An Overview of Payment Solutions in Latin America

In the US, most people gloss over payment processing because almost everyone has a credit card, Paypal account, or another simple way to pay. Developers use Stripe and can process in seconds. For consumers, Amazon even created one-click purchasing for some customers and physical buttons that automatically reorder your favorite products.

In China, paying is even easier; almost everyone uses Wechat or Alipay to scan QR codes and pay for everything automatically without ever taking out their wallet.

Startups have filled almost every niche in the payments industry, providing solutions for any vendor. Need to pay someone for something you bought in an online shop? PayPal can help. Setting up online payments for your business? Try Stripe. Want to compensate your roommate for your half of the gas bill? Venmo can help you do that.

We tend to take these solutions, as well as more traditional payment systems such as credit cards, for granted in the US. Only 6.5% of households in the US don’t have a bank account, although 18.7% of households are considered underbanked. If someone in the US wants to sign up for a Netflix account or buy a t-shirt online, they enter their credit or debit card information, and that’s it.

In Latin America, completing an online transaction is not so simple.

Up to 65% of adults do not use formal financial services, meaning they don’t have credit cards, debit cards, and/or bank accounts. Established startups like PayPal, Venmo, Stripe, Square, and others do not operate in Latin America or do not integrate with Latin American banking systems. If they do work, they function via local services that charge as much as 10% in fees in countries like Chile, Argentina, and Brazil.

For the average Latin American consumer, buying an upgrade through an app, paying for a gym membership online, paying bills, or signing up for Spotify Premium, is not so straightforward. Even for those that have a local debit or credit card, most accounts do not allow international payments or charge excessive fees.

As Latin America becomes increasingly connected to the world through the Internet and mobile devices, the demand for simplified payments is growing exponentially. Today, startups are meeting this demand across the region. There are now Stripe, Square, Paypal, and Venmo clones in almost every Latin American tech hub.

However, these startups generally operate in only one country, which stifles their growth. Due to regulations, few payments startups have yet to dominate the entire region. Regional consolidation, meaning solutions that work in every country in Latin America, would help these companies offer services that are as seamless and widespread as they are in the US.

In 2017, Latin American fintech startups received over US$600M in VC funding and grew even more in 2018. 56% of the companies that received funding were payments and remittance startups. This is a good sign that the demand for these services is growing. Here’s a look at the current state of the payments industry in Latin America today.

Helping businesses accept online payments

The e-commerce boom in Latin America is pushing companies of all sizes to provide more flexible payment methods.

Currently, traditional payment processors, such as monopoly Transbank in Chile, are clunky, slow, and incompatible with many cards. For example, I can’t use my US credit card to buy online through Cencosud, one of Latin America’s largest retail chains, or to use Cabify or Cornershop. For some reason, I can use my US issued credit card for Rappi Colombia, but not for Rappi Chile or Brazil. Uber uses mostly foreign payment methods, making them less attractive to locals, who are charged in dollars. These incompatible payments systems create friction that slows consumption and creates barriers to purchasing.

In the US, the solution to this problem is Stripe, an online payments platform that integrates into any website easily. Stripe is currently worth over US$20B. But even before Stripe, online vendors in the US could send and receive payments via PayPal.

Almost every large country in Latin America has its own “Stripe clones” that are working to streamline online payments processing for businesses of all sizes.

Some of the most prominent companies in the online payments space include Kushki, QVO, Ebanx, Allpago, Culqi, and Conekta. Many of these startups are starting to scale regionally, angling to become the Stripe for all of Latin America.

At this point, the payments space is still relatively open. No company is widely accepted enough to be the clear market leader. However, Ecuadorian Stripe clone, Kushki, founded by Sebastián Castro and Aron Schwarzkopf, is on track to compete for this role.

Kushki is streamlining payments in Ecuador and Colombia and will likely expand across the region.

“In Latin America, a lot of consumers and businesses still depend on cash transactions, but it is time for the region to catch up to the new global standard of digital payments,” says Aron Schwarzkopf, Kushki’s CEO.

Mobile credit cards for everyone in Latin American

Worldwide, neobanks – fully-mobile, branchless banks – are starting to compete with traditional banks by providing more agile, customer-focused services to their users.

In Latin America, where many adults have never become fully-integrated into the banking system, neobanks are among the fastest-growing startups in the fintech industry. Recent investments into Brazil’s Nubank, Argentina’s Ualá, Mexico’s Albo and Cuenca speak to the potential of neobanks to transform financial services in Latin America.

