Ericsson ConsumerLab: M-commerce in Latin America

M-COMMERCE INLATIN AMERICA

June 2013

Contents

Ericsson ConsumerLab has more than 15 years experience of studying people’s behaviors and values, including the way they act and think about ICT products and services. Ericsson ConsumerLab provides unique insights on market and consumer trends.

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A BOOMING CONSUMER MARKET

STILL VERY MUCH A ‘CASHONOMY’

THE IMPORTANCE OF CONSUMER CONTROL

FAVORABLE CONDITIONS FOR M-COMMERCE

STRUGGLERS AND ACHIEVERS

SAFETY AND CONVENIENCE: KEY DRIVERS

SCEPTICISM AND KNOWLEDGE BARRIERS

THE CULTURAL LEGACY OF DISTRUST

UNLOCKING FUTURE POTENTIAL

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11

2 ERICSSON CONSUMERLAB M-COMMERCE IN LATIN AMERICA

Argentina

21% 30% 31% 28% 31%BRazil Chile Mexico

Figure 1: Current Use of M-commerce

M-commerce

Mobile banking

Mobile wallet

Mobile shopping

Source: Ericsson ConsumerLab, Analytical Platform, 2012 Base: Internet users (Argentina, Brazil, Chile, Colombia, Mexico)

12% 20% 20% 20% 18%

7% 13% 11% 10% 12%

11% 15% 15% 14% 17%

IntroductionA wide range of mobile financial services – mobile pay-ments, remittances and banking, exist in Latin America but the market is largely fragmented and current use is low. However, smartphone penetration in Latin America is increasing rapidly and consumer interest in m-commerce is at an all-time high.

Ericsson ConsumerLab has conducted a study into the possibilities of widespread m-commerce adoption in Latin America through interviews and studies in Brazil, Argentina, Chile, Mexico and Colombia. With this report, we examine consumer behavior and customs, the key drivers and bar-riers to using mobile financial services, and how m-com-merce can gain ground.

Colombia

A booming consumer marketLatin America is a diverse continent, both culturally and economically. On one hand, there is great prosperity, but on the other, a unique set of challenges. The region is character-ized by wide-ranging consumer profiles, representing varying social conditions and a deep division between the richest and the poorest. The markets covered in this study regularly produce resilient annual GDP growth and reached nearly 3.5 percent in the last year alone.

Social mobility is common in the region. Over the past decade, Latin America’s middle class grew 50 percent - the equivalent of 50 million consumers. The middle class now represents 30 percent of the population. Regardless, many millions of people have been left behind, with poverty levels ranging from 15 percent in Chile, to 50 percent in Mexico.

> Convenience Is a Key Driver of M-commerce

The main driver for m-commerce among Latin Americans is convenience. Depending on eco-nomic status and financial inclusion, the con-venience m-commerce can bring is expressed in different ways. For unbanked consumers, in this report referred to as ‘strugglers’, the main benefit would be avoiding time-consuming lines when paying bills. For consumers who already are banked, ‘achievers’, m-commerce would mean a more flexible everyday life, where payments, shopping and other transfers can be handled from anywhere at any time.

> Security and Control Essential for Latin Americans

Latin America can be described as a ‘cashono-my’, where cash is still the most common means of payment for consumers. A majority of them handle their economy exclusively in cash. While cash is seen as convenient and easy to use, the major drawback is safety concerns. The very thought of not having to handle cash, or even cards, is seen as a key benefit of m-commerce,

however hard to grasp since it still is a novel concept. Control over one’s own economy is also important for consumers; many of which keep detailed budgets as well as record of expenses. Having complete control over spending is impor-tant, especially among ‘strugglers’ with lesser economic margins.

