By Jack Ehlers, Director of Product, Payment Networks and Business Development at PPRO
Latin America has historically been one of the most economically diverse continents in the world. Richer nations such as Uruguay and Chile have a GDP per capita that compares with those of mid-ranking EU states. Poorer countries however, such as Peru and Colombia, have a GDP per capita that’s lower than the poorest EU member state.
Today, Latin America’s economy is on the rise and growing once again. In 2019, 155.5 million people in the region are expected to buy goods and services online, which is a dramatic increase from 126.8 million in 2016. Recent figures have also shown that while Latin America’s e-commerce market remains small, in comparison with Asia Pacific or North American, the area’s retail e-commerce sales are projected to grow from $49.8 billion U.S. dollars in 2016 to $79.7 billion U.S. dollars in 2019.
With a population of 386 million, there is an abundance of potential opportunities for e-commerce success in this region. However, the economic environment in Latin America also presents some challenges. But this is not a reason to shy away from it. Afterall, the value of online commerce is estimated to be worth $41.22 billion US dollars. What’s interesting however, is that the booming e-commerce growth in recent years took place against a backdrop of a struggling economy. While many wouldn’t expect a growth in e-commerce during economic unrest, this surge mostly came from the rise in internet and smartphone usage which provided access to goods from abroad that were previously out of reach.
Local growth driven by e-commerce
Latin America’s economy has traditionally been dominated by primary commodities. Low value raw materials and intermediate goods make up the overwhelming bulk of exports. Latin America’s abundance of, and thus reliance on, raw materials worked to its advantage in the early-to-mid 2000s. Between 2002 and 2007, Chinese consumption of commodities exported from South America increased, on average seven-fold.
The growth in the commodities trade crowded out other economic activity. From the 1970s up until the late 1990s, South American economies diversified and become less reliant on a small number of exports. However, in the early 2000s, this process went into reverse. This not only left private prosperity highly dependent on a narrow range of economic activity, it did the same for state revenues. Before oil prices began to decline in 2014, for instance, 47% of Venezuela’s public revenue came from taxing the commodities trade, primarily oil.
By 2008, with the financial crisis already in full swing, commodity prices were falling. After this period, a normalisation of commodity pricing in the post global financial crisis period between 2010 and 2016 translated into significantly lower growth rates. But this all changed in 2016, helped by the explosion of e-commerce in the region. Now, Latin America looks to be on a recovery path and the region generates better results, with e-commerce at the forefront of this growth.
Overcoming payments and logistic challenges
Latin America still has much to overcome, especially when it comes to payment processing. In Latin America, access to secure, credit card-based payment methods are limited. In fact, many people in the region do not use a formal banking system. Amongst the logistical nightmare of a cash-based society for ecommerce providers targeting the region, merchants have found ways to manage this reality. eShopWorld reported that 36% of online consumers prefer to utilise PayPal, and 35% use Cash on Delivery.
Interestingly, in the region’s largest markets – Brazil and Mexico – consumers’ preferred payment method is via credit card. These two markets hold enormous potential for e-commerce in Latin America. There are currently 66.4 million e-commerce users in Brazil, with an additional 28.2 million expected to be shopping online by 2021. Four years from now, these 94.6 million e-commerce users are anticipated to spend an average of 307 USD online. By comparison, in Mexico, there are 59.4 million internet users, accounting for just under half of the population, leaving room for substantial growth. The number of Mexican internet users is equivalent to the entire population of the UK.
However, it isn’t all plain sailing even when targeting the most affluent populations in Latin America. Logistics, traffic and infrastructure are a major issue for the region and has a detrimental impact on sales, where logistics alone can amount to 15% of the cost of what’s sold. Many online retailers have put logistics on the back burner for years, focusing on the user experience through purchase, and as a result it can take weeks for a purchase to arrive at a customer’s door. In order to remain successful in the booming e-commerce era, investment in this area could result in more e-commerce sales in smaller regions.
A return to growth, even if it’s still in its early stages, provides a better environment for retail than the economic stagnation and contraction of recent years within Latin America. The region’s consumers want premium products and are willing to pay for them. But that doesn’t mean they are not price conscious — 79% say that they are changing their shopping behaviour to save money on their purchases.
Latin American consumers are also willing to buy services and digital goods online, but there is still a high degree of openness to the idea of digital shopping for physical goods. Almost 40% of consumers, for instance, said they would be willing to buy food-takeaways, toys, and beauty products, using their smartphone. 
After years of recession, there is an increasing demand for e-commerce in Latin America, but customers are highly price conscious so any merchant hoping to meet that demand and take advantage of the opportunities available will need a highly focussed and localised approach to win consumer acceptance.
Global Banking & Finance Review
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