In this episode of Payments Dialog, we sit down with Juan Ortega, co-founder of Rappi, to discuss how online merchants process payments in Latin America. Juan discusses the early days of payments at Rappi, the inflection points that lead Rappi to focus on payments, and how the customer experience is influenced by payments.

Payments In Latin America

This episode also covers how payments vary in the countries Rappi operates in (Mexico, Brazil, Columbia, Costa Rica, Ecuador, Peru, Chile, Argentina, and Uruguay) and how they had to build processes for each country. Juan also discusses important tips and issues to be aware of for any merchant that wants to operate in the Latin American region.

Learn about how to deal with variations in acceptance rates, how to deal with chargebacks and fraud, and planning for alternative payment methods.

This episode of Payments Dialog is packed with insight about payments in Latin America, and previews what merchants should expect when planning to expand or establish a business in the region.

Rough Transcript of Payments Dialog: Rappi and Latin American payments for online merchants

Peter Mollins: Well hello. This is Peter Mollins from Spreedly. Welcome to another edition of Payments Dialog. Today I have the pleasure of welcoming the co-founder of Rappi, Juan Ortega. Juan, if you don't mind, would you take a second just to introduce yourself and a bit of background, your background with Rappi.

Juan Ortega: Perfect. Thanks for the invitation Peter. So, I started Rappi, I'm part of the founding team four and a half years ago. My background was actually from aviation so I worked for airlines and I used to work for a consulting firm that specialized in airline consulting. I met Simon, my co-founder and we started working on developing an app that was basically able to get anything delivered really quickly.

Juan Ortega: We started with things from a convenience store and then started adding more things to the app like restaurants, like supermarket. Today in Rappi, you can basically get anything that you want delivered in your house in less than thirty minutes. We are delivering cash in most of our cities in Latin America.

Peter Mollins: That's incredible. That's an incredible twist on things isn't it, to deliver cash as part as your offer?

Juan Ortega: Yes.

Peter Mollins: Now tell me, when you were envisioning Rappi and before you had founded it, did you have prior experience with payments?

Juan Ortega: No. So I had zero experience with payments. Payments was a new thing that we felt was easy. So we used different gateways in Colombia, we used different gateways in Mexico. And as we grew, and as things like acceptance and chargebacks started to be something significant, we started to kind of digging into payments. That's how I started to get into payments and understanding how we work and what were those issues that from one day gave us 70% acceptance rate and then the next day 80% and trying to understand what was those variables.

Juan Ortega: Something at the beginning we didn't understand that much was chargebacks. So for us, we didn't know that people were able to call their bank and basically chargeback payments that made. So we deliver the products, we deliver the service and then two weeks later we were being called by the banks getting these payments back. And when we started understanding all of these issues, that's when we decided that payments was something that needed kind of their own space. [inaudible 00:02:43] I don't understand how I got there, but for some reason I think I needed... I moved to Mexico when we started Rappi and I opened operation in Mexico. There was a huge issue with the processing of the cards in Mexico that we didn't have in Colombia and I think that was a reason why I started to get into payments.

Juan Ortega: At first, I was just looking for a gateway and then trying to understand why one gateway was working better than the other one. And I think the most painful, the most painful thing here was in making a decision to choose a gateway was super long and it was super...it was a lot of time and a lot of effort in the technical side to first decide and then second [inaudible 00:03:27]to integration and then to move the credit card [inaudible 00:03:31].

Peter Mollins: Okay. Terrific. Now I mention part of your thinking was around customer experience as well and making sure that people that are purchasing through Rappi have a great experience. Is that true?

Juan Ortega: Yes. That's...I think something was really frustrating for clients was they went to the app, they shopped for I don't know ten, fifteen minutes, they found what they wanted, they went all the way to check out, they put their credit card information and when they placed the order the payment was declined. And for them, it's really frustrating because they say “Hey, my card is active. My card is working.” And in their mind it's "Hey, Rappi doesn't work. So I'm just going to use another app or I'm just going to go walk to the store because Rappi doesn't work". So we saw payments was something that was really [inaudible 00:04:18]the experience because it was able to completely block a purchase. It was...if you weren't able to pay, you weren't able to order, and people just move elsewhere.

