Clocktower Technology Ventures: Understanding Latin America’s Fragmented Payments Landscape

The global health crisis prompted consumers everywhere — including Latin America, where cash has dominated the region’s payments — to experiment with new payment methods. The pandemic’s impact on the Latin American payments sphere has granted payments players a unique opportunity to weaken cash’s grip, but it is important for these firms to understand the market’s payments landscape to gain a foothold there. Cash still is the method of choice for most Latin American consumers, and the online payments ecosystem is fragmented from country to country, said Adriana Saman, principal of venture capital and financial service innovation firm Clocktower Technology Ventures.

“Each country essentially operates independently with regard to key players, payment methods, et cetera,” she told PYMNTS in a recent interview. “That means what works in one country doesn’t necessarily work in another. For example, supporting a single payment type in a country could require connections to multiple providers. Similarly, … a popular payment type in one country might have little adoption in another, not to mention a whole new set of service providers.”

Knowledge of both payments players and consumer preferences is key for new entrants looking to achieve success in any market, and learning the diverse Latin American market’s specific needs could help both payment providers and merchants create the lasting customer loyalty required to establish a base in the region.

Understanding payment particularities

The pandemic did not break cash’s hold on the Latin American payments space, with paper money remaining the most popular way for individuals to transact by far, but it has given rise to a dizzying array of other options consumers can tap to fulfill their needs. Understanding which markets lean toward each of these methods, which range from credit cards to mobile wallets or app solutions, could offer business hopefuls a decisive advantage over competitors.

This payments fragmentation goes beyond simple consumer preferences, however, Saman warned. Government agencies and financial regulators across the market continue to debate how online payments should take shape in their respective countries. Payment players thus will not enjoy the same kind of industry standardization they would see when setting up shop in more mature payments markets such as the U.K. or the U.S., she continued.

“There’s a tendency for people outside the region to assume that Latin America is a monolith,” Saman said. “In reality, the region is very complex, with each country operating with its own set of key players, preferred payment methods, laws and regulations. … The Latin American payments space is much less developed than the U.S. and other [payments] markets. Many of the things people take for granted in other regions remain challenges in Latin America. For example, acceptance rates remain low … compared to other regions.”

Payment players that recognize the nascent quality of the Latin American payments ecosystem and the growing assortment of new methods vying for consumers’ attention can position themselves to better tailor their products for consumers from country to country. Popularizing payment tools beyond cash also requires establishing the infrastructure to support these solutions, however — and building out digital payments infrastructure in Latin America has been slow going, Saman explained.

“In my view, the region is missing a key player or a set of key players to go and build the payment technology infrastructure to coordinate and connect payments across the region, similar to what’s been done in the U.S.,” she said. “This could be anything from enabling a company to accept payments in a single country with the support of the preferred payment types locally to enabling companies to operate [across borders] without creating separate entities.”

Developing regulatory standards for digital payments is essential to reducing the fragmented nature of the Latin American payments landscape, Saman continued. Fortunately, this appears to be the goal of several financial entities, many of which are newer, digital-first entrants working to establish the connectivity required for consumers to make speedy payments not just in their own countries, but also across all of Latin America.

The rising role of FinTechs

Financial and payment service firms have taken a greater interest in the Latin American market over the past year and a half as the pandemic has reduced cash’s efficacy for many consumers and businesses. The true dawn of a connected digital payments ecosystem will be possible only if such transactions can be supported everywhere easily and seamlessly — and in this arena, traditional FIs may find themselves outmatched by their FinTech counterparts, Saman noted.

“With regard to banking and card penetration rates, I believe the greatest innovation in the region is going to come from the newer FinTech entrants,” she predicted. “They will embrace a tech-forward approach, offering easy and modern solutions to drive bank and card adoption rates. This is [different] from [the approach of] legacy incumbents, who tend to be technological laggards, offering older and heavier solutions. Willingness to enable competition with incumbent monopolies and establish regulation is another key factor.”

Observing FinTechs’ role in Latin America’s adoption of new payment methods could offer a preview to the region’s financial future. Payment players wishing to enter or expand their presences in this market will want to keep a close watch on these developments accordingly.