Digital B2B Payments Will Surge in Latin America as the Region’s War on Cash Intensifies

This is the second in a series of B2B Payment articles. In this article, we take a deep dive into the B2B Payments Landscape in Mexico specifically, and Latin America more broadly.

In a previous article, “Why B2B Payments Automation is Finally Having Its Moment” we laid out our thoughts on how COVID-19 will accelerate US B2B Payments away from inefficient manual processes like paper invoices and checks. In this article, we turn our attention to B2B Payments in Mexico — and — to a lesser extent — the Latin American region as a whole.

While there are some notable structural differences between the financial/payment markets within the Latin American economies, they face similar obstacles when it comes to B2B Payments Automation. Namely, the region is still behind on the adoption curve of digital payments and automation. In the US, the legacy B2B payment method is paper checks, which still represent 42% of all B2B payment volumes. In Latin America, however, checks are virtually non-existent. Cash is still king. Across the B2C and B2B landscape, cash has remained stubbornly dominant.

Current State of Payments in Latin America

The world has been in a war on cash for over half a century, as governments, businesses and consumers have moved to more efficient, secure, and traceable digital payments. However, some emerging markets have lagged behind, due to a number of structural and banking challenges. In Latin America, the numbers may look daunting, leading some to understandably suggest that the region is “Losing the War on Cash”. In Latin America, 81% of retail spending was still transacted through cash. The two top countries in the region — Mexico and Colombia — had a cash penetration of close to 90% in 2018. This compares to cash penetration of 24% and 18% in the US and China, respectively.

Figure 1: Penetration of Cash vs Cards

Source: AMI Analysis, 2018, “Latin America is losing the war on cash”, Lindsay Lehr

There are several contributing factors that could explain why Latin America has struggled with the war on cash. A large percentage of the population remains low-income, underbanked; the informal sector continues to thrive; and the e-commerce market, which has been a bright spot for the region as of late, is still 2% of the region’s GDP. All of these factors have partly contributed to cash’s dominance in the region.

But over the last decade, the ingredients for accelerated adoption of digital payments have gradually fallen into place. These include:

Favorable demographics. Latin America has one of the youngest populations in the world, second only to Africa. This means the bulk of their population is digitally native, more prone to adopt digital solutions in their personal lives, and in the workplace. Younger generations are far more willing to adopt digital financial solutions than older generations, including savings accounts, credit, and mobile payments.

Figure 2: Latin America Has One of the Youngest Populations in the World

Source: United Nations Department of Economic and Social Affairs, 2019.

Widespread internet and mobile connectivity. Latin America has made. great strides in internet penetration and mobile adoption. According to the World Bank, nearly 70% of the region has access to internet activity, well above the 53% world average. In addition, the mobile phone has reached ubiquity in several markets, with over 70% of the population estimated to have a mobile phone in several key countries. That penetration will continue to rise given the introduction of lower-priced smartphones. The combination of high mobile adoption and internet connectivity are paving the way for new, digital solutions that address the gaps in the banking and payment systems.

Figure 3: Latin America Is One of the Fastest-Growing Regions for Internet and Mobile adoption

Source: World Bank, 2019

A surge in Fintech startup investment. Fintech Startups and Venture Capital investors have begun to seize the moment. Financing for Latin American fintech deals increased gradually from 2013, but that growth accelerated in recent years. In 2019, over $2B was invested in a Latin America fintech company, which accounted for nearly 44% of the total investment in the region.

Figure 4: Latin America is Experiencing a Fintech Boom

Source: CBS Insights, 2019

COVID-19: An Unexpected Catalyst for Digital Payments in Latin America

The ingredients for the wide adoption of digital payments in Latin America had fallen into place. All that was needed was a catalyst. We believe COVID-19 is that catalyst. Since the onset of the COVID-19 pandemic, we have already seen a meaningful uptick in online commerce, which is positively correlated with growing digital payment adoption. According to Forbes, over 63 million people (50% of the population) are now shopping online and are expected to drive online commerce growth of over 20% YoY in 2020. Based on a survey of Mexican Consumers, moreover, the Asociación Mexicana de Ventas Online (AMVO), (which studies trends in Mexico e-commerce) many consumers are shopping online for the first time. These consumers are going online to purchase a wide range of products and services, ranging from groceries to online banking…

Figure 5: Products and Services Bought Online For the First Time During the Pandemic

Source: Netquest and AMVO, 2020

This is a window of opportunity for online commerce to get more widespread adoption. The COVID-19 pandemic forced Mexican consumers to get online. But that is half the battle. The overall experience — from discovery to delivery to the safety of transactions — will be critical to retain these customers online post COVID. According to AMVO, the early indications are that consumers who have shopped online for the first time had an overall positive experience. In fact, there was a 78% increase in positive sentiment over internet purchases and a 90% increase in neutral sentiment. By contrast, there was a sharp decline in the percentage of people that had a negative sentiment for online sales.

