In talking about global payment technology, emerging markets are an area of keen interest.
Latin America is a land of opportunity, but it also presents challenges that demand an on-the-ground understanding of commerce and transacting within the various countries and cultures that it comprises.
MPD CEO Karen Webster recently hosted a live digital discussion with Martin Schrimpff, Co-Founder of PayU, during which they addressed the necessity for a unique approach to payments in the region, and how to turn challenges into opportunities across the continent.
As Schrimpff notes, PayU — which also has a presence in India, Eastern Europe, and some parts of Africa — was “the first to see the need [for electronic payments] in Latin America,” where the offering had not previously existed.
“We are very different than your usual payments providers in the fact that we act locally in those markets,” says Schrimpff. “We have more than 250 payment options, and we don’t use any third part PSPs. The amount of work to build those local connections has been incredible. In all these markets we have local offices, local people to give us real local expertise.”
For example, of the company’s 1400 employees, only about 20 of them are based in the company’s headquarters in Amsterdam. The rest, according to Schrimpff, are all based in local markets.
WHY GOING LOCAL MAKES A DIFFERENCE
Operating locally can give a payments service provider a distinct advantage. As Schrimpff — who, despite his British accent, is 100 percent Colombian, having grown up in that country — remarks, “There are some things that are really hard to grasp if you’re not from the region.” Among the advantages are the ability to offer installments, offering local-based credit cards (that don’t even use the Visa or MasterCard brand), the option to offer better approval ratings locally, avoiding international charges for the consumer, and superior fraud management.
Schrimpff points out that PayU offers installments in all 7 of the Latin American countries it operates in. But how these installments work varies dramatically from country to country. It’s important to understand, says Schrimpff, that the banks assume all of the risk in these transactions. Another key factor is that over 60 percent of eCommerce in Latin America is done via installments.
“If you don’t understand that,” says Schrimpff, “you won’t succeed.”
What’s the difference between a revolving balance and a credit card? As Schrimpff explains, the major difference is the fixed amount of time in which a sum is paid back. Beneficial in that regard is that the consumer knows exactly how much they’ll be paying and the payment installments are split evenly across the time frame.
In other cases, installments are used for promotions — something Schrimpff remarks is “very powerful.” In those situations, the merchant will very often assume the interest owed on the installment plan in order to attract a higher volume of sales. This varies from country to country, but installments are popular throughout the region. In Brazil, 80 percent of all transactions involve installments. “That’s how big of an opportunity it is,” says Schrimpff.
In order to make it easier for local merchants to start processing faster PayU acts as the merchant of record.
The other part that is important to understand about payments in Latin America the concept of local credit cards. These cards represent close to 10 percent of all the transactions in the region. Furthermore, there are commonly used by consumers who may not have been approved by Visa or MasterCard, and that is important for a payment provider to broaden its reach.
“By going local,” attests Schrimpff, “you are gaining access to these cards and have an advantage in reaching more consumers via your payment network.”
Approval rates can also improve when a provider operate locally. Some countries, like Columbia or Nigeria, are monitored for fraud in untraditional ways and, as a result, cards will often be flagged. Local payment operators, unlike global ones, have more access to the local databases and therefore have more working knowledge or what’s going on, and can access the end user to understand if that user is actually a fraudster or not.
Banks and issuers in general, notes Schrimpff, are often more comfortable if the transaction is being done locally, because a lot of fraud happens in international transactions. If an acquirer sees that a transaction is happening locally they tend to put less rules on those. In countries such as Mexico and Peru, where debit cards are prevalent, this local connection to payments players can be even more important since debit transactions — because they directly impact a consumer’s bank account — are often scrutinized more stringently than credit cards.
IMPORTANCE OF ALTERNATIVE PAYMENTS
“Cash, in Latin America, is still king,” says Schrimpff, noting that credit card penetration is still relatively low in the region. It’s still very common for consumers to transact in cash, and even keep their money in their own homes versus paying for a bank account. People are also wary to put their credit card information online to make eCommerce purchases. Another disincentive, notes Schrimpff, are additional fees that some merchants tack onto credit card transactions – which is in violation of Visa and MasterCard rules, and actually illegal.
