Why Homegrown Latin American BNPL Providers Are Ahead in Underserved Markets

Latin American countries are emerging economies marked by limited access to financial services and consumer goods and characterized by a significant number of unbanked and underbanked citizens. Paying for purchases in installments is much more common and desirable in these economies because it gives consumers access to products and services that would otherwise be beyond their reach. Buy now, pay later (BNPL) services help finance the cost of expensive purchases through non-traditional channels, but they only made up 1% of total e-commerce in the region in 2021. Brazil and Mexico are the biggest markets in terms of people and sales volume—both countries where many people don’t own a credit card. With Klarna’s expansion into Mexico, it’s worth looking at what it’ll take for foreign BNPLs to succeed in the space at large. No doubt, homegrown BNPLs have the home-field advantage—it’s their turf. They know the ins and outs of the financial infrastructure in place and are much more familiar with the on-the-ground realities ordinary people face. Here’s what foreign players need to understand as they enter the market and why native providers have succeeded so far.

Latin America is Not a Monolith

BNPL providers such as Klarna, Affirm and Afterpay have built and expanded their financial services and products in the U.S. and Europe, where the economic infrastructures are near homogenous, broader consumer habits overlap, and most adults have access to traditional financial products. Similar socio-economic environments encourage a little one-size-fits-all approach. In Latin America, things are not quite so clear. Each country is different, with different consumer habits and varied dynamics with financial infrastructures. In Colombia, for example, the most common form of e-commerce payment is bank transfers (40% of the total volume), much higher than Latin America’s average of 13%. Assuming that 300 million LatAm digital buyers have the same or similar consumer behavior across the region would be a catastrophic misunderstanding of the diverse socio-economic challenges plaguing these countries. Native BNPLs understand these challenges and tend to have a much more flexible game plan to adapt country by country as they grow, and it’s something foreign players will have to accept and implement if they hope to gain any traction.

Cash is King

Roughly 178 million people in Latin America were considered unbanked in 2021, with the highest proportion of unbanked adults in Mexico. Lack of access to typical banking services and a booming informal labor economy means that cash is still the most common form of payment in Mexico and across the region. Even in Brazil, the region’s largest economy, cash still accounts for one-third of all payments. Foreign providers still heavily rely on credit and debit card payments, which won’t work as the sole payment method in Latin America. Mexican BNPL Kueski found a workaround by establishing a network of locations that allows consumers to pay in cash for their purchases. International providers will similarly need to develop their own payment solutions that center cash payments as an alternative to card payments.

Lack of Data

Because many people in the region are unbanked, there is limited data on consumer cash flow histories, purchasing habits, loan payments, and other consumer financial behavior. Some native providers have been in the game long enough to have generated their own consumer data over time. But even they had to get creative when they first started, pulling data from non-traditional sources and designing risk models that incorporate cash flow predictability and build safeguards without totally writing off subprime customers. Local providers have developed sophisticated risk models and have efficient operations that enable them to offer microloans of $100 or less. Also, some providers offer a single line of credit, which means customers can’t make more purchases until the loan is paid off, reducing the provider’s risk and curtailing a cumulative debt effect for customers.

Mistrust of the Financial System

High fees, predatory banking practices, lack of transparency, poor financial literacy, and limited access to formal banking services have led to an inherent mistrust of the traditional financial system, especially for individuals with lower incomes or those who live in rural or marginalized communities. The most successful native BNPL providers understand these challenges and respond with zero hidden fees and robust and active customer service to work with their customers and not against them. They also implement flexible service models with microloans and extended installment plans, instead of the standard pay-in-four biweekly payments that foreign players implement, which makes it easier for customers to pay back the loans. Foreign players that look at local providers and grasp the underlying factors contributing to their successes are likely to experience smoother expansion into underserved markets.