Figure 6: Mexico Consumer Sentiment On E-commerce Has Improved

An uptick in e-commerce could help pave the way for a long-awaited shift to digital payments in Mexico (and Latin America). A JP Morgan 2019 Payments Trends Report found that card (mostly debit card) accounted for 45% of Mexico’s e-commerce purchase volume. Cash decreased significantly from 90% of transactions in total retail sales to just 17% of e-commerce volume. Digital wallets, which also reached 17% of e-commerce volume is set to overtake cash in 2020. The fact that cash has remained so important in e-commerce is a testament to creative retailers and payment service providers who have tried to bring a cash-intensive society online (mostly through “prepaid vouchers”). But the upshot is this: more e-commerce, means more digital payments and less cash circulating in the system.

Figure 7: Card Represents the Bulk of E-commerce Volume In Mexico

Source: JP Morgan Payment Trends, 2019

Implications for B2B Payments in Latin America

Latin America offers an impressive growth runway for digital B2B Payments solutions as the market is significantly underpenetrated. In the US and much of the developed world, B2B Payments Automation is playing catch up to B2C Payments when it comes to digital. But in emerging markets, including Latin America, both B2C and B2B Payments are allies in the war on cash. This is particularly the case for Small and Medium-Sized Enterprises (SMEs). A World Bank report on Global B2B Payments estimated that the Latin American B2B market reached $1.4 Trillion in 2016. Only 45% of that was electronic with the remainder being cash. This was lower than the global average for SMEs (53% of B2B Payments were electronic) and significantly below the High-Income OECD average (81%).

Figure 8: B2B Payments in Latin America are Battling a War on Cash

Source: World Bank, 2019

One of the key factors driving cash’s dominance in Latin America B2B Payments is a low level of B2B e-commerce. The growth in SMEs willing to buy or sell online has been gradual to date. INEGI (Mexico’s National Institute of Statistics and Geography) found that less than 5% of companies in Mexico reported using the internet for purchases or sales as of 2019.

Figure 9: Less Than 5% of Mexico Based Businesses Reported Buying or Selling Online

Source: INEGI, 2019

We expect more and more businesses to embrace online commerce and digital automation as they adjust to remote work and a cost-conscious environment. As we noted in our previous article on B2B Payments Automation, there are four key reasons why CFOs are accelerating their efforts to adopt digital B2B Payment tools. We believe these also apply to Mexico and Latin America, including:

(1) Accounts receivable: Number One Priority for CFOs Today.
In an uncertain economic environment, CFOs must convert Accounts Receivable into cash. According to the “Atradius Payment Practices Survey”, businesses based in Mexico and Brazil had a lower proportion of their sales on credit (i.e. Accounts Receivable) compared to the average for the Americas. In addition, Mexico based businesses asked their business clients to pay quicker — on average within 21 days (down from 33 days in 2018). This compares to an average of 32 days in the Americas (and well below the average payment terms of 38 days in Brazil). While this relatively conservative stance could potentially lose business in normal times, it could also pay off in an economic downturn through lower “uncollectible receivables”.

Figure 10: Proportion of Total B2B Sales Made On Credit (AR) in Mexico and Brazil

Source: Atradius Payment Practices Barometer, 2019

Despite a lower proportion of sales on credit, however, Mexico and Brazil-based businesses reported more incidents of late payments in the Americas. Atradius found that 87% of Mexican businesses and 93% of Brazilian businesses reported late payment by B2B customers. These were significantly higher than the late payments reported by their US (74%) and Canadian (73%) peers.

Figure 11: The Americas: Percentage of Businesses reporting Late Payments by B2B Customers

Source: Atradius Payment Practices Barometer, 2019

The Accounts Receivable risk appeared particularly acute in Mexico, where businesses reported that as much as 27% of invoices were past due in 2019. In order to protect cash, 39% of Mexico and Brazil-based firms needed to pay their own suppliers late in 2019. As we mentioned previously, not collecting on Accounts Receivable could have detrimental economic effects across the B2B supply chain as businesses manage cash flow.

Figure 12: A Snapshot of B2B Receivables in Mexico

Source: Atradius Payment Practices Barometer, 2019

In 2019, approximately 35% of Mexico and Brazil-based firms were expecting either a slight increase or a significant increase in the percentage of outstanding B2B invoices over 90 days old. This was above the 29% average for the Americas. We expect that the economic shock in 2020 has driven these expectations higher across the board, leading CFOs to heighten their focus on collection on AR.

Figure 13: The Americas: Expected Changes In Percentage of Outstanding B2B Invoices Over 90 Days Old

Source: Atradius Payment Practices Barometer, 2019

(2) High Costs of Paper Too Difficult To Ignore In This Environment

In our previous article, we noted the Federal Reserve Bank estimated that US businesses spent $150 billion per year in direct and indirect costs of processing paper invoices and checks. According to McKinsey, the costs of processing cash and check payments — as well as overall payment fees — are disproportionately higher in emerging markets such as Latin America and the Asia Pacific. Comparing regions by payments revenue relative to GDP, McKinsey found that the cost of payments in Asia Pac and Latin America is 50% to 60% percent higher compared to Europe and North America. This is despite the fact that the share of digital payments transactions in Asia Pacifica and Latin America is 60% to 65% lower than in Europe and North America. This is a particularly tough challenge for businesses in Mexico, where 90%+ of payment transactions are still cash-based across all industries, according to a 2019 INEGI study.