> Widespread Consumer Distrust in Institutions and Network Performance

Overall consumer distrust in institutions is an obstacle in Latin America. Consumers are inher-ently cautious and question the ability of the mobile channel to deliver reliable and secure m-commerce solutions. The consumer perception that m-commerce transactions can be interrupted or disturbed by an unreliable Internet connection is a common fear. It is therefore paramount to im-prove network reliability, and customer relations, to build consumer trust. Another major barrier is lack of knowledge. In order for consumers to fully embrace m-commerce services, education and validation from independent and trusted parties are key factors. Government regulations to protect the consumer are also imperative to gain trust.

key findings

ERICSSON CONSUMERLAB M-COMMERCE IN LATIN AMERICA 3

Figure 2: The Growth of the Middle Class in Latin America and the Caribbean, 1995-2010

Source: The World Bank, Economic Mobility and the Rise of The Latin American Middle Class, 2012

Poor (US$0-US$4 a day)

Middle class and rich (>US$10 a day)

Vulnerable (US$4-US$10 a day)

1995Middle Class Growth(US$10-US$50 a day)

2010

39%

46%

23%

33%

36%

21%

41%

million people

2003 2009

million people

Still very much a ‘cashonomy’

Figure 3: Financial Inclusion in Latin America

61%48%

of the population is unbanked

of the labor force is informally employed

An Economy Built on CashIn most markets in the study, ongoing regulation is tak-ing place with the objective of financial inclusion. However, Latin America is still very much a ‘cashonomy’. Whenever and wherever possible, consumers in the region choose to pay with cash, regardless of socioeconomic status. Infor-mal workers receive their salary in cash and formal workers often use an ATM to withdraw most or all of their salary on pay day. Many save money at home rather than relying on a bank account. This is especially common among low income consumers.

In many places, cash is the only acceptable means of pay-ment. Consumers simply need to carry cash with them to make sure they are able to pay for a taxi fare, grocery shop-ping at a local store, or when paying for certain goods or services. It’s not uncommon for household bills to be paid in cash too, especially when it comes to rent.

The Tangibility of CashUsing cash is a natural part of people’s lives, and little thought is given to why. Among consumers, cash is consid-ered a fast, convenient and transparent means of payment that provides a great sense of control over one’s spending.

Some stores that accept debit and credit cards implement two queues for the customers – one queue for card pay-ments and one for cash payments. Naturally, consumers often find the cash queue faster.

Just as different discounts can be linked to specific creditcards, paying in cash can also result in a discounted price in for example Brazil, Argentina and Colombia.

Safety Issues a ConcernA big disadvantage of using cash is safety concerns. Crimi-nality is a major concern in the everyday life in all markets in the study, and many have first-hand experience of robberies. Thus, consumers have developed individual strategies that increase their sense of safety when forced to handle large sums of cash. Keeping the money hidden close to the body is one way of feeling more safe.

Conspicuous ConsumptionStatus purchases such as flat screen TVs, high-end smart-phones and clothes from international brands, are prevalent especially among middle class consumers. It is a way for people to show others that they have accomplished a cer-tain economic status. In order to afford it, large purchases like these are often bought in installments, and it is not unusual to be on multiple plans at the same time.

The bigger dream in people’s lives seem to revolve around aspirations less conspicuous, such as buying your own home, a new car, or perhaps even travelling or working abroad.

“When I buy food I always pay cash with the money I get from an ATM. That’s because I have a hard time realizing how much I spend when I use debit.”

— Male, 30, Argentina


Sources: World Bank Global Financial Inclusion Database, 2012and International Labour Office, Labour overview, 2012

The importance of consumer controlControl Over One’s Economy ImportantPeople stress the importance of being in control over their own economy. Many wage-earners begin each month by settling all monthly bills, mortgage payments and rent. This provides an overview of the means available for the rest of the month.

Forgetting to pay bills on time is a major concern, mostly due to the inconvenience of having to physically go to the bank or to the bill recipient to pay in case of a missed due date. This is prevalent in several of the countries in the study.

