How disruptive will WhatsApp Pay be in Brazil?

The ubiquitous instant messaging app will now be developing a tool to send and receive money. How much of a game-changer will this be in Brazil?

After months of planning, Facebook has increased its footprint in the payments industry by launching a payment function in WhatsApp Messenger — and Brazilian users will be the company’s guinea pigs. The highly expected move strengthened WhatsApp’s position in its second-largest market but also has the potential to set up an entirely new payment ecosystem in Brazil

In a Facebook post, the social media giant’s CEO Mark Zuckerberg announced the WhatsApp Pay function will make “sending and receiving money as easy as sharing photos.” It should also allow small businesses to make sales right from WhatsApp. At first, customers from state-owned bank Banco do Brasil, fintech Nubank, and credit cooperative Sicredi will be allowed to register their cards and transfer money to both individuals and companies. [restricted]

Cielo, Brazil’s largest payment company, will be the first — and, so far, the only — firm responsible for processing the transactions.

However unprecedented it is around the world, Facebook’s biggest attempt to monetize WhatsApp is actually built upon several business functions that have been successfully adopted by Brazilian companies for years — such as following up deliveries, or presenting a product catalog to customers and even using automatic replies for a 2.0 customer service experience. 

Even though Facebook still has not released estimates about revenues or WhatsApp Business’ user base, the impact of the move is expected to be huge. The company did not answer a comment request.

According to the App Annie Report 2019, WhatsApp was the most-used app in Brazil last year. That should guarantee that the company will quickly become one of the leading names in the country’s instant payment industry.  “There are several digital wallet tools and the problem to make them work has always been convincing people to install them. But everybody has WhatsApp, imagine how useful this will be, opening an infinite number of opportunities for payment, that previously needed invoices and other tools,” said Amure Pinho, chairman of the Brazilian Association of Startups, to The Brazilian Report.

Ripple effects on competitors

The positive expectations pushed stocks of Cielo up 35 percent during trading hours, reaching their highest level since March.  

But however impressive the daily gains are, it is important to note that, since its historical peak in July 2016, Cielo has lost 80 percent of its market value thanks to the arrival of fierce competition from players such as PagSeguro and Stone. These rival stocks traded in New York were, simultaneously, dropping by 4.1 percent and 2.8 percent in the afternoon.

The session gains could be explained by the deals’ conditions. To use WhatsApp Business’ payment function, companies will have to sign up with Cielo and pay a 3.99-percent fee for both credit and debit payments — higher than the current fees charged by both Cielo and the competition for debit payments or those with a longer deadline to receive the money.

On the other hand, companies may receive debit payments in up to a day and credit payments in two days, a special advantage at a time when companies need liquidity. But, above all, they don’t need to purchase POS machines — the rental and/or purchasing of which was one of the first tools the competition used to hit Cielo back in the day.

For Mr. Pinho, the convenience and the better user experience will probably make the fee worth it for companies. But as Cielo is the first, and not an exclusive player in WhatsApp, any changes in regulation or new partnerships could bring competition to the marketplace, he says. “I think we are about to see the same price war we’ve seen with POS machines.”

BTG Pactual analysts are also gambling on the democratization of the ecosystem in the future. While acknowledging that it will obviously be more positive for Cielo than the competition at first, they warn in a report that the company has other issues, such as its shareholder structure — Cielo is owned by banks Banco do Brasil and Bradesco — as well as conflicts of interest, that make them reiterate their cautious view on the stock, with a neutral recommendation.

The payments industry in Brazil

WhatsApp’s announcement comes at a time of huge transformation for the Brazilian payments industry. The Central Bank has just started the first trials of its instant payments function, PIX, with over 140 financial institutions applying to join the instant transaction QR-Code based system. 

By the end of the year, open banking is expected to become a reality in Brazil, allowing other companies — not only financial institutions — to have access to customer’s banking data and build their own solutions.

Ativa Investimentos’ analyst Ilan Arbetman believes that the companies that struck a deal with Facebook are ahead in this movement but “with open banking’s appreciation, I believe that these initiatives shall multiply. Therefore, getting an early start may help to gain the necessary know-how to become a leader in the future,” he told The Brazilian Report, adding that given the crisis sparked by the pandemic, finding alternatives such as providing integrations with other companies was already a necessity for payment companies.

BTG Pactual analysts also believe that it is very hard to predict how Brazilian consumers will adapt to these new trends. They quote PagSeguro’s CEO, Ricardo Dutra, who says that the experience with physical cards is good for the average consumer in Brazil, which may delay the adoption of PIX. In this sense, they say, Mr. Dutra believes that transfers will be more impacted than card payments.

WhatsApp may also have a role in this, as its announcement includes a peer-to-peer transfer solution, allowing users to transfer up to BRL 1,000 at a time and receive BRL 5,000 per month — limited to 20 transactions per day.

Mr. Pinho, on the other hand, believes that the fintech ecosystem may see some steeper changes, especially concerning companies that offer digital wallet services. “Fintechs that bet on instant payments as a differential (…) will have to find new functions, or they’ll be swallowed by WhatsApp,” he said.[/restricted]

By Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.