There is a huge transformation ahead in Latin America's payment industry. In the past two years, new methods have emerged as the region's favorite, granting access to millions of people to the financial system and digital commerce. The traditionally excluded portion of the population has been rapidly declining due to the rapid growth of fintech companies. We are witnessing a quantum leap from a historically cash-based society to digital payments without passing through banks. The digitization of payments will provide an unprecedented opportunity to bring about disruptive changes that will allow companies to innovate previous-century business models.
Before the pandemic, over 60% of the population were unbanked and paying for goods and services with cash and or prepaid cards; due to the lockdown, about 20% of the people obtained a wallet to get an electronic payment method to enable them to make e-commerce. However, consumers are still primarily paying in FIAT today due to utility companies and merchants' lack of crypto adoption. My Wallet Guru will enable companies to accept digital currency payments.
Today's payment systems are clunky, expensive, and exclusive as they cater only to the banked portion of the population. Credit or debit card transactions are costly; they typically charge anywhere from 1.29 to 3.5% plus a $0.10 processing fee, limiting how merchants market their products. Traditional payment systems are so inefficient that service providers opt for setting a fixed monthly fee regardless of what their clients consume. Prepaid cards are even more expensive for consumers, utility companies, and merchants. Consumers typically pay higher rates than the regular postpaid subscriber rate plus recurring recharge fees.
On the other hand, utility companies and merchants are subject to high fees, deductions, and commissions from prepaid cards by vendors, plus fees and sometimes even interest. Under this context, marketing services in Latin America can be challenging as a significant portion of the population has a low purchasing power. Both conditions considerably limit consumers' ability to acquire many services and challenge businesses to grow.
Paystreme will provide a quantum leap in efficiency, functionality, and inclusion in payment systems. It will thus offer disruptive opportunities to market services in Latin America and beyond. By building on Stellar, Paystreme will offer the fastest, most scalable, and most cost-effective alternative for usage-based micropayment solutions, capable of settling transactions as small as one second of video in any digital or fiat currency. This innovative payment solution will provide a real-world use case that will accelerate digital currency adoption in Latin America and beyond.
Target Market
Wallet Guru's initial strategy will target medium to large-sized cell phone carriers, internet service providers, pay-TV, and SVOD providers in Argentina, Brazil, Chile, Colombia, and Mexico to reach a critical mass quickly. We chose these five countries as they account for approximately 75% of the region's subscribers and sales. According to a 2020 study from Dataxis, these industries have a combined aggregate user base of 618 million and an approximate annual revenue of USD 131 billion in these five countries alone. They are all still in their growth stage, except for Paid-TV, which is declining by 1-3% annually. The broadband, SVOD (streaming video on demand), and mobile industries are growing at 5%, 11%, and 1%, respectively. The largest market by far is the phone carrier business, accounting for 77% of the total revenue, followed by broadband with 13.4%, pay-TV with 6.3%, and SVOD with 3.3%. The size of each individual company can vary dramatically, having anywhere from 1.5M to 165M subscribers. We aim to reach critical mass quickly by targeting these types of companies.
Although our target market operates in different industries, they all have a fundamental similarity: they struggle with payments. For example, most subscribers are prepaid in all five countries in the phone carrier industry. According to Statista, Mexico leads the group with a whopping 83.5% of prepaid customers, followed by Colombia with 78.8%. Chile has the lowest prepaid user base with 57.1%, followed by Brazil with 57.8%. Thus, the phone carrier market in these five countries alone has to collect $67.7 billion a year in prepaid users since their customers are either unbanked or underbanked and cannot afford a credit or debit card. Having such a sizeable prepaid customer costs billions of dollars a year in subscriber churn and customer acquisition.
This data suggests a huge opportunity for more efficient payment systems in LatAm. We estimate that the region has 365 million prepaid subscribers in these five industries alone who struggle with two things in common: gaining access to traditional payment rails and having low purchasing power. Paystreme addresses these critical issues as users will no longer need bank accounts to prepay upfront for services; rather, they will pay from their smartphones in real-time for what they need on demand.
Revenue model and Pricing Strategy
Our revenue model and pricing strategy are simple: Guru and Paystreme will be free for consumers and cost 1% - 1.5% for service providers. We will grow our business quickly and obtain economies of scale by offering more functionality than traditional payment rails at more competitive rates for utility companies.
We plan to allow third-party wallets to integrate via an API at no cost onto Paystreme to achieve strong network effects quickly. The added functionality of Paystreme will incentivize third-party wallets to integrate. This feature opens up the possibility of allowing utility companies to launch their wallets and enter LatAm's exciting fintech market.
Sales Forecast
We constructed an 8-year financial projection with P&L, Balance Sheet, and Cash Flow statements. However, given the early stage of our company and the volatile nature of the LATAM market, we will use the first three as content for this application. We based our key assumptions on market demographics from Kagan and Dataxis; market intelligence providers specialized in the Worldwide TV, Telecom, Media, and Entertainment markets in Europe, Latam, and Africa.