Detailed Accounting of Household EconomyThe need for control manifests itself in the form of detailed accounting of household incomes and expenditures. Budg-eting is often quite formal and it is common to use note-books or Excel sheets.

Control over one’s finances is important to the average Latin American. Many people choose to keep records of payments to avoid future problems. Payment verifications are stored for a long time as evidence in case the payment is challenged or for tax reasons. Payment verification via e-mail or SMS is considered favorable.

Concerns Over SpendingMany consumers, independent of economic status, find it difficult to control spending if funds are available. Despite difficulty to control spending, middle and high-income earn-ers appreciate constant access to their money. However, low-income earners with more strained economies do not find high accessibility as attractive.

Cash gives people a high degree of control over expenses, but limits accessibility of funds in case of need. On the other hand, cards and m-commerce solutions make funds readily available, but increase the risk of overspending.

Cautiousness to DebtFear of debt, both from private loans and credit cards, is commonplace, especially among low-income consumers. Loans are considered both risky and costly, and many con-sumers strive to repay loans as quickly as possible.

The purpose of loans differs between higher and lower income consumers. Low-income consumers take loans primarily to cover unforeseen expenses or to cover daily expenses when their income fluctuates. Middle and high-income consumers use loans for larger expenses, such as buying a home or a car. Both consumer groups however consider buying a home the most legitimate reason to take a loan.

”If a bill is lying on the table in the living room I’m afraid I will forget about it. So I put reminders on the mobile phone and on the fridge. Once I forgot to pay for my medical insurance. The next month I had to pay for two months, it was a lot.”

— Female, 43, Argentina


Many Consumers Lack Access to Financial ServicesA large portion of the Latin American population is left out-side of the financial system, receiving their incomes in cash and lacking bank affiliations, savings accounts, and credit or debit cards.

At the same time, mobile penetration is high and smart-phone adoption is increasing rapidly. In 2017, the smart-phone penetration in the region is estimated to be over 60 percent*.

The low financial inclusion combined with the high mobile penetration is opening up opportunities for m-commerce in Latin America. Among consumers currently excluded from the financial system, but connected through their mobile phones, m-commerce can provide an attractive alternative to traditional financial services.

From E- to M-commerceExperience of online shopping, for items such as clothes, electronics goods, and even food, is common among the region’s achievers. The online marketplace Mercadolibre, the largest e-commerce ecosystem in Latin America, is very popular in the region.

Migration from e- to m-commerce is evident across this vast region. Seven percent of Mercadolibre’s sales is via the mobile channel. PayPal recently reported that 15 percent of sales in Brazil and Mexico was carried out via mobile chan-nels last year, and that this figure is increasing all the time. Groupon, a deal-of-the-day website, reports that between five and ten percent of sales is done via mobile in the region.

Searching for Deals and DiscountsIt is common for a great number of consumers to seek out deals and discounts at stores, supermarkets and shopping malls. The degree to which consumers do this naturally cor-responds to their financial situation – the more affluent the less price hunting.

Consumers are interested in using their mobile phone for this purpose. Two out of three consumers in the study say they are interested in getting good deals and save money using special offers or coupons on their mobile.

favorable conditions for m-commerce

74%

Sources: World Bank Global Financial Inclusion Database, 2012 and Ericsson ConsumerLab, Analytical Platform, 2012

*Source: Source: Pyramid Telecom Insider Nov 2012

Figure 4: Low Financial Inclusion, High Mobile Penetration


145%

134%

152%

106%

87%

24%15%

25%20% 20%22%

29%23%

10% 13%

33%

56%

42%

30% 27%

160

140

120

100

80

60

40

20

0Argentina Brazil Chile Colombia Mexico

66% 42% 44%

Mobile banking

Mobile wallet

Mobile shopping

Source: Ericsson ConsumerLab, Analytical Platform, 2012 Base: Non-users of M-commerce(Argentina, Brazil, Chile, Colombia, Mexico)

Have/Use Bank Product

Mobile Penetration

Smartphone Penetration

Have/Use Credit Card

who are not using m-commerce today are interested in starting to use at least one m-commerce service on their mobile phone.