Juan Ortega: And that was something really confusing for us because we say, "Hey, why if this card is active, why is the bank declining?” That's when we started finding out for example in Mexico, there are so many different variables where when the bank receives a payment. That's why we started looking into different options to be able to retry these payments.

Peter Mollins: Okay. Terrific. And I imagine in an app like Rappi, there must be a lot of repeat customers. You have people that are using it many times. So then for them, or I guess for you, for losing a customer for one transaction isn't just one lost transaction I imagine. It's that whole lifetime.

Juan Ortega: Yeah. And also we have customers that they had made I don't know fifty or sometimes up to eighty orders. And all of the transactions were accepted and then from one day to another one, they started getting declined. So for them, it was even more frustrating and say “Hey, I have used my card eighty times in Rappi, what is going on”? They call the bank and the bank doesn't know and it just mess up the whole experience and in their mind, Rappi failed. Rappi didn't work. It's not that their bank declined the transactions. So, we are the face in what's going on in payments and we have to make sure every payment is accepted when it can be accepted basically.

Peter Mollins: Terrific. Now you'd mentioned about Mexico and Colombia. Can you tell me just for context for those that are not familiar with Rappi, what markets does Rappi cover?

Juan Ortega: So we are now operating in nine different countries. So we are in Mexico, Brazil, Colombia, Costa Rica, Ecuador, Peru, Chile, Argentina and Uruguay.

Peter Mollins: Okay. Great. And those are, I mean those are just such rapidly growing markets. It must be very exciting spaces to be in.

Juan Ortega: Yeah. And I think that in the payments space, it's super interesting because it's nine different countries that operate credit cards and debit cards in their own way. So basically everything that we do up in one country we can't really use in the next because they are different gateways, there are different payment processors. The way they operate the cards are different. So for example in Mexico, we use kind of like a two-step system where we authorize the transaction in the beginning and then we capture at the end. That's something that for example in Colombia we cannot do. So in local networks here only accept a purchase and a full refund. So we can't even do a partial refund which makes the operation for us super complicated.

Juan Ortega: So, we developed a super flexible system that let us choose what kind of operations and how we're going to charge the cards depending on the type of orders. So, it becomes super complicated at times.

Peter Mollins: Right. Yeah I imagine. Now in Latin America, because you're dealing with those nine different markets, are there other aspects... that, like if a new merchant were to come to you and just say “I'm going into Latin America”, are there other challenges that you would advise them to look into?

Juan Ortega: Yeah. So I think, so the biggest challenge that they're going to have there, like two main challenges. Actually, there are three. So number one is acceptance. So it varies a lot by country. For example, Mexico is sort of the biggest offenders where banks are really picky and they are... they decide whether they're going to accept the transaction or not. So you may have one day 50% acceptance rate and then next day you're going to have 90%. You didn't change anything but the bank just moved their rules. And you have really big banks that will be 60% of your traffic and they change something that will move your acceptance all over the place.

Juan Ortega: So number one is acceptance. I think for us what has been super helpful is the add retry logic to your transactions. So all them soft declines, so the 05 Do Not Honor, well we [inaudible 00:08:34] that when we retried it in two, three, up to four different gateways and what we see is that we see an increment up to 20% acceptance just retrying the transactions. So, looking at different gateways in each market I think is key. You shouldn't have one. You should have at least two or more.

Juan Ortega: Number two is chargebacks. So fraud is huge in Latin America, Mexico, Brazil, Uruguay is one of the countries with the highest rates of card[inaudible 00:08:59]fraud and you have to be really careful. It is something that happens and you didn't know it happened, and thirty days later you are just faced with thousands and hundred of thousands of dollars in chargebacks and you didn't know what was going on. The problem is that that is not only an... you not only have to pay the fines, you not only have to pay the chargebacks but it also affects your acceptance. So if you're still having that huge amount of chargebacks next month, your acceptance is going to be really low while banks are being really picky on your [inaudible 00:09:35] and on your different ways you process cards.

