marcelo Theodoro, Latin American product and marketing director at e-payments processor PayU Latam, is particularly attractive to foreign entrants. Recent arrivals include Apple’s Brazilian iTunes Store which opened in December 2011, and Amazon, which entered the Brazilian market in December 2012. AméricaEconomía’s 2012 Latin American e-commerce market study quotes Neil Ashe, president of Walmart Global E-Commerce, as saying that "Brazil is Walmart.com’s second priority after China."
"US e-commerce companies using MercadoPago’s Latin American online payments gateway include Walmart, Hewlett-Packard, Facebook, and Groupon," says Mariano Garrasino, MercadoPago’s head of sales, business development and marketing. MercadoPago is the online payments arm of Nasdaq-quoted MercadoLibre, which owns online marketplaces across Latin America.
"We’re seeing a lot of our e-merchant clients moving into Latin America," says Philip McGraskin, WorldPay’s chief product officer. "It’s not just large US e-merchants who want to sell in Latin America, but also merchants from all over the world."
Amsterdam-based processor Adyen has nearly 1,000 e-merchant clients in Latin America, says Peter Caparso, president of Adyen North America. "We’ve identified Latin America as a key market for us. Around 65% of the merchants we work with in Latin America are local, and 35% are European or US," he says. "We process in Latin America for mainstream e-commerce firms, such as retailers, software vendors and online games websites."
An example of a European e-merchant using Adyen’s payments platform to enter the Latin American market is Dutch online social gaming website Spil Games. Adyen won a contract in February 2011 to provide its platform to Spil Games.
Taxation
"The main barrier to entering the Latin American e-commerce market is not e-payments regulations but the complex fiscal landscape in the region," says McGraskin. "Latin America lacks advanced e-payments regulations such as the European Union’s Payment Services Directive. This means that it’s possible to enter the Latin American e-commerce market without having to jump through regulatory hoops."
"As yet, there are no regional e-commerce regulations in Latin America," says Garrasino.
Unlike the European Union, Latin America lacks a harmonised cross-border tax regime, says McGraskin. "The biggest issue for foreign e-commerce merchants is to understand the corporation tax and sales tax regimes in different Latin American countries," he notes. "Both domestic and cross-border taxation is challenging in Latin America."
"Brazil’s tax regime is particularly complex, as the country has a large number of different sales taxes," says Theodoro. In addition, the Brazilian government charges a 6.38% tax on cross-border credit card payments.
Alternative payments
Another challenge is the multiplicity of online payments methods used by Latin American consumers. "Around 80% of e-commerce payments in Latin America are made by credit card," says Juan Pablo D’Antiochia, general manager, Latin America at Netherlands-based processor GlobalCollect. "However, a significant proportion of Latin American online shoppers, particularly unbanked or underbanked consumers, prefer to pay by non-card alternative payment methods such as bank transfers, e-wallets, and offline cash payments. These methods are both less prone to fraud and cheaper for merchants to accept than card-based payments."
"It’s important for foreign e-commerce firms to offer Latin American consumers the online payment methods that they prefer and are familiar with," says Garrasino.
According to WorldPay’s Optimising your Alternative Payments report, which was published in May 2012, the Boleto Bancário (banking ticket) offline direct credit system has 76% of the Brazilian alternative online payment market.
Boleto Bancário involves downloading an invoice containing a bar-code from an e-commerce website and taking it to an agent such as a post office or convenience store which accepts cash-based bill payments. There are over 150,000 agents in the Boleto Bancário network across Brazil. In Argentina, the equivalent cash collection services are PagoFacil (easy payment) and RapiPago, while Mexican consumers can pay with cash for online purchases at Oxxo and 7-Eleven convenience stores.
According to WorldPay, direct debits account for 11% of the Brazilian alternative online payments market, followed by cash-on-delivery (COD) with 8%, and PayPal with 5%.
In Latin America, PayPal competes with e-wallets provided by DineroMail and MercadoPago. DineroMail, which, like Pay U Latam, is owned by e-commerce firm Grupo BuscaPé, provides e-wallet payments in Argentina, Brazil, Chile, Colombia and Mexico. Both Pay U Latam and DineroMail provide e-commerce gateways enabling merchants to accept multiple payment methods including e-wallets. MercadoPago has 65 million e-wallet users across Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela.
Similar to PayPal, users can add money to DineroMail and MercadoPago e-wallets by credit card or bank transfer. But, because of the high numbers of unbanked Latin Americans, DineroMail and MercadoPago allow users to fund their e-wallets using cash collection methods such as Boleto Bancário and PagoFacil.
D’Antiochia says there are major opportunities for non-scheme virtual prepaid cards to be offered to unbanked Latin American consumers for online purchases. Examples include Paysafecard, which is available in Argentina and Mexico; Ukash, which is available in Argentina, Bolivia, Brazil, Ecuador, Mexico, and Uruguay; and Mexico’s Todito Cash. "Unbanked consumers buy these cards in a convenience store, and then use them to make purchases online," D’Antiochia says.
According to WorldPay, COD and offline direct credit payments each represent 36% of the Mexican alternative online payments market, followed by Todito Cash and PayPal, both with 14%.
Single integration point
Processors such as Adyen, DineroMail, GlobalCollect, MercadoPago, PayU Latam, and WorldPay provide a single point of integration for their clients to accept multiple online payment methods in Latin America. "We provide our clients with access to all the local payment methods offered on our platform through a single API (application programming interface)," says McGraskin. "Globally, we support around 100 different payment methods."