Strugglers and achievers

Two Key Segments for M-commerceSix out of ten in Latin America are unbanked, either because they do not have the possibility to open an account or sim-ply don’t have any interest in affiliating themselves with a fi-nancial institution. Their income is received in cash or check, sometimes on a day to day basis, and can also fluctuate in the course of a year. For this consumer group, referred to as ‘strugglers’ in this report, cash is the only means of pay-ment, since they rarely have access to or interest in other financial services. Cash is considered a transparent and easy means of payment, and a way to control one’s spending.

Four out of ten have access to bank products, such as sav-ings accounts, debit and credit cards, even though far from all fully take advantage of these services. These consumers constitute another important segment for m-commerce that is expanding continously in the region: ‘achievers’. They are

often formal workers, receiving a fixed salary on a monthly basis, deposited into an account. Credit cards and paying in installments are common among achievers, who often are middle or high income earners, and have a higher education level than strugglers. They have the economic margins allow-ing for leisure consumption to a higher degree, and embrace new technology they can benefit from in their daily lives.

Both Segments can Benefit from M-commerceMobile penetration is high among both consumer groups, making them potential users of m-commerce services. De-pending on specific needs, key barriers and drivers differ to some extent between the groups.

One concrete example of an m-commerce service that would be appreciated by achievers is mobile payments, while strugglers would find mobile remittances convenient and easy.

Source: Ericsson ConsumerLab, M-Commerce in Latin America, 2013 Figure 5: Two different segments for m-commerce

Two Segments for M-commerce


> Low income, sometimes fluctuating> Informal workers, ‘independents’> Unbanked/underbanked> Cash is only means of payment> Occasionally use credit, but don’t like it> Feature phone or low-end smartphone> Low awareness and use of new technology

> Higher income, monthly salary> Formal workers, self-employed> Banked/financially included> Prefer cards over cash> Frequently use credit, and like it> High-end smartphone> Embrace new technology

STRUGGLERS ACHIEVERS

Acknowledging the economic development of the region also means acknowledging the different conditions under which consumers live and work. On one hand there is the rising middle class, already in or rapidly moving towards financial inclusion, and on the other hand there are the majority of not yet financially included consumers.

SAFETY AND CONVENIENCE: KEY DRIVERSThe main driver for m-commerce is convenience, primarily manifested in not having to stand in time-consuming lines and being able to spend, send and receive money from any location, any time of the day or night.

Safety Important for ConsumersAmong strugglers, the main advantage of m-commerce is the possibility of avoiding handling large amounts of cash, for example when paying household bills at remote loca-tions. Achievers have a similar viewpoint, perceiving m-commerce as a way of getting rid of the necessity to carry cash or even plastic cards in public. One Brazilian consumer interviewed in the study expresses it as: “Nowadays anyone can steal your card, and your password. But with the mobile phone a criminal will not know that you have money in there.”

Less Waiting Is a Major AdvantageWaiting in line is a major hassle in all markets. Many hours are spent at banks, ATMs and locations where consumers are paying their bills, taking up valuable time from their lives on a regular basis. Spending time in queues to pay bills also generates a sense of insecurity, as consumers then need to carry large sums of cash in a crowd of people.

The desire to avoid queues is especially apparent among strugglers, who almost exclusively use cash to manage their economy.

M-commerce Allows FlexibilityOn the other hand, achievers appreciate the possibility to handle their economy anywhere at any time of the day or night. To be able to carry out payments while travelling, com-muting or from the comfort of one’s home, and pay bills with short due dates after banking hours are a couple of concreteand significant upsides of m-commerce. In many areas inLatin America, bank offices are rather scarce, whereas mobile operator agents are more common.