Juan Ortega: So we are now facing this new [inaudible 00:09:40] the 3D Secure 2.0 because the 1.0 didn't really work. It didn't work... it worked for web a little bit. It didn't work really well in Latin America because many insurers didn't support it. So for example, their challenge was call your bank. So if you are using for example the biggest bank in Colombia and you send them to a 3D 1.0 flow, what's going to happen is that they tell you to call your bank and you're going to have to call your bank and stay in line for an hour just to honor the purchase. So if you're [inaudible 00:10:10]buying a hamburger you're not going to do that. You're just going to hang up and walk to the store and do it.

Peter Mollins: Right.

Juan Ortega: Fighting [inaudible 00:10:16]is super hard. I think, let's see how 3D Secured 2.0 is here. I think it's really promising. We have to see if it actually [inaudible 00:10:27]if it's actually is what they're promising. But using different tools, I see if signs and different companies are really helpful so for the second one. And then the third one, is that you have to be aware of the alternative payment methods.

Juan Ortega: So, countries like for example Brazil, huge part of the market use... they all have bank accounts but they don't have credit cards. This is changing and is going to change a lot with 3DS 2.0 but up to a couple of months ago, you weren't able to process debit cards payment online. So only a few merchants had that opportunity. But what the banks are doing is that they are letting the merchants process all the debit cards which is a huge [inaudible 00:11:15]. If you take a look at the percentage of [inaudible 00:11:18] issued in Brazil are debit or credit, debit is huge and if you don't accept it, you're missing out.

Juan Ortega: So, they're accepting debit with 3D Secured it's a new [inaudible 00:11:27] but then there is alternative to that and it's called Buneto. Buneto is like a bank transfer. So if you go into a market and you don't have these alternative payment methods, you're going to be losing out in a lot of potential customers. So that's another important thing that I think merchants have to take into account when they look up payments.

Peter Mollins: Okay great. Now, really interesting discussion there, fraud and the chargebacks, because it is a balancing act isn't it where you're wanting to have that great customer experience and you're trying to minimize fraud. Is there, is there just, is that just a balancing act that you and your teams have to work through or how do you think about that?

Juan Ortega: Yeah so I think that's... so you want to be a zero false negative and a zero false positive where basically you're letting all the good customers through and you're stopping all the bad customers in and your chargeback rate is zero. So if you ask a CEO and he say,“So you need to be at 0% false negative and 0% false positive”, unfortunately it's almost impossible to have those two at zero. So you as a [inaudible 00:12:34] you have to make a decision. You have to say "Hey, do I want to have 0% false negative and basically don't pay for any chargebacks but I want to have an acceptance of 60%”. So basically, you're declining 40% of your customers. And then those 40%, you're going to have people who are good customers which are false positive. And that's a decision that you have to make with the business. And it's hard, because you have to balance that. You say “Okay. I'm going to maybe increase my rules a little bit and I know I'm going to have false positives and I'm going to then have a team looking at those false positive and trying to call these customers and trying to come back again”.

Juan Ortega: Or [inaudible 00:13:16] “ Let's open up the rules and let's have more false negatives and I'm going to end up in chargebacks, but at least I know I'm not blocking my good customers because the lifetime value of my customers is huge and if I stop one, I'm missing out more than just paying a couple of chargebacks”.

Peter Mollins: Right.

Juan Ortega: And it's a balancing act and it's something that takes time. So we use a lot of merchant learning models and unfortunately it takes a lot of time to kind of find how these people are operating. And the crazy part is that you fix a problem today and in two weeks they find a new way of doing it. So let me give you an example. We [inaudible 00:13:58]there is actually a really fascinating [inaudible 00:14:00] in this part of the region because we at the beginning saw super simple patterns. So they were using the same device, they were using the same IP. They were buying the same things. And as we start blocking these things, they started becoming more sophisticated.

Juan Ortega: So[crosstalk 00:14:19] we have a guy, we had identified this guy and said “Okay, this guy is fraudulent” and we're able to map out, I don't know, let's say five hundred accounts tied to him. And what we see is that are different IP's, different info numbers, different emails. So all these new fraudsters are finding ways to becoming super sophisticated and you're able to use that. So, we have to dig deep in the application where have it as DK's that basically data carrier of information. So, they take information that's in a number, they take information on the GPS, the position, the altitude or if the phone is connected or disconnected, if the phone is in WIFI or is in a server network. And what we see is that all these different points that add up to a hundred different points are actually helping us catch these guys that are actually smarter than us.

