Lindsay Lehr, Americas Market Intelligence, Payments Practice Leader … Your source for payments education Merchant strategies for enabling a digital economy in Latin America: Evolving from a cash-dependent region Lindsay Lehr, Americas Market Intelligence, Payments Practice Leader …

The shifting electronic payment landscape in Latin America Competing technologies vying for cash

Financial inclusion is far from the norm Bank account penetration combined with smartphones is the motor for many financial inclusion initiatives Credit Card, Bank Account, Internet & Smartphone Penetration Brazil Mexico Colombia Chile Peru Source: World Bank, World Internet Stats, AMI analysis

Cash remains deeply engrained $1.5 trillion in cash spend at brick and mortar retailers annually across Latin America Penetration of cash in brick and mortar retail Debit card ownership vs. usage, % of pop, 15/yrs+, 2017 Source: Local public domain sources, World Bank, AMI analysis

Framework for understanding payment methods Cash has continued to win because its of “user experience” Advantages Disadvantages Perceived security User experience Cost Not digital, so not subject to fraud Subject to theft Easy to use and understand Accepted everywhere Ideal for small ticket purchases Must have it on hand Have to make exact change Not applicable for e-commerce and apps Free! ATM fees Hidden costs of cash Determinants of consumer behavior What new payment methods must combat What new payment methods should leverage

QR codes proliferating Which to enable and why? Merchant objectives should be clear Expanding electronic payments? Or providing an additional electronic payment option? PEI

Determinants of consumer behavior Who will pull ahead? Without a clear reason to use QR codes, consumers will revert to cash CoDi SPEI Cash RappiPay MercadoPago ) Perceived security User experience Cost How do they perform? Not digital, so not subject to fraud New player, potentially untrustworthy Well-known Banxico, highly trust-worthy Amazon boosts reputation Easy to use and understand Accepted everywhere Ideal for small ticket purchases Excellent UX Card-on-file Digital wallet pays interest Multiple use cases Not a user-friendly platform No clear incentive Determinants of consumer behavior Free! Free for consumers

Contactless cards off to a sluggish start But the card brands are committed, giving contactless an advantage other electronic payment methods Low contactless card potential Medium contactless card potential High contactless card potential As of Q4 2018… In 2018 in Costa Rica: 80% contactless penetration of card transactions Average transaction time reduction of 14 seconds Average cashier productivity improvement of 12% ~26% contactless Costa Rica transaction penetration ~22% contactless Chile transaction penetration Source: Contactless payments in Costa Rica, AMI

In Costa Rica, contactless growing in debt Contactless works for everyday, low ticket purchases. Merchant promotion of debit will help adoption Source: Contactless payments in Costa Rica, AMI

Determinants of consumer behavior Can contactless beat cash? What is the value of contactless to consumers and merchants? Perceived security User experience Cash Contactless cards Cost How do they perform? Not digital, so not subject to fraud No authentication leads to fears of theft Easy to use and understand Accepted everywhere Ideal for small ticket purchases “It’s what I know” Better experience than chip Signature/PIN/ID/installments make the transaction more complicated than cash Determinants of consumer behavior Free! Free, except for general costs associated with card ownership

QR vs. contactless Winners Winners Maintains interoperability As a merchant, what do you want to support? And what does your bank want to support? If contactless wins… If QR wins... Winners Winners Card networks Banks Modern merchants Card networks Modern merchants Traditional merchants Banks QR code network Maintains interoperability Enables cross-border Networks and banks remain brand-central Could expand card acceptance Could expand financial inclusion Payments to become more fragmented Networks and banks lose to a competing brand

Digital natives obscuring brands Where is the most innovative payment experience happening? Online marketplace and invisible payments threaten not only payment providers but also merchants Digital natives obscuring brands As marketplaces grow…. Merchant brands lose relevance Card-on-file and recurring payments prevail Blurred lines between the physical and digital Mobile phone grows as transactional channel On-demand delivery Restaurant delivery Supermarket delivery Mass success in ride hailing Digital goods top-ups Planning LatAm expansion

So how can merchants think strategically about payment acceptance? Leveraging payments as a strategy

Payments as a strategy Traditional thinking Innovative thinking Using payments to drive efficiency, customer experience, growth and revenue Payments as a growth driver Increasing efficiency and cost reduction Boost in productivity and sales Driver of customer loyalty Improved cashier experience Cost/benefit tradeoff Payments as a competitive advantage & central to company strategy Innovative thinking Payments as a cost center Not central to my business A necessary evil rather than an opportunity Accepting cash is free Traditional thinking

Merchants as powerful influencers Consumer engagement and branding is key to payment method adoption, something that the banks lack Banks depend on merchants to promote consumer adoption of payment methods Top-of-mind brand status Deeper consumer engagement in person and digitally Influence over the consumer at the time of purchase Merchant advantages over banks Greater ability to diversity product and service offering

Account management and savings Banks to remain the hub User experience will be outsourced to a diverse number of players, including merchants P2P Apps Banks to remain the hub Merchant payments Ecommerce payments Lending Account management and savings

Developing a framework for merchants Planning your payment acceptance strategy Revenue growth Payment method penetration Data Regulation Digital Image Global trends Perceived security User experience Cost Determinants of consumer behavior Determinants of consumer behavior Determinants of consumer behavior

Contact Us Thank you! Lindsay Lehr Associate Managing Director, Payments Practice llehr@americasmi.com www.americasmi.com