Providing ControlAnother aspect of m-commerce is that it can provide a sense of control, something that is of great importance to Latin American consumers. Keeping track of transactions, past and future bill payments and purchases is common in Latin America, and many keep detailed budgets as well as records of expenses. The mobile phone can act as a facilitator in this regard, by letting users save verifications and receipts in a digital format, receive notifications when transactions are being made, facilitating bill payments on time and acting as a budgeting tool.

Education, Trust and Transparency However, to fully tend to the strong consumer need of being in control when using m-commerce services, it’s important that transactions are transparent to make consumers feel absolutely reassured. One example of this could be instant verifications when money is withdrawn, inserted or in other ways transferred.

Another key prerequisite that needs to be fulfilled is trust, both in the provider and in the service itself. Consumer faith in service providers to supply reliable and secure Internet connections is low.

Most importantly, Latin American consumers need to be educated on the possibilities of m-commerce, since the general knowledge of m-commerce services still is very low in the region, especially among strugglers.

“I value time in my life, not wasting time doing things. Anything that makes me save time is very valuable for me. I quit paying my bills in cash and passed them to debit because I don’t want queues in my life.”

— Male, 26, Argentina

SafetyNo queuing

MobilityIndependence

Control

IndependenceNo queuingSafetyMobilityControl

Figure 8: Drivers for m-commerce


Source: Ericsson ConsumerLab, M-Commerce in Latin America, 2013

Drivers for M-commerce


SAFETY AND CONVENIENCE: KEY DRIVERS

SCEPTICISM ANDKNOWLEDGE BARRIERSCurrent adoption of m-commerce services is low in Latin America. The main barriers are lack of trust in the ser-vice, lack of network quality and a general lack of knowledge about m-commerce services among consumers.

Lack of Security and Network Reliability are Major ConcernsNetwork reliability is the most important barrier among achievers, and it’s also crucial for strugglers. Current poor coverage and network stability in all markets are key concerns that impact how consumers regard m-commerce services. The perception that m-commerce transactions can be interrupted or disturbed by unreliable Internet connec-tion is a common fear which makes consumers reluctant to adopt m-commerce services.

Other barriers connected to security concerns are fear of losing one’s mobile phone and fear of someone hacking one’s account. Consumers are worried they will not be able to get their money back in case of a crime, a concern that is tightly connected to a current lack of reliable and easy-to-reach customer support.

Lack of Knowledge Spurs Concern The general knowledge of m-commerce and its possibilities is low in Latin America, especially among strugglers, leading to misconceptions and distrust and slowing m-commerce adoption.

Another important barrier for strugglers is having to pay service fees. As cash is free to use, consumers are naturally hesitant towards paying for a payment solution, especially since they are not aware of the benefits m-commerce brings.

“At the beginning I felt unsafe and I did not use m-banking, but then I asked the people that already used it if it was safe. They reassured me and I started to use these services.”

— Male, 24, Brazil

Lack of knowledgeHigh service fees

Poor securityUnreliable network

Absence of transparencyInaccessibility

Unreliable networkLack of transparencyPoor user interfaceAbsence of securityInaccessibility

Figure 7: Barriers for m-commerce Source: Ericsson ConsumerLab, M-Commerce in Latin America, 2013

Barriers for M-commerce



THE CULTURAL LEGACY OF DISTRUSTDistrust of Institutions CommonAmong Latin American consumers, distrust of institutions is widespread, even though few have any first-hand experience to base this feeling upon. The skepticism towards institutions revolves around three common perceptions.

> Institutions are historically regarded as part of the estab- lishment, primarily serving the interests of those in power and the wealthy.

> Repeated news of official misconduct and corrup- tion fuels the common belief that institutions are not to be trusted.

> The level of service and customer friendliness of institutions is considered low. This is also true when it comes to mobile operators.

Beyond perceived poor or non-existent customer support, the main reason for consumers’ distrust of operators is the notion of unreliable network quality and poor performance. Consumers are also sensitive to high or hidden fees.

