How Brazil's e-commerce market fosters innovation

March 26, 2021 10:31 AM

Payment opportunities exist across all segments of Brazil’s growing e-commerce market as card ownership is low (relative to U.S. and European levels), and there is a high level of cash usage to pay for internet purchases, which are often initiated by phone. In many rural areas of the country, mobile devices are the only way Brazilians access the internet and shop online.

In a country with 210 million consumers and the world’s ninth largest economy at $1.84 trillion, based on World Bank data, the fact that e-commerce represents just 3% of the country’s total retail sales (according to PPRO) signals a strong opportunity for payments firms.

Companies like Amazon and MercadoLibre are moving fast to not only take advantage of this opportunity, but to make investments that will strengthen the market overall. And the growth of mobile commerce provides an alternative to internet infrastructure issues that have held back e-commerce.

JPMorgan’s 2020 E-commerce Payment Trends – Global Insights Report found that the e-commerce market in Brazil had been growing at double digit rates since 2017, and is predicted to grow in excess of 9% annually through 2023, reflecting economic pressures caused by COVID-19.

However, the first half of 2020 demonstrated explosive e-commerce growth in Brazil, as it did in many countries that went into a lockdown phase. Reuters reported that e-commerce sales volume grew by over 56% in the first five months of 2020 in Brazil, as more consumers had shifted to online shopping during the pandemic.

Recent growth in Brazil’s e-commerce market has led to large infrastructure investments by two of the country’s largest e-commerce players – Amazon and MercadoLibre. CNBC reported in November that Amazon opened three new logistics centers in Brazil, giving it a total of eight across the country and creating 1,500 new jobs. Additionally, Brazil is currently the country with the fastest growth in Amazon Prime subscriptions.

Argentine Rival MercadoLibre, which generates 55% of its revenues from Brazil (annual report), told Bloomberg that it was doubling its investment in the country in 2021 by spending $1.8 billion on expanding its logistics network.

Brazil represents the largest e-commerce market across the entire Latin American region, generating two in five dollars spent online, according to data from the Brazlian e-commerce payments solution provider PagBrasil.

Brazilian online shopping is concentrated in the cities of Rio de Janeiro and São Paulo, which contribute roughly 60% of the country’s total e-commerce volume, based on data in the JPMorgan report.

Additionally, 72% of the country’s population has yet to make its first e-commerce purchase, demonstrating strong potential for expansion. The biggest barriers standing in the way of growth are slow internet speeds that are on average three times slower than the world average, and an unstable internet connection. Roughly two in five Brazilians reported that an unstable internet connection was their main reason for not shopping online.

Cash represents about one fifth (18%) of Brazil e-commerce payments volume, based on data from PPRO Payments Almanac.

While this could seem limiting for e-commerce growth, high cash usage can also represent opportunities for payment facilitators, card networks, banks and convenience stores that represent cash networks.

As the adoption of e-commerce grows, Brazilian consumers will have stronger incentives to adopt digital payments. For those who cannot adopt digital payment means or do not wish to, there will be a stronger demand for cash networks that allow consumers to deposit cash, such as Brazil’s Boleto Bancário.

Roughly 62% of Brazil's e-commerce volume is transacted over payment cards, making it the preferred payment method, followed by cash at 18% and then nearly tied for third place are e-wallets (10%) and bank transfers (9%).

Approximately 70% of Brazilians are banked, which is slightly below Colombia (80%) and Chile (74%), but significantly ahead of Argentina (49%) and Mexico (37%), according to the PPRO report. While credit card penetration is near the top among Latin American countries at 27%, it’s a far distance from U.S. levels at 66%.

In response to the impact of the COVID-19 pandemic, the Brazilian government devised the coronavoucher program, which was an emergency subsidy for low-income informal workers to be distributed by the state-owned bank Caixa Econômica Federal (CEF). The coronavoucher application, as well as disbursements, were made exclusively through the Caixa Tem app. Consumers had six options to receive the funds: 1) transfer to a bank account, 2) payment of a Boleto Bancário, 3) payment of public services, utilities or mobile top up, 4) QR code payments, 5) a virtual debit card from CEF and 6) ATM cash withdrawals.

Mastercard reported that as of August 2020, 66 million people had received the subsidy and of those people, 36 million had been previously unbanked – boosting Brazil’s banked population by 17 percentage points in one swoop.

China and the U.S. are the most attractive foreign e-commerce shopping destinations for Brazilian consumers, accounting for 85% of total cross-border e-commerce volume. Japan, a distant third-place shopping destination made up only 3% of cross-border volume based on JPMorgan data.

About half (47%) of Brazil’s online consumers shop on foreign websites, demonstrating a strong level of confidence in making overseas purchases. However, only 8% of the total e-commerce volume is cross-border, which is a possible indicator that cross-border purchases may be infrequent or of low value, based on the JPMorgan report.

Factors that can act as detractors from growing cross-border e-commerce trade include the high fluctuation levels of the Brazilian currency, long delivery times and an onerous customs infrastructure that imposes hefty importation taxes on almost all goods not produced in Brazil.

SelectUSA, a unit of the U.S. Department of Commerce, reported in 2019 that most U.S. products imported into Brazil are subject to import tariffs ranging from 10% to 35%. The World Bank reported that after China and the U.S., Brazil’s largest import partners are Argentina and Germany.

Probably the biggest potential driver for e-commerce growth in Brazil is wider mobile commerce adoption. Brazil, based on PPRO data, generated over one third (36%) of its e-commerce through a smartphone device, which was well below the world average of 50%. Other major South American e-commerce markets had slightly lower levels of mobile commerce at 35% for both Argentina and Chile and 32% for Colombia.

China, which is a leader for mobile commerce penetration and a potential flag bearer of the potential Brazil could achieve, generated 59% of online sales through smartphones. In other words, Brazil could leapfrog the U.S. and the world average in mobile commerce penetration due to growing consumer adoption of smartphones and the unreliability of the fixed internet connections.

Another example of Brazil’s potential is Mexico, which is already generating more of its e-commerce through mobile devices at 44%, than the U.S. is currently doing so at 39%.

The JPMorgan report found that Brazil is quickly transitioning to a mobile-first country with the proportion of internet users that exclusively use their smartphones to access the internet jumping from 49% in 2017 to 56% in 2018. Additionally, smartphones are the sole device used to access the internet in rural parts of the country.