Latin American consumers love digital goods–video and music streaming, gaming, apps, etc.–and the mobile channel over which the majority of digital goods are consumed is growing. Global merchants have an increasing opportunity to reach Latin Americans as goods and services become increasingly digitized and mobile-compatible. 

The mobile market is still growing

With Brazil and Mexico leading the charge, Latin Americans have become some of the most active mobile users in the world. In 2018, Brazilians spent over three and a half hours a day on social media and streamed 20 billion hours of videos, a 130% increase in two years. An increase in mobile subscribers and smartphone users, fueled by the expansion of 4G networks and more affordable technology, has boosted connectivity and the consumption of digital goods and services regionwide. As the GSMA reports, smartphones made up 62% of total Latin American mobile connections in 2018 and are growing, expected to reach 78% by 2025.

“Beyond Borders – The Cross-Border Consumption in Brazil” research from payments platform EBANX, reflects that all income-classes are increasingly using their smartphones to access the internet. In 2015, 65% of the ‘Class D’ population used the internet only by smartphone, according to data from The Regional Center for Studies on the Development of the Information Society. In 2018, that number reached 85%. Similarly, ‘Class C’ grew from 44% to 61%. In Classes A and B, the numbers are smaller, since there is a greater availability of desktops and tablets. As smartphone penetration grows, so will the use of the internet and digital consumption. This will be fueled by the base of the pyramid having greater access to smartphones in the future.

At the same time, hardware and data are becoming more affordable. $77 billion dollars of infrastructure by mobile operators and the influx of handsets from foreign players Huawei and Xiaomi have brought prices down. Regionwide, the cost of a 500 MB monthly data plan has decreased from 3.3% to 2.4% of monthly GDP per capita, while download speeds increased by more than five times in merely three years. Huawei shipments to Latin America grew by 51% in 2018 and Xiaomi, another foreign smartphone seller, increased its market share in Latin America by 218% from 2018 to 2019, all evidence that the mobile market has not yet reached saturation in the region. 

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This context, combined with Latin Americans’ passion for social media and mobile engagement, creates a hotbed of opportunity for mobile apps, digital goods and other mobile-based services. The mobile economy, which encompasses mobile handset sales, technologies, and services, is projected to generate $330 billion dollars of economic value added by 2022, equivalent to 5% of the total GDP in the region. 

Addicted to apps; barriers to pay

This mobile growth has been followed by an explosion of app and social media usage across Latin America. In 2016, there were 25 billion app sessions every month in the region, with countries such as the Dominican Republic and Bolivia seeing 116% and 155% year over year growth since. Brazil and Mexico are among the top 10 countries both in the number of Google Play downloads and mobile game downloads. Those two countries also rank 3^rd and 5^th among most Facebook users in the world, while the entire Latin American region has a Facebook penetration rate of 93% among social network users. 64% of Latin Americans report using WhatsApp. It is clear—Latin Americans love mobile content and mobile communication, and digital companies leveraging this channel have a massive and growing addressable market. 

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Of course, the region presents some peculiarities on the payment side, which can be problematic for digital goods merchants. But, with the correct understanding, merchants can successfully cater to the Latin American mobile user and capture billions in revenue doing so. 

First, merchants must know that 80% of Latin Americans don’t have credit cards; these consumers are most comfortable transacting online using alternative payment methods, including bank transfers, vouchers or invoices paid in cash at affiliated physical establishments. In e-commerce overall, non-card payment methods represented 38% of total online purchase volume in 2018.

Because of the importance of alternative, and especially cash-based, payment methods, nearly all major online retailers accept them. In the digital goods world, however, merchants have been slower to accept alternative payment methods, for three key reasons: 

1. At the outset, digital goods merchants (think Uber) attracted an affluent consumer group, because they required a smartphone, data plan, and technological acumen. This affluent group tended to also be credit card owners; 
2. Digital goods tend to have a lower average ticket than retail purchases and are often consumed instantaneously (think ringtone downloads, purchases in gaming apps, etc.) These two attributes are not conducive to cash payments, which require the buyer to take a purchase voucher to a physical location and pay in cash; 
3. Many digital goods merchants use an automatic recurring payment model, for which a credit or debit card is required (think Netflix or Spotify).

Capturing payment for digital goods requires creativity

Yet, solutions to these challenges are becoming more mainstream. First and foremost, app purchasing has become extremely commonplace: in an AMI survey of Latin American e-commerce shoppers, 70% of participants had made at least one in-app purchase in the past six months and 28% had made three or more purchases. A credit or debit card was the preferred payment method for 82% of respondents, showing that cards still dominate in the digital channel. Most credit cards in Latin America, however, are enabled for domestic use only, as are debit cards. 

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Another problem is the currency in which the transactions are processed. At the LatAm Cross-Border Summit, EBANX unveiled research that reflects 54% of Brazilian consumers would not pay for digital services if they are charged in USD.

Alternative payment methods were also relevant: overall, a cash voucher, prepaid card or gift card was preferred by 9%. Within the video streaming category, they had even more appeal. In Mexico, 14% preferred paying with a prepaid or gift card; in Colombia, 12% wanted to pay with a cash voucher. As more consumers are drawn to digital goods, the need for diverse payment method acceptance will increase; the more merchants can cater to local preferences, the better they will perform. 

Secondly, merchants are getting creative about how to capture recurring payments for non-carded customers.  A recurring payment model is challenging both technically (lack of credit card ownership) and culturally (aversion to long-term contracts and fear of getting overcharged). To meet the needs of Latin American consumers, merchants must get creative around how to offer subscription services. 

A prepaid option has been the most popular strategy so far, offered by Netflix, Spotify and others in select markets. In fact, our survey results revealed that 30% of subscribers to a digital service in Brazil and Mexico report pre-paying, indicative that savvy merchants in these markets offer a prepaid option. Additionally, merchants are getting creative about what types of prepaid product bundles to offer.  Of prepaying customers, roughly 30% prefer paying just one month at a time, while another 30% prefer paying a whole year upfront, for a discounted cost. 

As Latin America’s mobile usage grows and expands the addressable market for digital goods, it will essentially penetrate the middle and lower segments of the economic pyramid. This presents a challenge for merchants, since these consumers are more difficult to serve, but also a tremendous opportunity. Underbanked consumers wield massive economic resources and are increasingly drawn to digital services.

In 2018, AMI estimated the digital goods market to amass $16 billion, growing at more than 20% per year. Understanding the preferences and unique use cases that apply to Latin American consumers will determine merchants’ success when trying to capture a share of this growing fortune.