With Payment Through WhatsApp, Cielo Goes Beyond Terminal War

RIO DE JANEIRO, BRAZIL – Brazil’s financial companies have acquired a strong player on Monday, June 15th. WhatsApp, a messaging app owned by Facebook, announced an option to pay directly through the App. Brazil will be the first country where the tool will be tested.

The first partner of the announced tool was Cielo, which had been negotiating with the US company for some time. The innovation led Cielo’s shares to skyrocket, since it could be a solution for the company that has been suffering in recent years with younger and more agile competitors.

Other buyers may join the partnership, which is not exclusive. “We’ve built an open model to welcome more partners in the future,” WhatsApp says in a statement. The Mastercard and Visa card groups are also partners and for the time being WhatsApp will accept cards from Bank of Brazil and Nubank as well as the Sicredi credit union.

The announcement has pushed the acquirer’s shares up over 20 percent throughout most of yesterday. At 2:30 PM, shares were up 25 percent to R$5.28. Although the appreciation is striking, the stock value had been dropping since the start of the year and is still 40 percent below its value earlier in the year. Last year, stocks in general lost 20 percent of their value.

Expectations coming from China

The reason for yesterday’s stock price hike is the potential to create a large market, believes Luis Sales, market analyst at Guide Investments. In China, the world’s most progressive market for digital payments, payment via messaging Apps is already common, and widely used. WeChat, a messaging App that also allows shopping, booking services, ordering a taxi, among other services, has 1.1 billion users and its parent company, Tencent, is one of the largest in the world, with a market value of US$541.9 billion.

The market the new WhatsApp tool will join, the card payment market in Brazil, currently handles over R$1.55 trillion, according to the Brazilian Retail and Consumer Society. These cards are connected to digital wallets, virtual stores, QR codes and a dozen terminals in physical retail.

“There’s a very high expectation regarding this feature,” Sales says. Unlike other payment methods, such as payment by QR code, used by iFood in restaurants and PicPay, WhatsApp is now widely used in Brazil. WhatsApp has 120 million active users per month in Brazil, according to the company. Brazil is the second largest market for the App in the world behind India with 400 million users. There are over 1 billion users in the world.

This gives Cielo a major advantage. In the terminal war, Cielo was present mainly among the big companies and did not have much presence in small and medium companies, restaurants and neighborhood trade. Other companies like PagSeguro and Stone have a stronger presence in this segment. Cielo launched simpler and more accessible machines and started selling the equipment two years ago, but still without success. “Cielo invested to gain market share, but for now these bets only created expenses, without results,” says Sales.

Now it is seeking to go beyond terminals. Cielo Pay was launched last year. It is an App that allows stores to sell products without using payment terminals, simply by generating a QR code on the cell phone, sending a link to pay by WhatsApp or by issuing a receipt. By partnering with Facebook for payment via WhatsApp, Cielo is a pioneer in such technology.

Although the outlook is positive, caution is required. “It’s still a pilot project and the results should take time to materialize,” Sales says. Cielo’s greatest challenge is more pressing: the coronavirus pandemic, which has forced businesses to close their doors for weeks and even months. This should be the main factor of impact on the results not only for Cielo but also for its competitors.

The search for payments

Cielo, controlled by Bank of Brazil and Bradesco, for a long time ruled the Brazilian terminal sector alongside Rede, Itaú, and Getnet by Santander, and in the past two years has gained strong competitors such as PagSeguro and Stone, as well as other fintechs and even retailers.

Among its competitors are Mercado Livre, owner of fintech Mercado Pago with more than 30 million users, and PicPay, which is growing during the novel coronavirus pandemic and has reached over 20 million users. Itaú also launched its digital wallet, the iti, B2W and Americanas control Ame Digital, Magalu controls Magalu Pay, and Movile owns Movile Pay, which is part of iFood, a meal delivery company. The list goes on.

Now, Whatsapp payment creates unprecedented competition for banks, finance companies or digital wallets.

In addition to the end user, the main stakeholders in WhatsApp technology should be the small and medium-seized businesses that the tangle of fintechs and large banks try to take over. It is a particularly necessary demand during the coronavirus pandemic, which has made a number of small businesses turn to online sales without a large structure to do so.

The WhatsApp payment service will be open to small companies using the so-called WhatsApp Business, the App’s corporate arm, and fees for businesses will stand at 3.99 percent. “The ability to easily sell on WhatsApp will help entrepreneurs adapt to the digital economy, support growth and financial rebound,” said Cidmar Stoffel, executive director of Products and Services at Sicredi Co-operative Bank, in a statement.

A report from UBS bank released after WhatsApp’s announcement points out that while buyer ecosystems and digital wallets should suffer with the new competitor, a number of companies already have payment links through WhatsApp – thereby not needing to use the platform’s direct service.

Thus, this type of service can continue to generate payment flow. A point for companies with a stronger ecosystem, such as Ame Digital and the Mercado Pago, according to UBS. “While WhatsApp offers offline risks for AME and the Mercado Pago, it also increases the overall adoption of Social Commerce, and consequently the size of the market,” wrote the bank’s analysts.

UBS classifies Stone, PagSeguro, Mercado Livre, and Cielo shares as “neutral” for purchase recommendations.

Threat to terminals?

However, the potential market twist that WhatsApp may cause is not necessarily a big surprise. The shift of large technology companies towards the financial services segment was already occurring. Facebook itself, which owns WhatsApp and Instagram, has been providing a payment tool through Facebook Messenger, the social media chat with the same name, for over three years in the United States.

Digital transactions also have an impact on the physical retail payment segment, as customers should avoid touching the payment terminals once the economy picks up. But Brazilians will still have to adapt to a format like the QR Code, even less widespread. In WhatsApp, its high market presence among Brazilians can be a strong competitor.

For Cielo, it can be either a relief or a new setback, amid a terminal war and the retail crisis caused by the pandemic.

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