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August 18, 2010updated 04 Apr 2017 4:16pm

The emergence of non-banks

The Latin America region is recognised as one of the fastest-growing electronic payment markets in the world. A new report from consultancy Speer & Associates examines the growth of non-bank and online payment players, which are bringing innovative payment solutions to market. Victoria Conroy reports.

By Victoria Conroy

The Latin America region is recognised as one of the fastest-growing electronic payment markets in the world. A new report from consultancy Speer & Associates examines the growth of non-bank and online payment players, which are bringing innovative payment solutions to market. Victoria Conroy reports.

 

Changes in the payments industry have been brewing thanks to an array of new technology and its increased availability to consumers. New trends in the way we communicate with each other and the world around us – from the new ‘smart media’ at bus stops accessed via mobile devices and purchased via text messages, to the new virtual currency used in online gaming sites – all point to innovation from the electronic arena being applied to real-world payment processes.

These are generating real revenues, increased efficiencies, and clear advantages over traditional banking payment strategies that failed to deal with cash as the main alternative for a large segment of the population.

US business consultancy Speer & Associates (S&A) provides an overview of selected Latin American/Caribbean (LAC) companies – some originally created with the intention of being preferred online payments solutions – which, in light of the slow adoption process of the internet as a transactional channel, have transformed themselves to offer both virtual and real-world payment alternatives. These alternatives are bringing innovative options to an otherwise standard bank card and cash dominated market.

In a June 2009 assessment of eBay and PayPal, JPMorgan stated that "by 2011, e-commerce and online travel will combine to be over $1trn worldwide, up from $770bn in 2008", a significant achievement in a tough economic environment. New players have come onto the scene in this market.

Originally, web-based payment services supporting online purchases and consumer-to-consumer (C2C) transfers are now making the transition from online-only to the ‘real world’. These companies are leveraging the results achieved in global e-commerce and are entering the banking arena with new approaches, views, and flexibility that traditional financial institutions may have a hard time trying to match.

The latest available card association statistics show that total transaction volume reached 113.8bn transactions in 2009, with a total volume (purchase and cash advance) of $9.7trn. PayPal, one of the most recognised online payment services, has established itself as a global payment processor, handling approximately $60bn in total payment volume in 2008.

Whereas in the US, its services include consumer-to-business (C2B) and C2C payments, international reach is not yet fully in place. Most international use relates to non-US consumers buying on US-based websites via PayPal, avoiding rejection of international credit cards by some merchants. No major advances have taken place in ‘in-country’ purchases outside of the US.

Latin America: Internet users – selected Latin American countries

Who are the local LAC players?

A quick look around in major LAC economies will point out the traditional local banking institutions, which have maintained a stronghold in the payments market via traditional association (Visa/MasterCard/American Express) bank cards and their own branch/closed merchant POS networks.

In some countries, financial institutions have implemented agreements with non-financial entities (corresponsales no bancarios – CNBs) to reach isolated or small communities where it would otherwise be unprofitable to set up a traditional banking centre, leveraging existing delivery networks like post office service centres and retail chains.

Unlike the US, LAC local economies still cater to a cash-customers majority. Low bank card market share, combined with low internet penetration have slowed down the adoption of online purchases as the main ‘transactional’ channel for most LAC customers. As a result of this cash predominance, non-financial payment service providers who originally targeted the online world have developed software solutions for the integration of cash payments into everyday life.

Over the last decade, various companies have been developing new technology focused on servicing the cash flow coming from non-banked LAC customers. These vary from cash-in terminals that provide a practical solution for local unbanked consumers at ‘corner stores’ (with advantages including reduced waiting times, filling out forms, or waiting hours for the money to be credited into bank accounts) to lottery vending machines upgraded to take different payment forms and handle all sorts of payment messaging formats.

 

LAC regional players

Traditionally catering to a younger audience, MercadoLibre is the LAC version of eBay, (and one of its current investments).

Self-described as the ‘largest online trading platform in Latin America,’ it is the result of a business plan assignment at Stanford University in the late 1990s and offers a technological and commercial solution that addresses the cultural and geographic challenges of operating an online commerce platform in Latin America. The company offers its users two principal services: the MercadoLibre marketplace and the MercadoPago online payments solution.

MercadoLibre began operations in 1999 and has since expanded from Argentina to Brazil, Mexico, Uruguay, Colombia, Venezuela, Chile, Ecuador, Peru, Costa Rica, the Dominican Republic and Panama. Latest available figures indicate that as of December 2009, the company had 42.6m registered users with a transaction volume of around $2.7bn for 2009 (not including real estate, services, and vehicles).