Banks Most Trusted Provider of M-commerceIn regard to banks, consumers’ relationship is usually quite instrumental and hence loyalty tends to be low. It is not unusual for banked consumers to have accounts with multi-ple banks. The lack of interoperability between banks is also considered a problem in some markets.

However, consumers tend to view banks as the preferred provider of m-commerce services. Security is important among Latin Americans, and since keeping money safe is banks’ core business, consumers perceive them as more trustworthy than other players in this regard.

Another aspect of making consumers feel safer is the adoption of regulations that safeguard consumer rights and security.

“If there was an unexpected expense, I would ask someone in my family for money. Even if it was a big amount, I would still ask someone I know. Rather than going to a bank.”

— Female, 39, Chile

Figure 6: Preferred M-commerce Provider


A bank

A mobile network provider/carrier

A large retail store

A bank credit card provider

A mobile handset brand

Source: Ericsson ConsumerLab, Analytical Platform, 2012Base: User or interested in mobile wallet (Argentina, Brazil, Chile, Colombia, Mexico)

Mexico 51%

14%

9%

12%

14%

Colombia 63%

9%

5%6%

17%

Chile 56%

15%

11%

6%

11%Argentina 43%14%

9%

26%

7%

Brazil 50%14%

7%

21%

8%

For m-commerce to gain ground in Latin America, consumer needs on all levels have to be addressed - by getting necessary regulation in place and adjusting basic prerequisites to the mode of communication.

Methodology

The data in this report comes from qualitative, in-depth interviews as well as expert interviews and quantitative data.

Unlocking future potential

One important prerequisite for m-commerce is building trust: both institutional trust on a broad level and trust in mobile operators in particular. Lack of network quality, speed and coverage as well as perceived poor customer support have had a negative effect on the confidence in mobile operators. Government regulations to protect the consumer is also im-perative to gain trust by making m-commerce more secure.

The overall lack of consumer confidence suggests that stra-tegic alliances between different types of players might be necessary. Successfully launching m-commerce on a broad scale would most likely require cooperation rather than com-peting alternatives which could fuel consumer doubt. While banks are the most trusted institution to handle money, mobile operators are trusted as a facilitating intermediary,

since they are the link between the mobile device and the network. Retailers can in turn provide convenient access to customers in store.

M-commerce services need to be developed based on key drivers for the two segments; control, safety and conveni-ence. For strugglers, basic mobile banking solutions would provide safety and control, while mobile payments would be convenient for achievers, who appreciate not having to handle cash at all.

When communicating around m-commerce services, education and validation from independent and trusted parties are key factors, since knowledge of m-commerce and its advantages is scarce in Latin America.

Figure 9: Pyramid of Consumer Needs


Source: Ericsson ConsumerLab, M-Commerce in Latin America, 2013

Ericsson ConsumerLab, M-Commerce in Latin America, 2013

50 in-depth consumer interviews in São Paulo,Bogota, Buenos Aires, Santiago and Mexico City, including consumer diaries 25 of the interviews were conducted inrepondents’ homes and followed by shop-alongs 30 expert interviews with leading professionals from the m-commerce ecosystem in Latin America January - April 2013

Argentina, Brazil, Chile, Colombia, Mexico > 4,080 online interviews, age 16-60 May 2012

Ericsson ConsumerLab, Analytical Platform, 2012

Features

Services

Trust

Context

Consumers require transparency, traceability and ease of use in order to adopt fully.

Consumers need services based on the key drivers for the segments: control, safety and convenience.

Education and validation from independent and trusted parties are key factors.

Regulations to protect the consumer need to be in place.

The content of this document is subject to revision withoutnotice due to continued progress in methodology, design andmanufacturing. Ericsson shall have no liability for any error ordamage of any kind resulting from the use of this document.

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Ericsson ConsumerLab: M-commerce in Latin America

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