Exclusive: ‘Bringiton!’ – Daniel Vallejo, Addi in “The Paytech Magazine”
Addi is a home-grown point-of-finance solution in Latin America – the second fastest-growing region for e-commerce in the world, but also one of the smallest. It’s why Co-founder Daniel Vallejo isn’t fazed by global BNPL competition
As in other fast-growing e-commerce markets, such asAfrica and Asia, the online payment experience in Latin America is far from ideal.
While less than 20 per cent of Latin Americans own credit or debit cards, according to the World Bank, those that do often find they are not enabled for online transactions; and only a small number hold international payment cards, so their buying choices are limited. Interest rates are, in any case, crippling. The Brazilian government recently considered capping rates charged on consumer credit products, including credit cards, which have climbed as high as 200 per cent APR.
Partly as a response to this restricted use of plastic and partly due to regional governments’ policy of digitisation and financial inclusion in an area of the world where only just over half of adults hold a bank account, there has been an explosion in alternative local payment methods. The first-ever instant payment system, PIX, was launched in Brazil in November 2020, and e-wallets, Nequi in Colombia and PagBank in Brazil, for example, have witnessed massive growth. But there is another defining characteristic of this colourful payments market: instalment plans. Known as parcelas in Brazil, cuotas in Argentina and meses sin interés in Mexico, interest-free, split payments began as a way for in-store retailers to survive periods of hyper-inflation when cash was scarce. Today, it’s estimated that, across the region, more than 60 per cent of transactions on- and offline, are enabled by instalments – even for comparatively low-ticket items – and up to a whacking 77 per cent in some countries.
But, even here, there are drawbacks, not least that instalment plans are often linked to credit cards and tie up a cardholder’s credit line until the entire instalment plan is paid off; and getting approval for point-of-sale (POS) finance is frequently a long-winded process.
Buy now, pay later (BNPL) startup, Addi, aims to get around such limitations. It uses just an ID card, email address and WhatsApp account to extend finance instantly at the checkout. The company was founded in Colombia in 2018, and in the middle of the COVID-19 pandemic, in May 2020, raised $15million in a Series A funding round. It will launch in Mexico and Brazil by the end of the year.
Addi uses APIs to integrate with merchant sales processes online and in-store. Right now, the focus is on the latter, but with e-commerce forecast to grow by 19 per cent across the region in 2021, online is where the real potential to scale is. Latin America is now the second fastest-growing market for e-commerce in the world: in Colombia alone, online payment platform PayU saw nearly 1.500 new merchants sign up in the second half of April 2020, alone.
“Nevertheless, e-commerce in Latin America is still less than 10 per cent of all commerce,” says Addi co-founder, Daniel Vallejo, “so, there’s a huge opportunity to grow. The other key thing to remember about e commerce is that transaction approval is incredibly low. More than 70 per cent of transactions in some markets are declined. So, retailers spend on Google and Facebook ads, generate the traffic, get the consumer interested in buying – and then they can’t.”
Addi’s API-driven platform presents loans to consumers as instalment plans at the checkout, with a clear schedule of payments. Applications can be approved in less than 10 minutes.
Existing in-store credit options can take hours or several visits to organise. So, for consumers, Addi addresses both the issue of lack of access to affordable credit and reduces friction at the checkout. For retailers, it builds consumer loyalty, so that customers return to spend more. Crucially, it also gives merchants access to huge amounts of data, cementing and growing that sales relationship with the customer, which tends to increase the ticket value of items purchased. Addi’s API-powered offer, both online and offline, is one of its key selling points, says Vallejo.
“API availability and adoption in the region has made life for retailers much easier. There is just a tonne of efficiency opportunities, for example, in the supply chain – just-in-time inventory, managing your cash flow, etc – that definitely can be impacted by APIs.
“But when it comes to the front end of their operations, which is directly linked to our work at Addi, what APIs allow retailers to do is two-fold. First, it can help to significantly increase the breadth of their target audiences, either because they tap into new channels, or because they just open up new physical ways of selling. “The second is to do with the customer experience. APIs have allowed retailers to make this much better and easier.
For example, the know-your-customer information required when you buy online; as a client, you don’t have to fill in every single field because the information is fetched and fields populated automatically. API connections to different data providers allow retailers to make buying much more seamless and convenient. And there, in that step, is where we plug in. We take the information from the retailer, and from the client, and try to make a match in terms of what credit the retailer can offer that client for them to make a purchase.
“When you think about how credit has been underwritten in the past, especially in terms of credit cards, what financial institutions do is underwrite an open-to-buy limit. That’s what a credit card is, right? You’ve got a limit and you can buy beers, English courses, dental treatment or whatever, until you reach it.
“Through the use of APIs, mainly, we get to understand what it is that you are buying at that exact moment, and with that detailed information, we can better underwrite the credit with adjusted limits and differential pricing. APIs are key to our existence.”
When it comes to e-commerce, Addi extends services to hundreds of thousands of small retailers by partnering with virtual store platforms such as VTEX and Nuvemshop, the Latin American equivalent of Shopify. “The way we achieve distribution at scale is by partnering with content management systems like these. Two of our partners, between them, have more than 200,000 retailers connected to their e-commerce enablement platforms. That is a very important channel for us.”
Everything in Addi’s technology stack, is ‘home-grown’. “We have done everything from scratch, starting with our proprietary loan management system, which is multi-currency. The infrastructure is all Cloud-based. “In terms of how we think this will evolve, we’ve divided our different tech domains into core and generic. For whatever is generic, we try to get the best provider of that potential technology. It doesn’t make sense to build a customer relationship management system from scratch when you have people like Kustomer, Zendesk, etc, doing it for a living. So, for those pieces, we integrate with third parties,” says Vallejo.
THE MORE, THE MERRIER
The COVID-19 public health crisis has had an impact on nearly all aspects of daily life for people across the world, and has put the global economy on an uncertain footing. For the payments industry, the pandemic and its consequences have accelerated existing trends. Ongoing shifts toward e-commerce, digital payments, instant payments, and cash displacement, have all been significantly boosted since March 2020, adding to the market opportunity for paytech companies. In 2019, retail e-commerce sales in Latin America surpassed US $70billion. According to forecasts, taking into account the impact of the pandemic, this figure is expected to reach almost US $116billion by 2023. It would be foolish to think, therefore, that the region is not on the radar of global BNPL operators such as Europe’s Klarna and Afterpay in Australia.
“Will they represent strong competition whenever they come here? Yes. But they’ll have to adapt from operating in developed markets with much better bureau data, high credit card penetration, etc,” says Vallejo. “In
Latin American markets, the game is not only about cannibalising credit card usage, but also expanding the credit box. That is a big difference for them and is going to take them some time to get their heads around.
“Plugging into the Latin American ecosystem of retailers is going to be different as well, especially when you think about developer-first cultures,” continues Vallejo. “When you are in a developed market, and you expose your API, even SMEs and long-tail retailers are able to hop on.
In Latin America, it’s different, and so distribution strategies have to be different. That will also present a challenge for them.
“Having said that, having them here would actually be great! It would help us to expand the category. There is plenty of space for more than one point-of-sale lender to do well, and the bigger the market, the easier it is to specialise, for instance in medical services, vocational education or apparel.
“It’s going to be awesome whenever they get here. There’s lot for them to learn about the region – and there is a lot for us to learn from them.”