Building mobile payments infrastructure: 3 key learnings

Want a robust, widely-used mobile payments system like AliPay or WeChat Pay? Learn from Latin America and avoid these three pitfalls.

Katie Llanos-Small is a journalist and the editor of iupana, the only source of detailed reporting on technology in Latin American financial services.

In Mexico, a brand new mobile payments system is close to launching.

Designed by the country’s central bank, the system will allow Mexicans to pay for goods and services with a few taps of their mobile phone.

The new architecture, dubbed CoDi—short for Cobro Digital, or Digital Charging—promises to be quick and easy. Payment details will be shared via QR codes, a square barcode that can be quickly scanned and interpreted by mobile phone apps, as well as encrypted messaging.

CoDi is a particularly ambitious example of a trend underway across Latin America and the Caribbean. Governments, in tandem with banks, development institutions, and fintechs, are pushing the development of digital payment systems. They want Latin Americans to drop their cash addiction—and instead pay via electronic means. (article continues below)

diagram courtesy of Banco de México

The explicit goal here is financial inclusion. The more we leave a digital trail of our spending, the thinking goes, the easier it is to get a loan when we need one. Additionally, electronic payments expand the tax base by growing the size of the formal economy.

But it hasn’t been all smooth sailing for these new payments systems. On the path to digital progress, countries like Mexico, Peru, and Brazil have encountered significant obstacles—and learned some important lessons.

The promise - and challenges - of CoDi in Mexico

Driven by the pronounced success of mobile money schemes in Kenya—where Mpesa transformed the local economy—and China—where paying with QR codes is commonplace—Mexico is striving for something similar in CoDi. The Bank of Mexico hopes that small businesses in particular will benefit from the free payments system. The alternative is debit or credit card payments, for which they are charged fees.

“There’s a clearly favorable impact here,” said Alejandro Díaz de León, governor of the Bank of Mexico said in January.

“Mobile payments aren’t just faster and more secure. Its users become part of the financial system, taking their first step toward accessing other services. At the same time, this type of transaction reduces the safety risks of using cash, as well as other risks related to corruption and illicit activities.”

But CoDi is also an example of the difficulties inherent in developing a widely used digital payments system.

First is UX. In order to get a critical mass of users on board, the system needs to be simple and fast enough to make using it a breeze: easier than other ways of paying. That means the back-end authentication and identification processes should work in a snap, in addition to the money going through as it should. In areas with patchy internet or mobile coverage, this can be tricky.

Mobile payments aren’t just faster and more secure. Its users become part of the financial system, taking their first step toward accessing other services.

Next is the ecosystem challenge. A payments system needs to reach a certain scale fairly quickly. Would you go to the trouble of signing up for a new type of Venmo if you weren’t clear who you could pay with it?

Neither would I. Nor would merchants, without knowing a decent number of customers would want to pay with it. It’s kind of a chicken-and-egg thing: you can’t have merchants on the system without customers who’ll use it—but who goes first?

Cost is a third hurdle. Is the system cheaper than its competitors? Or so vastly superior that people are willing to pay a little more for it? How do you show someone the “cost” of paying with cash, anyway?

To overcome these challenges, one digital expert at a major Mexican bank suggests onboarding a few big, essential merchants, perhaps starting with Mexico City’s public transport operators. If, for example, the cheapest way to buy a bus ticket is with CoDi, millions would be nudged to take their first step into mobile payments, an intervention that has the potential to jump-start the entire ecosystem.

Learning from Peru’s mobile payments experience

Peru shows us that having lots of people signed up to a system may be a necessary condition for success—but, by itself, it’s not sufficient.

There, an organization called Pagos Digitales Peruanos—owned jointly by the country’s banks and other financial institutions—set out to develop a national mobile payments system.

Their goal? Integrate the 10 million Peruvians without a bank account into the financial system.

The resulting product is BIM, short for Billetera Móvil, or Mobile Wallet. The paradox is that BIM had great takeup—but once people signed up, few actually used it.

How did they get so many people on board? Good marketing, of course, but also good infrastructure. Peru’s system has the advantage of bringing together many different institutions: all the big banks and phone companies came together in pursuit of the same goal. The system is easy to use. And it doesn’t rely on having a smartphone or a bank account—just an old fashioned mobile phone will do. (article continues below)

diagram courtesy of Pagos Digitales Peruanos

Yet despite the initial optimism, few people used BIM. Here, much came down to the user experience. It turned out that actually getting cash into and out of the system was not easy.

(BIM had been designed to attract people without bank accounts—but this hurdle shows the advantage of bank account-linked models).

