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Increased use of digital payments in Latin America and the Caribbean: An opportunity for merchants and DFS providers

At the peak of the pandemic, about 50 million consumers in Latin America and the Caribbean (LAC) adopted in-store digital merchant payments for the first time in a region where cash has ruled for years, a recent World Bank survey found. Digital merchant payments involve using a card, mobile phone, or the internet to make a purchase online or in-store. The same survey also found that in-store digital merchant payments have since become more widespread than online payments. On a similar note, the pandemic encouraged several small businesses in the region to adopt digital payments to match customers’ needs.

Latin American countries have typically lagged in the shift from cash to digital payments due to the large volume of unbanked and underbanked citizens compounded by a lack of trust in non-cash payments, prohibitive adoption costs, and strict financial regulations. About 45% of people in LAC don’t have a bank account and about 80% don’t have a credit card.

However, usage was accelerated by the COVID-19 pandemic and has continued to grow consistently. Today, the number of cards in circulation is 1.8 billion compared to 800 million in 2007. In 2020, the number of active mobile money accounts increased by 67% while e-commerce grew by 18% in the same year with Argentina, Brazil, and Mexico leading the pack.

A new white paper published by the Inter-American Development Bank (IDB) notes that this growth of digital payments is especially important for LAC, where micro, small, and medium-sized enterprises (MSMEs) make up the vast majority (99%) of businesses but are often excluded from the formal financial system. For MSMEs, digital payment technologies create pathways to increase sales from existing and new customers, establish a financial history and formal banking relationships, and enable access to more sophisticated financial products, including credit and insurance, among others.

However, the benefits of digital payments may not be fully recognized or utilized by some LAC businesses — the World Bank survey found that half of those who adopted digital payments during the pandemic would prefer to return to cash. According to the World Bank, the challenge now is encouraging these digital adopters — both consumers and small businesses — to continue using these services. How so? By encouraging financial services providers (FSPs) in LAC to offer inclusive digital financial products, coupled with appropriate incentives, that enable merchants and consumers to thrive.

How can FSPs and governments encourage the continued use of digital payments?

To further advance digital payments in LAC, the IDB recommends that LAC governments should build good regulatory practices, including consumer protection, to reduce market barriers and promote innovation. Beyond an enabling environment for digital payments, several leading financial inclusion advocates offer tried and tested solutions that FSPs in LAC could also consider.

Offer value-added services to merchants.

CGAP recommends that financial services providers that target merchants can offer value-added services (VAS) on top of the payments product and ensure that these services address specific pain points and use cases of prospective users. Adding features that support merchants with customer relationship management, credit, inventory management, and business intelligence, in addition to considering loyalty programs as VAS, could help merchants get more value than just payments.

Choose the right acceptance model

The World Bank designed a handbook for digital financial service providers — such as financial institutions, mobile network operators, fintechs, and payment service providers — who are in the process of launching or expanding their existing merchant payments network in emerging markets. The Merchant Payments And Digital Financial Services, published in 2020, provides examples of markets where payment systems are successful. These include two mobile money case studies — EcoCash in Zimbabwe and M-Pesa in Kenya. A QR case study in Singapore, social media payments like WeChat Pay and Alipay in China, and lastly, international card schemes. The handbook emphasizes, among other things, segmenting merchants and customers, mapping the ecosystem and payments points of the potential users as providers consider which model to adopt.

Build strategic partnerships

Accion recommends that FSP make strategic partnerships with enabling actors within the ecosystem to expand the reach and uptake of financial products. These actors range from payment providers, digital marketplaces, insurance companies, logistics companies, and several others. Similarly, the IDB argues that LAC governments should partner with the private sector to deliver products and services that meet individual and business needs.

Looking ahead, only time will tell if merchants and consumers in LAC who adopted digital payments during the pandemic will continue to use them as they return to business as usual. For DFS providers, this is a critical time to consider meeting the customers where they are, but with the right products.

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