A washing machine in Brazil costs around USD 338, equivalent to one and a half minimum wage salaries (~USD 240/month). In a country where over 50% of the working population earns less than that, the flat-out purchase of the machine is impossible for most. Yet over 60% of Brazilian households own a washing machine. How is that possible? It’s all due to the invention of a payment mechanism that has empowered households across all of Latin America: installments.
Installments (parcelas in Brazil, cuotas in Argentina, meses sin interés in Mexico) refer to payment plans that allow consumers to pay for a purchase over the course of months or years without paying interest. Unlike traditional credit card usage, in which the consumer pays the full price upfront and pays off his balance over time with interest, installments are offered to the customer at the point of sale by the merchant. Of course, the “interest free’ nature of installments is an illusion: merchants raise the prices of goods sold to customers using installment plans to cover the financial cost of the credit. In fact, merchants often offer a discount for purchases made in cash.
Nevertheless, the advantage of installments is that customer sees the total purchase upfront and is not subject to the snowballing interest payments that may occur with paying down regular credit card debt. To offer installment plans to their customers, merchants pay a higher merchant discount fee to the acquirer—up to 7% or 8% in some cases—and opt to receive payments as they become due or receive the full purchase price up front for an added fee. Issuers are the ones to assume the credit risk, thus merchants are guaranteed to receive their total funds.
Hooked on installments
Installment payment plans have become extremely popular in Latin America, both for in-store payments and in e-commerce, particularly in Brazil, Mexico, Colombia and Argentina. Data from EBANX reveals that 60% of e-commerce purchases are paid for using an installment plan. Survey data developed by Argentine research firm D’Alessio IROL shows that in 2019, 77% of Argentine households are paying cuotas, up from 68% in 2018.
Data also tells us that installments are used for surprisingly low-ticket values and that their usage increases in line with purchase price. A 2019 consumer survey conducted by EBANX showed that 65% of consumers prefer to pay with installments for products priced between USD 25-50; this number grows to 79% for products valued USD 50 or more (see INFO 1). As such, installments are heavily relied upon for the purchase of high-value goods, such as jewelry, electronics and travel.
In many ways, installment payments have been responsible for modernizing Latin America and enriching the middle class, by providing unprecedented access to technology and travel services.
Travel and the use of installments during economic downturn
Travel is one of the industries in which installments have been most critical in Latin America. Within e-commerce alone (which represents only a fraction of the total travel industry), travel expenditure totaled USD 43 billion in the region’s top 10 markets, according to Americas Market Intelligence (AMI) data.
Travel is fundamental for the Latin American middle class and represents a treasured annual event. For aspirational families, especially Brazilians and Argentineans, international travel is an especially important indicator of well-being and success. From 2010 to 2017, the number of Latin American visitors to the U.S. grew from 5.2 million to 8.3 million, reflecting a 7% annual growth rate, according to Statista data platform.
Curiously, outbound travel from Latin America has grown despite periods of recession and currency devaluation. In 2018 alone, 4.4 million Argentines flew to international destinations despite GDP falling by 2.5% and the Argentine peso devaluating by 70% in comparison to the US dollar. Argentines, 70% of whom believe travel is synonymous with good living, admitted to sacrificing spending in other areas of their lives to accommodate their “annual” trip. In Brazil, the real devaluated by 15% in 2018, but the number of Brazilians who studied abroad increased by 20% (see INFO 2).
This poses the question of how? How does spend in US dollars consistently increase even when the value of Latin American currencies decreases? This growing consumption is powered by installments.
In select markets, travel services are overwhelmingly paid for using installment payments because of the high average purchase price. Their use increases during times of weak local currency. For example, INFO 3 displays the change in installment use over time of a particular Brazilian online travel services merchant.
We see that the share of total transactions made in installments nearly doubled from 2017 to 2018, precisely when the Brazilian real lost 15% of its value. Installment usage declined slightly as currency devaluation decelerated in 2019 but still maintained a high total share of overall transactions (77%). Anecdotally, a Brazilian online seller of tickets for major events in the U.S., including the Superbowl and the NBA Finals, reported that its total number of credit card transactions grew by 35% between July 2018 and March 2019—all thanks to a growing number of installment purchases.
These data show that travel remains a priority for Latin Americans even during periods of financial crisis. This, however, does not mean that consumers spend wastefully. Experts observe that during times of currency volatility, Brazilian consumers frequently issue several boleto bancários—a printable voucher that allows consumers to pay in cash at a convenience store—at various times throughout the day to try and get the best exchange rate for their online purchases. At the end of the day, the consumer chooses the boleto with the most favorable exchange rate and converts the sale—subsequently saving a few cents, on average.
This process is so common that the boleto conversion rate falls to just 10% (from its average of ~30%) during times of currency volatility. Despite being time-consuming and minimally effective, the issuance of multiple boletos shows that LatAm consumers are willing to go the extra mile to pay less at the point of sale.
This practice demonstrates why installments are so popular in Latin America: consumers seek ways to maintain their consumption levels even when their money is worth less. Doing so is well-engrained in their culture and shopping habits. Installments enable such behavior: they expand consumers’ purchasing power and open up a realm of possibilities that would be unattainable otherwise.
A caveat to installments—further opportunity to empower consumers
Undoubtedly, merchants who offers installments to Latin Americans sell more by making their products more affordable. That said, merchants can be an even stronger ally to customers by helping them to pay the full price of their trip before their travel dates. When traveling abroad, Latin Americans want to maximize their spending ability, since goods found internationally are most often cheaper than those in their home countries. Thus, Latin American travelers treat trips as epic shopping sprees. One problem with installment payments is that they tie up a cardholder’s credit line until the entire purchase is paid off; a trip paid for in installments could therefore hinder a cardholder’s ability to shop while traveling. As a result, programs or incentives for consumers to free up their credit lines before their date of travel could help empower consumers even more.
Installments are an essential tool for any merchant trying to penetrate Latin America. They are deeply embedded in consumers’ mindsets. The “jeitinho brasileiro,” which translates to “the Brazilian way,” means finding a way to accomplish something by slightly bending the rules. Installments are emblematic of this: they represent a way for consumers to access a product that they really cannot afford.
For international merchants, offering installments thus expands the addressable market and makes them competitive with local merchants. Latin American consumers and merchants have proven to be resilient despite recurring economic downturns, creatively coming up with solutions to economic pressures. To gain a foothold in the region, international merchants must adopt a similar sense of adaptability by offering the payment instruments that fuel consumption when pockets are thin.