Juan Ortega: But anything you do is started playing the cat and the mouse. You fix a problem and they open another one. So you think you solve the problem and you're super happy that you fix everything and then two weeks later they are doing fraud in a different way.

Peter Mollins: Right, right. That makes sense. Now you'd mention 3DS2 as an approach to it. So really interesting because I think a lot of folks tend to think about 3DS2 as just simply something for Europe but it sounds like the applications of it aren't limited to Europe at all.

Juan Ortega: Yeah. No... so okay, so Europe was the first actually region to come out with these really strict rules to stop credit card fraud. And I think it's great that these initiatives are happening and are happening in ways where it's actually going to benefit the consumer because no one wants to get their credit card cloned and used somewhere else. So, for consumer it's great.

Juan Ortega: So, well what's happening Latin. So Mexico right now in the next month, the commission of [inaudible 00:16:11] are getting together and they want to use something similar to what happened in Europe. Brazil... the [inaudible 00:16:19]is not moving but banks are opening up [inaudible 00:16:22]like [inaudible 00:16:23] and [inaudible 00:16:24]that weren't supported in the online world using this kind of authentication.

Juan Ortega: And in Colombia, we are pushing to having this because we want to find ways to authenticate people. We have this kind of like clearer way to do it and what we do is that we charge a random amount to a credit card. When they get the charge, they can input it. So basically you say, "Hey, if this person has access to a card and they can set a monthly charge, basically they should be a cardholder". But the problem is that banks here are using technology of the 1980's so when you make a purchase, you're not able to see any your statement for three days. So, if you're going out buy a hamburger and we think you're kind of fraudulent, we send you to verification, you're not going to be able to get your hamburger for three days and obviously in three days you're going to forget about it and you're going to leave.

Juan Ortega: So, finding ways to authenticate is extremely helpful for us because it help us kind of clean those false positive and eliminate the false negatives because we can be more aggressive on the rules we apply and basically say, telling customers "Hey, you want to do this then you're going to go through authentication process". For example, Chile, they have this... so Chile they have only one network that process cards is called Transbank and it's a monopoly in the country which has many benefits and it has many, many drawbacks. And I hate it. I think that having a monopoly it just doesn't benefit merchants but they do something that is really cool.

Juan Ortega: They have a way to authenticate user called Webpay Plus or Web OneClick [inaudible 00:17:57] where basically if you want a debit card, you go through an authentication process with your bank and then that gives you an authentication to a card. So when you go through a process, first of all, your acceptance is amazing because they're [inaudible 00:18:12]bypass all the [inaudible 00:18:15]rules. And second of all, you know that a user is... the one, the person using that credit card had to go through a really strict verification process with their bank. And basically, there no longer be fraud which is something that really is to wants to accomplish. They want to basically use a lot of information, a lot of data to decide whether the cardholder is making the purchase or not and if they're not sure, they're going to send you to the challenge.

Peter Mollins: Mm-hmm (affirmative). Okay great. Now, you'd mentioned one of the, one of your suggestions for merchants that are coming into Latin America is to work with multiple gateways. That seem... we seem to see that a lot as you can imagine with Spreedly looking to minimize complexity for customers to integrating with multiple gateways. So, really good advice there.

Juan Ortega: Yeah. You know, we work in many different countries and we operate with fifteen different gateways and we love it. We... it's so flexible in how we build a system in our side that is simple but complex at the same time that what basically let us use route transaction phonetically by [inaudible 00:19:25]by type of purchase, by country of issuance and all these different metrics.

Juan Ortega: There is no silver bullet on increasing acceptance. You have so many factors where you have to plug and play different things. You have to say, "Hey, this gateway is doing really well in Visa" but maybe it is one that's doing really well in MasterCard. And maybe a fee is here but in Visa, but here in MasterCard, so when you put all these things to account, cost, acceptance, how you chargeback, you basically...we basically build a routing that will optimize the business. It could be with two gateways, sometimes we use five different gateways. And well, one too, is that when people pay, they don't know these things are happening at the bank. They're just getting their payment accepted which before they couldn't. So, it's great.

