Why Paying in Installments Matters in LATAM

​In Latin America, the concept of paying in installments, known locally as "parcelamento" or "cuotas," has become deeply embedded in consumer culture, influencing purchasing behaviors across various sectors. This payment method, allowing consumers to spread the cost of purchases over time, has emerged as a significant driver for business growth in the region. From high-value items to everyday commodities, the option to pay in installments is often expected from Latin American shoppers.​

The Consumer Side:

The popularity of installment payments in Latin America can be traced back to several cultural and economic factors, a few of which are explored below:

1. Financial Accessibility: Although the proportion has been declining, a substantial amount of the Latin American population remains unbanked or underbanked, with the percentage reaching over half of the population in some countries. Installment payments provide a mechanism for these consumers to access goods and services without the immediate need for substantial funds or traditional credit facilities.​
2. Inflationary Histories: In the 1990s, when installment payments via credit card became popular in Brazil, the country was going through a heavy period of inflation. Paying in installments allowed consumers to lock in prices at the moment of purchase, effectively reducing the real cost of each installment over time as inflation eroded the currency’s value. In other words, it essentially made the purchase “cheaper." This phenomenon is not exclusive to Brazil: when countries in Latin America go through periods of inflation, spreading payments over time—for some, even small payments—can mitigate the impact of currency devaluation.​ It is worth noting that this choice can be a gamble, as the opposite effect can also occur, locking consumers into a price that would have been lower had they purchased later.
3. Consumer Behavior: Installments may be the only way for consumers to obtain some goods. 64% of Brazilians believe paying in installments is the only way for them to purchase certain desired products. Data also shows that even for small sums of money, there is a segment of consumers that will prefer to pay in installments when that option is available.

The Business Side:

For businesses operating in Latin America, offering installment payment options is a game-changer, or even necessary:

1. Increased Sales Volumes: In 2019, almost 80% of Argentine households were paying by installments in some capacity–a number which had grown from previous years. By enabling consumers to pay over time, businesses can attract a broader customer base, including those who might not have been able to afford lump-sum payments. This approach has been particularly effective in e-commerce, where 60% of purchases are made using installment plans.
2. Higher Average Purchase Values: Consumers are more likely to opt for higher-priced items when given the flexibility of installment payments— these are items which they may not have been able to afford while paying in one go. This trend increases the average purchase value, enhancing revenue streams for businesses.
3. Staying Competitive: In markets where installment payments are prevalent, businesses that do not offer such options may find themselves at a competitive disadvantage. Providing installment plans can be an important selling point, attracting customers seeking flexible payment terms.​ The option of a payment plan can be the single deciding factor for some consumers.

Challenges and Considerations

While the benefits are substantial, businesses must navigate certain challenges when implementing installment payment systems. One major concern is credit risk management. Since extending credit always comes with the possibility of defaults, businesses must have strong systems in place to handle potential losses.

Another challenge is economic volatility in the region, where in cases of acute economic instability, consumers can struggle to keep up with payments plans. To mitigate this, businesses need to monitor economic indicators and adjust their credit policies as needed. One must find a sweet spot on the installment limit - when consumers break payments into too many parcels, and choose to make too many purchases with payment plans, they can lose track of installments, which can quickly add-up, leading to trouble.

Lastly, regulatory compliance is crucial. Since financial laws and consumer protection regulations vary across countries, it goes without saying that businesses must stay informed and ensure that they adhere to local requirements to operate legally and smoothly.

Conclusion

Embracing installment payments, even for low-value items like a cup of coffee, has shown to be a transformative strategy for businesses in Latin America. This approach aligns with cultural preferences, empowers consumers to make more purchases, allows consumers to manage their personal finances and stay on top of payments, and drives business growth.

The integration of flexible payment options is showing no signs of stopping - in fact, in the future, it will likely permeate everyday purchases even more. Thus, it’s imperative that businesses in this region, and those looking to expand into this region, have a working understanding of payment plans and what’s needed to implement them at scale.