As companies move more aggressively into new global markets, there is a natural progression to think about alternative payment types to help improve conversion rates and customer satisfaction. I’m not talking about PayPal, but rather bank-based payment options that are often considered the “preferred” payment method in countries from Germany to India to Brazil. This includes direct debit, wires (electronic funds transfer) or real-time bank transfers.
Many of these markets have traditionally been cash-based societies, and as more commerce has moved online, the primary mode of payment has not shifted all the way to credit. When we say that certain payment types are “preferred”, I think it gives the improper connotation that individuals in these countries would rather not use credit cards because of a “cultural choice”. While the US is undoubtedly a credit driven society, it is important to note that the use of alternative bank payment options in these other markets is primarily driven by a less evolved credit and risk ecosystem rather than an aversion to credit.
Low credit limits – A credit card is really just a short term loan. Since the data points required to gauge someone’s credit worthiness are often limited in these markets, it is a lot harder to do a quick and dirty risk and underwriting using something like a social security number and an associated credit history with a FICO score. That typically means that credit limits for most consumers can be very low. In Brazil, credit card limits can often range between 100 USD and 500 USD. In India, many bank issued credit cards require fixed deposits (starting at about 300 USD) with a credit limit that is 70 to 80% of the fixed deposit. If you’re trying to buy an airplane ticket or an iPad over the internet, it’s going to be pretty hard to do with that low of a limit on your card.
High APR – In addition to low credit limits, most cards in these markets come with significantly higher annual rates than in the US. Rather that offering a very specific APR to an individual with a certain risk profile based on a number of data points, banks are typically offering a few tiers of APRs based on limited information. As a result, rates remain high so that the portfolio of individuals in a specific tier can offset each other regardless of their true credit worthiness. In India, we are talking about 30 to 45% APRs, and in Brazil, which has one of the worst rates globally, APRs start around 120% and go up from there. So even if you manage to secure a credit limit that is high enough to pay for a high ticket item, you’re going to have to find a way to pay for it during that billing cycle to avoid some hefty fees.
Reasons like these are what force consumers in these markets to “prefer” alternative payment options. This is also why many of these markets have evolved installment plans for the payment of expensive products and services. Yes, there is some aspect of this type of buying habit that is cultural. But let’s face it, if these consumers had access to the credit system that we enjoy in the US, they would probably buy everything on credit as well. Changing the issuance of credit is a systemic change that will take time, and in the meanwhile, it is important for companies moving into these markets to understand the specific payment types that make sense for their business and the underlying reasons why.