To facilitate the sales/purchase procedure, increase access, reach, and speed up the adoption process, MercadoLibre developed its own payments platform, MercadoPago. Founded in 2003, it has currently expanded operations from Argentina to Brazil, Chile, Colombia, Mexico, and Venezuela.

In 2009, a total of 3m transactions for about $382m moved through MercadoPago; it is now expanding into an external online payments service for consumers, online and real world companies.

Users of MercadoPago select a funding source, credit cards, bank accounts, or balances held at their own MercadoPago account, to make purchases on MercadoLibre’s website, transfer money to family members or others, and make purchases at online stores selling independently from MercadoLibre.

The funding sources vary by country and not all countries are currently covered, but the company plans to expand as new agreements are put in place.

Latin America: Banked population – percentage of population with access to financial services

Argentina

One of the leading bill payment collection networks in Argentina is PagoFácil. The company uses electronic data interchange and electronic funds transfer systems to allow clients to pay all their bills and services.

Since creation in 1994 it has expanded from an online purchase payment system into a wide variety of bill payment categories, including utilities, telephone, water, gas, electricity, cable / satellite, insurance companies, municipalities, educational institutions, consortia administrators, clubs, and associations, etc, where the user can pay at more than 4,000 points across the country via bank cards and cash.

The company began offering prepaid cell phone top-ups for the main communications providers, opening the door for a whole new and expanding segment. In addition, there is INFOVISA – a new service which lets customers pay US Embassy fees for the interview process, as well as a close relationship with Western Union for an expanded portfolio at their service centres.

Another interesting player in the Argentine market is Provincia Pagos (formerly Bapro-Pagos) also providing bill payment services. In 2009, the company reached 5m transactions per month via more than 900 agencies located mostly in the Province of Buenos Aires with over 600 collection agreements in place.

Both PagoFácil and Provincia Pagos have expanded agreements with banking institutions to give their clients access to services that otherwise would not be in place due to limitations in the banks’ reach, flexibility, and time to market capabilities.

International attention has been focused on a 2003 Argentine start-up, DineroMail, which today has expanded its presence in Brazil, Mexico, Argentina, Chile, and Colombia.

With offices and agreements with banks and other payments providers in each of these countries, the company has obtained investment support from entities such as the IFC (a World Bank agency that focuses on investments in the private sector with high social impact), Grupo Clarin, Fintech Advisory (leader-based investment in the US and UK) and Actarus Funds (group of US funds aimed to finance start-ups in the internet industry 2.0).

Services offered are similar to PayPal’s: C2C payments using email addresses, C2B payment via shopping cart, email, invoice print-outs for payments at bank branches and such regional specifics as prepaid mobile top-ups as well as telephone prepaid cards. Interestingly, invoice print-outs or ‘collection cards’ can be used to make deposits at PagoFácil, Rapipago, BaproPagos, and CobroExpress using the bar code printed on the back of each card.

 

Brazil

One of the fastest-growing online payment options in Brazil is Boleto Bancário. When Brazilian consumers choose Boleto Bancário as their preferred payment method on a Brazilian e-commerce site, they are presented with a convenient, pre-filled Boleto Bancário payment slip in a pop-up window. A form is printed, and then the consumer visits any bank office to physically make the payment.

Currently this system processes around 20% of the e-payments in Brazil, a very significant share of a market that for 2009 presented growth trends of about 25%, generating a total turnover of BRL2.3bn ($1.3bn). An additional positive drive for the business is a recent report of 10% growth of internet access in Brazil between 2008 and 2009, according to IBOPE Media.

Quickly becoming one of the preferred payment methods, Boleto Bancário is banking on factors such as convenience and high security to expand its business value and revenues.

Customers in Brazil, who do not have, or do not choose to use, a credit card for their online purchases, can minimise risk by paying cash at a banking institution.

Aware of fraud risks related to credit cards, some consumers still shy away from using them online and choose to expose a limited amount of cash. Merchants find it a good solution to avoid charge-backs since payment is final. Favourable costs and fees make the service more convenient.

Boleto Bancário is a payment option in Brazil for Google’s AdWords service, as well as various internet gaming sites that have seen the use of credit card payment restricted by changes in bank card association and government regulation.

Bradesco, along with other local banks, has expanded its services to the internet. In addition to implementing Visa Electron Card purchases over the internet and electronic financing, the bank manages a portal under its umbrella brand Dia&Noite (Day&Night) which contains links to 68 related websites, 48 of which are institutional and 20 transactional.

Since its debut, Bradesco has been innovating and making available the highest number possible of online products and services to its clients.

Expanding its reach in February 2010, Western Union, a leader in the money transfer segment of global payments, and Bradesco announced an agreement to offer the Western Union global money transfer service at most of Bradesco’s locations in Brazil.

