Payment Processing Overview
As online shopping grows in Latin America (Latam), retailers are starting to explore this international market and, to do so, they need to better understand how cross-border payment processing works. But fully understanding it is not an easy task.
The whole operation is very complex and quite bureaucratic for someone without a local intermediary, in addition to the fact that 60% of Latin America customers still don't have international credit cards and even the ones who do will opt to use local payment methods when faced with many different options in an online purchase.
It is important to point out that even though there are a few differences in payment facilitator for Latin American countries, the basic framework remains the same, no matter where you are located or which is the payment method selected.
How an Online Transaction is Processed
The customer makes a purchase on the merchant's website, chooses their preferred payment method and enters their data
The merchant will transmit this request to the payment gateway, which will validate it and work as an interface for other payment processors
The Payment Processor will send the transaction information to local third parties (such as the acquiring or issuing bank, depending on the payment method) which will either confirm or deny the transaction
The state of the transaction type is relayed back to the payment processor, which will complete it and notify the merchant, then show the status to the customer
Further on Payment Processors
The payment processor is a player involved in the merchant payment processing and is responsible for handling its transactions and linking it to the acquiring banks and issuers, according to the selected payment method. The payment processor is also responsible for gathering all funds originated in the transactions and then depositing them back into the merchant's account, in a process called settlement, which will later be discussed in this article.
Other Parties Involved
The Customer takes the first step in the online transaction by making the purchase.
The Merchant handles the purchase itself, being responsible for the logistics and dealing with customer services related to the good or service.
The Payment Gateway is the bridge between the merchant and the payment processor, being responsible for sending the credit card information to the processor and returning both the transaction details and the response back to the customer. It works as an interface to assure security and simplicity in the transaction.
The Payment Processor facilitates the transaction process by intermediating with all players (sometimes, this service can include the gateway). It transmits the data to the right player according to the payment method, besides depositing the funds originated by the purchase into the merchant's account.
The Acquiring Bank links the processor to the brands and issuing banks. It is responsible for approving or denying the transaction according to risk analysis, passing the transaction information along and sending the response back to the payment processor.
The Issuing Bank receives the transaction information and then verifies if the Customer is authorized to perform such transaction by checking the bank account data. If everything checks out, the Issuing Bank then charges the Customer and notifies the Acquiring Bank.
Most Common Payment Methods
The traditional payment methods in Latin America are credit card, debit card and cash payments like the "boleto bancário". The Boleto Bancário is a well-known payment method in Brazil, that allows the Customer to pay for purchases in cash through a bank slip in person, at ATMs or through online banking. In other Latam countries, you will find similar cash payment methods, such as OXXO in Mexico, Sencillito in Chile and Via Baloto in Colombia.
Nowadays, if the consumer wants to make a real-time bank transfer between accounts when buying something online, he or she can do it using EFT (electronic funds transfer) or can opt to use Online Debit, which charges through their debit card, deducting from their account instantly.
Credit Card Payment Processing
Using a credit card is the most popular payment method in Brazil: it corresponds to more than 60% of all online purchases. But only ⅓ of Brazilians actually have their credit card enabled for international shopping, which means that to access the vast majority of the population you must accept local credit card payments.
Another big advantage of using this payment option is that it's very fast and synchronous. The entire process takes up to a few seconds.
Alternative Payment Methods
As technology advances, being fast and practical becomes vital. Alternative payment methods are gaining space, platforms, like mobile wallets that store all payment information, are gaining popularity. PayPal, Venmo, and Amazon Pay are just a few examples of these systems that have as their mission to provide faster and more secure payments. A payment gateway can facilitate receiving payments from any of these solutions by providing a standardized integration. Both the customer and the merchant benefit from having alternative payment options.
Different Types of Transactions
Within the entire transaction mechanism described, the role of the payment processor is present in each of the steps: From the moment in which the customer makes the purchase to every phase of the merchant's business that involves any exchange of money. Likewise, when the customer requests a refund or a return, the transaction also goes through all the all the mentioned steps.
Cross-Border Payment Services
When looking at international trading in Latin America from a merchant's perspective, this process is considered to be a Cross-Border operation. Currency exchange is the main issue of international transactions, given that when customers pay in local methods they are always paying in local currency and international retailers always want to receive the payment amount in their own currency.
In order to solve this issue, payment processors and gateways, like EBANX, were founded. These companies are in charge of handling all currency exchange and making sure that all kinds of transactions made between the merchant and the local players are smooth and safe.
Even though we've discussed some of the complexities of processing payment transactions, there is still a lot of ground to be covered when talking about how to exchange funds between the processor and the merchant, especially considering they are collected in a local currency and deposited in the merchant's account in another.
This operation is part of a process called remittance, which consists of the payment processor transferring money from one account to another overseas while exchanging its currency. It's important to point out that it's a process made by the payment processor only, without involving the merchant.
Once the merchant is fully integrated with a local company and all the derived funds from its transactions are collected by the payment processor, there must be an operation in which the funds are then returned to the merchant. This process is called settlement and is generally the term applied to the exchange of the payments amount between the seller and the collector in a currency different from the one in which the payment was first made, thanks to the remittance process.
How to make Payment Processing easier?
Having understood how payment processing in Latin America works, it's fundamental to find a good facilitator that operates in your target selling country.
Operating via a local intermediator can benefit both the merchant and the customer, by making the customer's purchase more accessible, secure and easy, and therefore, increasing the merchant's sales. Besides, a good payment processor will provide legal assistance, local customer services, and sales strategies, making the merchant's expansion smoother.