Since then, BIM has taken steps to improve the user experience. Last year, they rallied the country’s ATM networks to participate. Now they're getting card companies on board, so that users can pay at POS machines without a card—just a one-time password. Finally, they have rolled out smartphone apps that allow users to connect with their bank accounts.

Colombia wrestles with new methods

When companies and governments experiment with mobile payments, these three hurdles—ecosystem, user experience and cost—crop up again and again. In Colombia, for example, one of the country’s biggest banks is experimenting with QR codes for mobile payments. Nequi, the all-digital spin-off brand from Bancolombia, has dabbled with QR codes and push messages for instant mobile payments.

But the technology and the way people use it are still in an early stage, said Andres Vasquez, Nequi’s CEO.

"When companies and governments experiment with mobile payments, these three hurdles—ecosystem, user experience and cost—crop up again and again."

In a bid to get more merchants on its platform, Nequi allowed small businesses to generate QR codes or push messages. They did this with an eye to social commerce in particular—offering a payment mechanism for clients that were selling over Instagram or Facebook.

But the bank found that merchants were slower to pick up QR codes than forecast. That’s probably an ecosystem challenge, as well as a user experience question. The simplicity of QR codes is a huge boost in their favor; still, other forms of payment are competing for dominance.

Chile takes its turn

In Chile, despite having one of the region’s most-banked populations, mobile payments have struggled to take off. Now, the country’s biggest bank is moving into mobile payments—and its reach gives it potential.

BancoEstado has a huge share of the retail banking market: it has some 11 million customers, in a country with just 18 million people.

The bank is just taking its first steps in the area of payments. Last year it teamed up with Copec, a local gas station network. Under the deal, BancoEstado account holders can use an app to pay for their gas purchases. The bank boasts that it had “tremendous success” with the app, with 400,000 transactions going through in the first few months of usage. Now it’s looking to roll out its own mobile wallet, according to an executive.

Given BancoEstado’s broad customer base, it already has the makings of an ecosystem. Now, it needs to make sure it doesn’t get tripped up by UX or cost issues. (article continues below)

diagram courtesy of BancoEstado

Brazilian payments set to evolve

In Latin America’s biggest economy, payments with debit and credit cards are common.

Some BRL47 trillion ($12.5 trillion) of cashless payments went through in 2017. While paper checks are still used for larger-value payments, debit and credit cards are commonly used for smaller payments.

To wit: Brazilians made some 14 billion payments with debit and credit cards in 2017, with a total value of BRL1.26 trillion (US$334 billion). Meanwhile, they made just 731 million check payments, with a total value of BRL1.8 trillion (US$478 billion).

"Latin America’s efforts in creating fluid, frictionless mobile systems that are the preferred way to pay show that getting a mobile payments system right is highly complex. Regardless of a project’s budget, or the backers behind it, fine-tuning such a system is wrought with pitfalls."

Given that Brazilians are comfortable paying with debit cards, does that mean new payments technology like QR codes will struggle to get traction? It’s possible, but not necessarily the case. Consider a couple of factors.

One is the impressive investment by Chinese tech giant Tencent into Brazilian fintech Nubank in late 2018. Observers say that Nubank is not just getting capital out of the deal—it’s also getting Tencent’s knowhow in tech and payments.

Nubank started out as a credit card issuer. It’s since added more products—perhaps a QR-code payment option could be next. The combined skills of Tencent and Nubank mean a payments product is likely to feature impressive UX. But will they hit an ecosystem wall?

Another factor is the Brazilian Central Bank’s payments plans. The Bank is working on setting up a new instant payments infrastructure that would be available around the clock. One focus of the new system will be ensuring that a range of institutions can connect: payments companies, fintechs, and banks.

Complexity in simplicity

It’s likely that mobile payments will remain a head scratcher for Latin Americans—and, indeed the world—for some time.

Latin America’s efforts in creating fluid, frictionless mobile systems that are the preferred way to pay show that getting a mobile payments system right is highly complex. Regardless of a project’s budget, or the backers behind it, fine-tuning such a system is wrought with pitfalls.

"The explicit goal here is financial inclusion. The more we leave a digital trail of our spending, the thinking goes, the easier it is to get a loan when we need one."

Developing a digital payments system that replaces cash on a widespread basis requires overcoming three big hurdles: developing an ecosystem, getting the user experience right, and making the cost competitive.

Those might seem like fairly straight-forward challenges. That’s because when they work, as they do in Kenya and China, they become seamless and simple - virtually an invisible part of the success story. In reality, getting all three necessary elements present and fine-tuned is frustratingly complicated. Latin America’s payments operators have a formidable challenge ahead.

Katie Llanos-Small is a journalist and the editor of iupana, the only source of detailed reporting on technology in Latin American financial services.

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