Peter Mollins: Yeah, so just giving that again, coming back to that great customer experience and getting you closer to that maximum success rate. Yeah, I think for us, we always talk about flexibility and the importance of building flexibility into your payment stack. It sounded... I definitely know that's your approach and certainly sounds like it.

Juan Ortega: Yeah, and you know what, and another thing that you have also, like we get approached by gateways all the time and on my PSP's. And they say "Hey, we have this thing, it's amazing. You have to try it" and before, we couldn't. Before it was hey, if we want to trust them, we have to do it this whole change, transfer [inaudible 00:20:43]it's going to take so long that the end, we say "Hey. You know, you sound amazing but unfortunately so much [inaudible 00:20:48]". Today, when a gateway comes to me, I say "Hey, can you at least give me at the APA keys[inaudible 00:20:54] and I will send you 1% traffic and we'll see how you guys are doing". And something really helpful for different gateways, that we have gateways that the first day you see huge increase in acceptance and we say, "Okay. You got 1%. Let me give you 2%, let me give you 5% and right now [inaudible 00:21:09]50% of the traffic".

Juan Ortega: So, this is helpful for both of us, for us as merchants and also PSP to [inaudible 00:21:18] to ten different gateways but because right now if you have three different PSP's and you can try them the three side by side, pricing, chargebacks, everything, you're going to make a better decision than when you have to make it without trying it.

Juan Ortega: And if you're a PCI like many merchants are, even in your PCI just doing the connection, just doing the test, just doing all these things takes so long that when you finish, if it doesn't work, there is no way you're going to go back because you wasted so much time doing it that you now say "Okay. Whatever. This isn't what they promised, but it's working so let's deal with it".

Juan Ortega: With Spreedly, we can play around and we can say, "Hey, your guys are not performing" and cut the traffic right away. So you have the advantage.

Peter Mollins: I think that's a great perspective because even for gateways, it allows, it allows the gateways that know that there...you have confidence in their abilities, confidence in the functionality. It allows them to rise to the top, right?

Juan Ortega: Yeah. Yeah.

Peter Mollins: Terrific. Well, before I let you go, I just want to say thank you so much for taking time. This has been a great conversation. One thing I did want to ask you about though is we just got back from Payments at Forum, big conference on payments and they were talking about some of the innovation that Rappi's doing around payments and for individual payments and just curious if you have, if there's anything else, anything else from a payments topic you'd like to mention that would be interesting for the listeners?

Juan Ortega: Yeah. So in Rappi around a year ago, we start this new line of business that is called RappiPay. And in RappiPay, we want to be the biggest bank in the region. The idea was first to do what Venmo has in the U.S. and they do really well. And what we saw was that the opportunity was huge. So we started the secure payment system that were basically onboarding anyone that can accept payments online. But before, they didn't want to deal with credit cards because it took too long to get the money or was just too costly and we basically bring them a way to accept payments immediately electronically and they get the funds right away.

Juan Ortega: So we're working on that where we were issuing a debit card in all these different countries. And the idea is that today, for example in Mexico, 85% of transactions below $30 are [inaudible 00:23:42] cash. And this is done because most of the population are [inaudible 00:23:45] bank and they don't want to pay with debit cards because they are afraid of banks and different things. And what we want to do is we want to make it as easy as possible to open a bank account. And today in Mexico, you can open your account in three easy steps. You take a picture of your identification, you take a picture of yourself and that's the only thing you need to open an account.

Juan Ortega: Which, compared to a bank, you have to go, it takes hours to do it and people just don't want to hassle to that. So we want to make it simple to order a debit card that it is to order a hamburger. And right now, we are delivering thousands of cards in less than thirty minutes in Mexico city.

Peter Mollins: That's incredible. That is truly incredible. Well terrific. Juan this has been a real pleasure for me. I really enjoyed the conversation and definitely thank you for your time and we'll be having more Payments Dialogs coming up soon. But again, I want to say thank you to all the listeners. Thank you to Juan Ortega who is co-founder of Rappi and for his time and we'll be seeing you soon on another edition of Payments Dialog. So Juan again, thank you.

Juan Ortega: Right. Thank you.