PayU differentiates itself by offering vouchers for cash payments to be made online for eCommerce transactions. The user is able to find what they want to buy online, they create a voucher then walk to a local store and make the payment for the voucher, that merchant let’s the network know the payment has been received and then the system reports back to the online merchant that the product or service can be distributed to the purchaser.
“We don’t see cash taking away from our credit card transaction business,” says Schrimpff. It actually enables them to transact with consumers who are averse to using cards. PayU is also currently beta testing a cash on delivery service, focused on products sold via eCommerce. This is important in that it enables wary consumers to build trust with merchants — and that trust, in Schrimpff’s perspective, is “what makes these transactions so powerful”
Schrimpff and Webster walked the webinar attendees through a number of case studies that highlight PayU’s ability to accommodate various preferences.
Cash on Delivery: PayU has done pilots integrating cash on delivery into its platform. Schrimpff shares the example of a small merchant (a logistics company) whose sales, following a soft launch, increased by 15 times within eight months.
“Basically, 90 percent of [all the business the company] was doing was cash on delivery,” says Schrimpff, who adds that the offering is “a very interesting proposition” for small startups or new companies in the region.
Importance of Cash / Alternative Payments: Open English, an online English course, despite being a completely online product that operates on recurring payments, still decided to offer a cash payment option facilitated by PayU. 37 percent of all of its payments are now done with cash.
It “goes to show,” remarks Schrimpff, that even an online subscription business model can benefit from opening up to more than credit card payments.
Recurring Cash Payments: Schrimpff additionally illustrates that, in its work in Latin America with Amway, PayU provided the company with a special “collection card” that facilitates cash payments. Currently, 85 percent of all of Amway’s payments are processed using those cards.
FRAUD AND CHARGEBACK INSIGHTS
Just as operating payments in general from a local level is beneficial, Schrimpff shares examples of how the same goes for fraud management.
For one thing, there is the provider’s access to local websites and local credit bureaus. During manual reviews, this allows detailed information about the specific user that “would be very hard for other players to get a hold of,” notes Schrimpff.
Additionally, a company like PayU has good relationship with local acquirers. “When we see something strange,” explains the Co-Founder, “we have direct communication with them.”
Having that “local know-how” also lends an understanding that would be more difficult for someone that is not from the region — knowing the zones in a city, for example.
Lastly, Schrimpff explains that doing so many local transactions leads to PayU having “huge amounts of information” on various merchants — such as the main airlines and retailers, and a resultant familiarity with the trends of their businesses in the region.
Diving into some resultant numbers, Schrimpff shares that PayU’s fraud average in Latin America is between 0.6 and 0.7 percent, with approval rate of “about 75 to 80 percent.” That’s the standard they want to keep it at, as he remarks: “You don’t want fraud to be at zero, because then you’re killing your approval rate; but you don’t want approval rate at 90 and fraud at 10.” PayU tries to keep fraud below one percent.
The reason that total rates of fraud in Latin America shows (in the related slide) as 1.39 percent, explains Schrimpff, is Mexico. Mexico has a three times higher fraud levels than other countries in the Latin American market, due to market complexities such as high level of “friendly fraud” (whereby people know how much they can buy and still claim a chargeback even though they keep product). There is also less access for PayU to credit bureaus in Mexico than it has in other countries.
When it comes to chargebacks, Schrimpff provides the data point that less than 10 percent of disputes in the region are actually won by merchants, “so the merchant’s usually on the losing end.” In an effort to put merchants in a better position in that regard, PayU provides them with a module that “simplifies the back and forth with an acquirer” to help merchants automate the chargeback side.
Wrapping up the digital discussion with Webster, Schrimpff offers one last case study: this one related to PayU’s relationship with Cuponatic in Mexico (a company that Schrimpff describes as sort of lie Groupon). Cuponatic was experiencing a “huge amount of fraud rate” when handling it directly, says Schrimpff. But PayU got it down from 8 percent to about 1.5 percent — “which in Mexico is actually really good,” he notes.
Schrimpff additionally provides evidence showing how PayU is lowering the amount Cuponatic’s rejections — which less than 5 percent, now. The approval rate is close to 85 percent, “which is incredibly high for Mexico,” he adds.
Tying this last case study into the overarching perspective of the digital discussion, Schrimpff shows how a payment provider that offers local fraud tools and local know-how — be it Latin America or any other region — can “really control [all of a merchant’s operations] in a better way.”
To watch the webinar, click here or see above.