Figure 14: Percentage of Payment Transactions Reported By Mexican Businesses

Source: INEGI, 2019

(3) Automation is A Must in the New Normal
In the current economic environment, CFOs urgently need to have a full grasp of real-time budgets and results in order to make mission-critical decisions that balance capital allocation, cash management, and growth. In Latin America — this will undoubtedly lead business leaders to rethink how to automate their finance workflow. And they are starting from way behind. In Mexico, for example, 40% of businesses relied on manual processes for their accounting/bookkeeping according to INEGI. Only ~5% had adopted a third-party accounting software.

Based on a Sana Commerce report, 38% of Mexico based businesses pointed at the difficulty of connecting the flow information across finance/operations as a key barrier to adopting digital payments. cited that a barrier to adopting digital payments was the difficulty of connecting the flow of information across the sales/operations team. But over 40% of businesses stated that a key barrier to adopting digital payments was due a “culture of resistance to IT adoption”. We believe the current health and economic crisis will help break through some of that cultural resistance, as CFOs seek more visibility into the organization.

Figure 15: Nearly Half of Mexican Companies Rely on Manual Accounting/Bookkeeping Process

Fuente: INEGI, 2019

(4) Health Conscious Is A New Driver in B2B Payments
In the US, MasterCard noted a 40% jump YoY in the use of a card and mobile contactless payments, mainly driven by concerns over COVID-19. We are seeing a similar uptick in e-commerce/online sales in Mexico, which as we noted above is positively correlated with increased digital payments acceptance. The key driver, according to AMVO, was to avoid the COVID-19 pandemic in physical stores. The first and second most popular reasons why customers bought online during the Pandemic was to avoid leaving the house and to avoid crowds. We believe both of those reasons were at least partly driven by a desire to avoid contracting COVID-19. We believe that business leaders are just as worried about the potential health risks of managing manual processes — including cash payments.

Figure 17: Key Reasons Why More Mexican Consumers Are Shopping Online During The Pandemic

Sources: Netquest and AMVO, 2019

Our Investment in Yaydoo, the “Coupa of Latin America”

The COVID-19 crisis has opened a window of opportunity for companies focused on accelerating digital transformation initiatives in Latin America. We are convinced that CFOs across the region will need to adopt new technologies that automate the finance stack in order to better understand their cash positioning and make better capital allocation/budgeting decisions. While there are several structural challenges at the microenterprise level, we believe that the mid-market and enterprise-level will embrace increased automation of their finance/payment workflows.

Despite a recent surge in Latin American fintech investment and the large B2B Payments Automation market, only a fraction of total VC funding has been directed to new, innovative B2B Payments solutions. This is a key driver of our investment in Yaydoo, a procurement payments platform that helps companies plan, manage, and track their spending. Yaydoo has an opportunity to capture a significant share of an underpenetrated — and relatively underinvested — B2B space in Latin America.

Yaydoo is unique in the Mexican and Latin American market as it has two complementary business models:

1) A vendor marketplace that brings together hundreds of vendors and pre-negotiated agreements for more than 20,000 workspace related products and services. This aggregation of vendors results in meaningful (up to 30%) cost-savings for its customers. We believe this part of the business will benefit from a continued increase in overall online commerce, as more and more Mexico businesses embrace B2B e-commerce.

2) A procurement platform that digitizes and streamlines the B2B purchasing process, allowing the whole finance and operations teams to collaborate across the finance work-flow: from creating purchase requests, defining budgets, managing to spend, approving purchase orders, and handling accounts payables.

Given the historic reluctance to change in the Latin America finance department, Yaydoo opened the door to conversations about automation through cost-savings on recurring purchases. A platform that could generate 30% savings on monthly/quarterly expenses proved attractive to CFOs. Once on the platform, however, the CFO and the finance team witness the power of automation. CFOs can set and manage budgets, see spending trends, and manage outstanding payables all within one platform. While the cost-savings generated through the marketplace is a great acquisition channel, the procurement platform is the key driver of the company’s 97% retention rate.

As a cross-border fund, LEAP looks for Founders that have a deep understanding of their local market and are creative in how they customize solutions (or distribution strategies) that reflect the reality of that market. Yaydoo has demonstrated that since its founding 3 years ago and is now poised to benefit from a new normal that embraces more automation and digital payments in Mexico and Latin America. Their hybrid business model, combined with direct integrations to specific regional governmental/financial systems (Latin America is a global leader in digital invoices, for example), position Yaydoo well to win in Mexico and — eventually — in other key Latin American countries. We are excited to see how the company continues to evolve now that B2B Payments is finally having its moment.

Investing in the unconventional @ LEAP Partners