"MercadoPago offers over 50 different Latin American online payment methods including private-label and scheme-branded credit cards, bank transfers, offline cash payments, and our own MercadoPago e-wallet," says Garrasino. "Twice a year, MercadoPago reviews its coverage of alternative online payment methods to ensure that we accept any new payments methods. We have 77 million registered users of the MercadoPago payments platform, including MercadoPago e-wallet users."
"GlobalCollect offers its local market knowledge to help clients to accept the prevalent payment methods in specific countries," says D’Antiochia. "For example, we are working with a client in Ecuador, which is a small e-commerce market. What is unusual about Ecuador is the fact that Diners Club has 30% of the local cards market."
As part of its plans to expand in Latin America, WorldPay has formed a partnership with Brazilian processor Cobre Bem Tecnologia. "As Cobre Bem has links to domestic acquirers across Latin America, this will give WorldPay on-the-ground access to Latin American markets," says McGriskin. "It is still difficult for Latin American credit cards to be used cross-border for e-commerce purchases, and our partnership with Cobre Bem will help with this problem."
In December 2012, WorldPay added SafetyPay to the local payment methods that it offers in Latin America. Miami-based SafetyPay enables consumers in Brazil, Costa Rica, Mexico, and Peru to pay for online purchases from their bank accounts in their local currency.
Local entities
A key question for foreign e-commerce firms entering Latin America is whether to set up local subsidiaries in the Latin American countries they want to target.
"First Atlantic Commerce works with foreign e-commerce companies that want to enter Latin American markets, but don’t want a local presence," says Chris Burns, CEO of Bermuda-based gateway provider First Atlantic Commerce. "Our platform enables them to process transactions with a local acquirer in the local currency and settle cross-border in a non-Latin American currency such as the Euro or US dollar. This eliminates the need to set up a local presence in the country. Under Visa and MasterCard’s cross-border e-commerce acquiring rules, merchants which settle funds locally need to have a local corporate presence."
D’Antiochia says that, in addition to acting as a payment processor, GlobalCollect provides consultancy services to foreign e-merchants seeking to enter the Latin American market. "Our value-added services include providing assistance with setting up legal entities in specific markets, as well as local business intelligence and market data," he says.
If an e-merchant decides to set up a local entity, repatriating funds can be problematic. "In a lot of Latin American countries, it is very difficult for international e-commerce firms to repatriate their local revenues to their home operation," says Caparso. "So firms have to become creative to get round this problem. For example, one of Adyen’s US clients has a local subsidiary in Brazil. Instead of repatriating its Brazilian revenues to head office, this firm uses these funds to pay for its global marketing campaigns from Brazil."
Without a local presence in Brazil, foreign e-commerce firms are unable to accept the country’s domestic-only private-label credit cards, says Caparso. "This means being restricted to only accepting Brazilian cards bearing international brands such as Visa and MasterCard," he says. "Private-label cards such as Hipercard are very popular in Brazil."
According to Brazilian credit card trade association ABECS (Associação Brasileira das Empresas de Cartões de Crédito e Serviços), as at 30 June 2012 there were 258.9 million private-label cards in issue in Brazil, representing 36% of the total number of payment cards in issue in Brazil.
Private-label cards also represent a significant share of the card market in other Latin American countries such as Argentina, Chile, and Peru.
Instalment-based credit card loans are very common in Latin America both for point-of-sale and e-commerce purchases. These involve cardholders paying for purchases though a number of pre-agreed instalments instead of revolving their loan. According to D’Antiochia, 60% of credit card purchases in Brazil and Argentina and 20-30% in Mexico involve instalment loans. "A very high percentage of Latin American airline tickets are bought through instalment loans on credit cards," he says.
"If you want to sell heavily in Brazil, you need to offer instalment loans," says Burns. "But you can only offer instalment loans if you have a connection to a local acquirer, and this means setting up your own local entity."
"GlobalCollect can provide e-merchants with the integration to credit card instalment loan providers," says D’Antiochia.
Fraud
Commensurate with the rise of the Latin American e-commerce market, there has been growth in online fraud in the region.
"E-commerce fraud is certainly a challenge in Latin America which foreign entrants need to be aware of," says Garrasino. "Online fraud is growing in line with the growth of the Latin American e-commerce market," notes Theodoro.
A July 2012 survey of online consumers in Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela by Internet measurement firm ComScore found that security and privacy concerns are a major deterrent to shopping online. Among respondents who had not made an online purchase in the previous three months, 36% said the reason was concern about fraud, while 29% said the reason was a lack of payment options.
With Latin American countries such as Brazil and Mexico migrating to EMV, card fraudsters have been changing their focus from the point-of-sale to online channels in the region. To prevent card-not-present fraud, some Latin American issuers block their credit cards from being used on cross-border websites. "Another problem is that Latin American issuers may have outdated fraud prevention systems which reject genuine cards as being fraudulent when used for cross-border online purchases," says D’Antiochia.
Fraud prevention is a significant part of the value-added services provided by Latin American processors such as MercadoPago and PayU Latam. "As customer behaviour and payment fraud in each online vertical is different, MercadoPago has a segmented approach to payment fraud," says Garrasino. "We have built fraud prevention models for each different online retail vertical."