In September 2018, Nubank received a US$180M investment from Chinese giant Tencent at a US$4B valuation, after achieving unicorn status earlier in the same year. Over 20 million people have applied for Nubank’s mobile credit cards and bank accounts since it launched in 2013 and they have over five million users.

In Latin America’s third-largest market, Argentina, neobank Ualá has over 400,000 users. This free, fully-mobile global Mastercard allows customers to buy online, even internationally, from a country known for its tight capital controls and bureaucratic banking systems.

Ualá founder, Pierpaolo Barbieri, explained the size of the opportunity for neobanks in Argentina on my podcast.

“Currently, 75% of people in Argentina have some sort of card, but they don’t use them. Many people just take all their money out of the bank at the beginning of each month. This is a market where there are a lot of options for the top 2% of people, but over 50% of the population has never had access to a bank account before, and up to 15% have never had a banking credit line. However, we live in a highly-educated country where 95% of people have phones and 82% of those are smartphones.”

Transferring money through cryptocurrency

Latin Americans are among the fastest adopters of cryptocurrency in the world. Especially in countries with tight capital controls, like Argentina, Venezuela, and Brazil, Bitcoin and other cryptocurrencies often provide more stability and freedom than local currencies. Buenos Aires is considered one of the most Bitcoin-friendly cities on earth.

Across Latin America, people use cryptocurrency as more than just an investment; they’re also use it to transfer money between friends, pay for goods, and even send remittances to relatives in other countries.

Despite its many uses, cryptocurrency startups in the region still face many challenges. Earlier this year in Chile, banks decided to close the accounts of several prominent crypto-exchanges, including CryptoMKT and Buda, without warning. Mexico, and now Chile, are implementing fintech laws that regulate and protect cryptocurrency exchanges like CryptoMKT.

“We are very pleased with Latin America’s enthusiasm for the use of cryptocurrency; there is a growing group of Chileans, Argentines, Brazilians, and Mexicans that are actively using the opportunities that this technology provides, including this new way of sending and receiving payments,” said CryptoMKT cofounder, Rafael Meruane.

Across Latin America, cryptocurrency exchanges offer a way for people to transfer money and payments without depending on unstable local currencies. Some of the region’s most prominent players include Ripio (Argentina), CoinBR (Brazil), Bitso (Mexico) and RecargaPay (Brazil).

Integrating card payments for small businesses

In the US, Square revolutionized credit card processing for small businesses by creating a dongle that could attach to any smartphone or tablet. Square also automatically organizes and sorts invoices for companies to help entrepreneurs manage their finances.

This model made its way to Latin America by way of several startups that developed hardware and software to enable small businesses to integrate card payments with little upfront investment.

Latin America’s “Square clones” received significant international attention over the past year. However, many of these startups are limiting their services to Latin America’s largest economies, Brazil and Mexico.

In mid-October 2018, Brazil’s StoneCo raised US$1.5B in its IPO, then popped its valuation up to US$9B when the shares went public the next day, with Warren Buffet and Jack Ma investing in the IPO.

Another Brazilian Square clone, Pagseguro, raised over US$2.6M in its IPO in early 2018. Zoop, a white-label mobile payments service, received US$18.3M from Movile in April.

The most well-known Latin American Square clone might be Clip (previously Payclip), a Mexican startup that creates small credit card readers for smartphones.

“Clip has already raised over US$40M from international investors and has offices in Silicon Valley and Mexico City and has been growing quickly in Mexico, helping many business process payments,” said founder Adolfo Babatz.

Other opportunities in Latin American payments

It’s becoming clear that traditional banking is not well-adapted to the realities of Latin America. Despite local and international efforts from NGOs and governments, we’ve only seen a slight decrease in the unbanked rate, at around 2% per year, since the early-2000s.

Meanwhile, smartphone penetration increases by 12% yearly. This disparity calls for apter, agile solutions to help Latin Americans pay for everyday goods.

Consumers in Latin America shouldn’t have to think about payment methods when making a purchase, even across borders. However, traditional financial institutions and government regulations can make buying products frustrating and confusing.

Across the region, payments startups are making it easier for people to transfer money, pay businesses, and open bank accounts for the first time. Latin America may never become fully integrated into the traditional banking system in the near future, but these payments startups provide people with the financial freedom to fully participate in the formal economy now.

Read my post on the fintech opportunities and challenges in Latin America to learn more about the industry.