This agreement allows Western Union to expand its agent network in Brazil – available since 1997 – providing international money transfer services through more than 5,800 agent locations in the country.

As a global player, Western Union uses the Western Union, Vigo, and Orlandi Valuta brands to offer services through a combined network of more than 410,000 agent locations in 200 countries and territories.

In 2009, Western Union completed 196m C2C transactions worldwide for an estimated $71bn, and around 415m business payments. Agreements like Bradesco’s in Brazil could potentially expand a bank’s service portfolio improving branch profitability and bringing in new customers who require only basic banking products.

 

Colombia

Red-Via was initially awarded a government contract to handle a mega-millions lotto product whose revenues are destined to support social programmes and other government related initiatives.

Originally limited to lottery ticket sales, the company expanded with non-banking correspondent agreements (CNBs) with Colombian financial institutions as well as bill payment services, leveraging its more than 8,000-terminal network in 420 municipalities within the country.

Statistics for 2009 released by the company indicate that 800,000 transactions per day (298m a year) take place through its network. This is an impressive number considering that as recently as 2007 the company had an uncertain future due to new competitors entering the market and changes in government regulation threatening to extinguish the contract awarded.

The shift in business model has enabled it to enter different sectors such as MOTO sales collections, electronic toll payment, insurance payments, airline tickets, payment of utility bills, microcredit, prepaid mobile top-up, and others that, for 2009, represented 50.1% of net income (COP$30,800m, or $15.4m) whereas the remaining 49% came from lottery ticket sales.

Fees charged for the services increase revenue and help with infrastructure maintenance cost, mostly shared with retail vendors. Transaction income comes principally from cash-based operations in which the banking system does not take part.

This change allowed GTech (Red-Via’s parent company and part of the Lottomatica Group, which has 59% of the global lottery market and more than 450,000 terminals worldwide) to remain in the country and exposed the company to new income sources. In the past two years representatives of the group from England, Chile, China, Mexico, and other countries visited Colombia to replicate the model.

Following this initiative, other companies such as Efecty and the main bank-owned networks Credibanco (Visa) and Redeban-Multicolor (MasterCard) started offering similar services. Efecty covers 630 municipalities at a national level with more than 1,800 service centres, with added support from Servientrega’s courier service locations.

As in other countries in the LAC region, traditional banking institutions and card associations still own extensive merchant payment networks.

POS terminals in a large number of retail locations are the key driver for basic card present payments, but in S&A’s view they should be expanded to offer added services: bill payment, utilities payments, prepaid mobile top-up, private label cards, merchant prepaid, and loyalty cards, CNB facilities including cash withdrawals, funds transfer and others, thus stepping ahead of third-party investors that might build them outside of financial institutions’ control.

 

Chile

With a strong financial system in place, good access to banking services and a major POS bank-owned network handling most major card payments, competition has found it hard to expand in the country.

Transbank offers, in addition to traditional card present payment services, the option to implement online sales (WebpayPlus), as well as bill payment, collections, and recurring payments. This is one of the few examples where a real-world bank-owned network is making strong headway into value added services and the online world.

Complementing Transbank services, BCI and Banco de Chile’s 1990s JV – Servipag – has been in place to offer clients of the banks’ supplementary locations for bill payments, cash transfers, and other financial services; in addition to bricks and mortar locations the company has developed online payment collection capabilities.

 

Mexico

Telecomm, a public decentralised entity specialising in the telecom and transport industries, has seen its traditional business volume decrease due to the penetration of electronic media.

To maximise the use of its infrastructure and make up for decreasing revenues, it implemented CNB agreements with major banks in the country and set up its locations to receive payments for a variety of companies from digital TV providers to utilities, government taxes, and mobile communications providers.

The trend remains true when looking at traditional chains like 7-Eleven and Oxxo in Mexico. These have included within their traditional portfolio of food and convenience stores, the following: bill payment services and updating cash registers to allow their customers to pay for services not related to their core business, thus leveraging the merchant store network.

 

Where are these companies headed?

Strategies implemented by the companies described above include shifting business models to supplement decreasing revenues, expanding services, leveraging available technology and distribution networks, as well as profiting from opportunities afforded them by not being restricted to the ‘banking business way of thinking’.

These vendors have become known as ‘solutions centres’ to their customers, gaining critical transactional volume and enabling them to use already cheap flexible technology to steadily expand into versatile markets. Financial institutions have not fully understood the revenue opportunities in servicing cash-only clients, limiting themselves to contact with a reduced population segment.

Non-traditional vendors are revolutionising the payments services with cheap technology gaining valuable insight into segments that in the future could be well served with microloans, private-label cards, and rewards through their own merchant network associations, all without financial institution intermediation. It leaves banks with plenty to ponder.

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