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The debit cards not so silent revolution in Brazil's e-commerce

Of the BRL 198.4 billion spent via debit cards in the third quarter of this year in the country, 12.9% came from remote transactions. The use of this payment method for online purchases is likely to soar in 2021

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The COVID-19 pandemic is speeding up the use of debit cards in Brazilian e-commerce. It is natural for this to happen in a country where the number of unbanked people is still large, and access to credit is still restricted.

According to the Central Bank, the country ended 2019 with 132 million active debit cards (14% more than in 2018), and 123 million credit cards (18% more than in the previous year). The consolidated data for 2020 is likely to bring a different picture, with even more debit cards, due to the ongoing fintech revolution and the increase in the number of digital accounts launched by these companies in the country.

The use of this payment method in the online environment began to be more effectively promoted in the country in 2018 when the worldwide consortium of card labels, EMVco, started to test a new authentication protocol, called 3DS 2.0. More complete than other systems available on the market and much more straightforward than its first version, launched in the late 90s, this protocol promises to make the use of the debit card in e-commerce soar in Brazil. Alongside this labels’ effort, issuers are also launching virtual debit cards with their own authentication solutions. 

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The state-owned bank Caixa Econômica Federal was one of the first issuers to do that, and amid a significant process of inclusion: the transfer of the COVID-19 emergency aid to over 68 million unemployed, microentrepreuneurs and informal workers. More than 100 million digital accounts were created for this purpose in the country. All these digital accounts have a virtual debit card linked to it. 

The diligence of the private sector, especially retailers, supermarkets and utilities, to integrate their payment models into these digital accounts was even greater than that of the government itself in creating the emergency aid program. Within a few months, some of the largest retailers in the country, such as, Magazine Luiza and Mercado Libre were already accepting Caixa’s virtual debit card. This race had a very clear reason: from April to December, more than BRL 266 bilhões were paid via emergency aid program in the country.

While many are concerned about what will become of the Brazilian economy starting in January, when this assistance will no longer be available, others, mainly Caixa and fintechs, are looking for ways to consolidate these millions of financially included Brazilians thanks to the program.

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The adoption of the debit card for online purchases is not just a recent move by the local private sector. Since last year, major digital product providers, such as Uber, Spotify, Netflix, Rappi, and iFood, have started to accept online payment by debit cards in Brazil. 

The amount generated by digital card purchases and other methods, such as digital wallets, grew 49.3% in the third quarter of 2020 in Brazil, to BRL 126.2 billion, according to the Brazilian Association of Credit Card and Services Companies (Abecs). This year, from January to September, the so-called card-not-present transactions increased by 31.4% over the same period last year, to almost BRL 307 billion.

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Abecs’s director, Pedro Coutinho, believes that in 2021 the advancement in the use of the debit card, as well as payments by approximation, will be even greater, not only due to the change in consumer habits, but also because of the sector’s work to improve safety and users’ experience with these means of payment. Abecs estimates that the debit card has the potential to generate BRL 160 billion per year in digital commerce.

Of the BRL 198.4 billion spent via debit cards in the third quarter of this year, 12.9% came from remote transactions. And within the total universe of remote purchases, 20.3% of the volume transacted came from payments made with a debit card.

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What is missing, then, for the use of debit cards to soar in e-commerce? 

New habits by the consumers – something that the pandemic is helping to speed up – and the integration of more issuers (banks and fintechs who are the ones who effectively decide to grant a card to a user) and retailers to the new virtual card solutions and the 3DS 2.0 protocol. The increasing offer of this payment method by fintechs that bridge virtual stores and consumers is also strategic. As it is the case of EBANX, which owns LABS and does this for international merchants, seeing online transactions with debit more than double in the last 12 months, and PayPal, which has started to accept debit cards for online purchases domestically last September in Brazil.

How does 3DS 2.0 work?

3DS 2.0 is nothing more than a protocol for online transactions with debit and credit cards. With each transaction, 3DS analyzes more than 100 types of data, which are encrypted and sent to the bank to authorize transactions with less risk. The customer can confirm its identity with a code sent by SMS or with a token, among other ways.

The simpler and faster a transaction, the greater the chance that a consumer will take the purchase to the end. In addition, the more familiar with digital services in general, the easier it is for consumers to make purchases online with a debit card. And Brazilians are getting there: a survey by consultancy Fujitsu, commissioned by the news outlet Valor Investe, shows that one in four Brazilians already use both banks and fintechs on a daily basis.

The bad experience with the first version of the 3DS also needs to be overcome. In the first version, of 1999, the user was taken to another window, outside the retailer’s website and within the issuing bank’s environment to finalize the purchase. This generated mistrust and made many consumers abandon their purchase.

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In the case of issuers, the main Brazilian banks (Itaú, Bradesco, Caixa Econômica Federal, Banco do Brasil and Santander), in addition to some of the main fintechs, such as Nubank, have already joined or are in the process of joining 3DS 2.0 – among banks, Bradesco was the last one to start the process, in March this year.

And this process, according to Mastercard, is a medium-term process. The fact is that the purchase by virtual debit involves a different risk dynamic than that of the physical transaction, where the risk can fall on the establishment. Within 3DS is the issuer that will verify that the card user is really the user, and it is the seller that will ask for the transaction authorization.

“I think the risk issue was a big component for (the sector) not adopting the debit card with the volume (that it could have) previously. The world of not-present cards today is mostly for very small transactions. But the entry of this new protocol of authentication, with issuers, also participating, imposing their own rules, changes this perspective, ” stressed Hugo Costa, executive director at Visa Brazil in an interview with LABS last August. “In a transaction that was authenticated, and then authorized, the chance of fraud is minimal, because the two sides of the chain exchanged information,” adds Costa.

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Apparently, the biggest challenge at the moment is the integration of more retailers and platforms in general to the new 3DS 2.0 protocol. In this case, the doubt lies in the difference that the offer of this type of payment can make when attracting new consumers versus the costs (of integrating the platform and also in transactions) for this.

In order to join 3DS 2.0, the retailer must ask its accreditation service provider (acquirer) the inclusion of the technology in its sales platform. Each acquirer has a process and, therefore, the costs of integration and per transaction with 3DS also vary. Mastercard and Visa believe that as sales volume increases, more retailers will offer debit cards as an online payment method.

Even solutions outside the 3DS 2.0 protocol gained ground during this pandemic period and can help the usage of debit cards on e-commerce soar from 2021 on. In the case of Caixa’s virtual debit card the authentication on the sites that have accepted the device is done with a CVV, dynamic card security number, which changes with each use. In September, Nubank also launched a virtual debit card with the same modus operandi.