Our revenue estimates are very conservative since our model assumes low penetration levels throughout the 3-year forecast with gradual increments as our distribution agreements and marketing co-op efforts roll out. The maximum penetration level we used was 1% of the market for years 1 and 2, and 2% of the market, for the last six months in year 3. The model assumes that we will be penetrating Argentina by month 3, Brasil by month 4, Colombia and Mexico by month 5, Mexico by month 6, and other smaller countries in Central and South America by month 12. The market penetration percentage of the total market we used was 1% for the first five countries and 0.5% for the smaller countries. Using these assumptions, we obtained revenues of $168k, $957k, and $1.7M for the first three years, respectively.
Financial Plan
Our extensive 8-year financial plan seems very promising despite its conservative sales assumptions. We estimate that the company will require an initial investment of $300k to fund operations and software development. The company's founders will contribute $200k in equity and finance the remaining $100k through a $50k bank loan and a $50k grant. We will have enough cash to operate with this financing until we become cash flow positive in year 2.
Our capital expenditures will total 120K for the first year in software development and 75K and 50k for the second and third years. We intend to keep the company very lean during this period. Thus, our SG&A costs are projected to be $253k, $381k, and $523k for the first three years.
Our P&L looks very promising for our Net Income ($183k) for year 1 and $91k and $310k for the following two years. Our total expenses are $353K, $784K, and $1.2M, giving us (108%), 15%, and 28% operating margins. As mentioned previously, sales are $170k, $928, and $1.7M.
Our balance sheet looks healthy: current and net fixed assets steadily grow from $111k in year one to $503k in year three, while total liabilities decrease from $48k to $38k in year 3. Total equity increases from $63k in the first year to 465K in year 3. We would be happy to share our extensive 8-year financial plan that includes P&L, Balance Sheet, and Cash Flow projections if you so require.
Industry and Market Research
The mobile phone carrier, ISP, pay-TV, and VSOD markets are growing in LatAm and beyond. They have an aggregate user base of 815 million and an approximate annual revenue of USD 174 billion in the region. They are all still in their growth stage, except for Paid-TV, which is declining by 1-3% annually. The broadband, SVOD, and mobile industries are approximately growing at 5%, 11%, and 1%, respectively.
The industries are expected to keep benefiting from the rapid development of mobile devices. Households have chosen to disconnect landlines to cut costs, suggesting that consumers no longer view mobile device purchases as discretionary. According to the World Bank, smartphone penetration reached over 100% in some markets, such as Colombia and Peru, while only 46% and 43% of the population have a bank account in these countries.
With the proliferation of smartphone use, the region has also been entering an exciting moment in the payment sector over the last two years: a considerable part of the population has adopted new payment methods. They are becoming increasingly digital (even in a region where cash is still king), bringing consumers to e-commerce, video, music streaming platforms, and other previously unavailable services. Digital wallets, for example, have outpaced cash-based payments in LatAm's e-commerce. In 2021, cash-based payments totaled 9%, down from 11%, while digital wallets accounted for 11% of payments.
The overall market conditions seem ideal for Wallet Guru's digital payment solutions. The large target market size continues to grow, yet it struggles with high subscriber churn and customer acquisition costs caused by antiquated previous-century payments. At the same time, the population has shown a remarkable openness to adopting new forms of payments, making the market conditions ripe for disruption.
Operations
Initially, we will have a remote operation without an on-site facility to optimize operating costs and efficiency. The required equipment would be computers with Internet connections with software tools to follow up on customer requests and access to the AWS environment. The operational team comprises four people, the Operations Manager, and three customer support staff. As the number of utility companies under our service increases, staff will be added to the customer support department. We will outsource our software development to Blue Guava, which was the company responsible for developing the HBO Go streaming platform in Europe, Asia and Latin America (in 50 different countries).
The application uses AWS as a cloud-based running environment and will have a microservices architecture, one of the modern and trending approaches in the backend ecosystem world. It provides scalability, fault isolation, technology agnostic, data security, easier deployment, and resilient application. We identified four different participants from the architectural perspective, which are: the utility company that provides ser information, the crypto engine supplied by the white label digital payment gateway, and our payment platform, which acts as the middleman between all parts and hides the complexity of the crypto and fiat transactions.
The installation, maintenance, and updating of the infrastructure are unnecessary because 100% of the infrastructure is a serverless solution in AWS. The platform could scale up according to the incoming traffic and scale down when the customers are not using the service; Iaas (Infrastructure as a Service) will deploy resources as needed in real-time.
These features give us advantages in:
- Reducing the costs of personnel dedicated to maintenance
- Testing and implementation of new solutions
- Backup and Disaster Recovery
- Time response to changes in the industry
- Analyzing Big Data
Our design is entirely cloud-based on the infrastructure side, allowing us to adjust on-demand and minimize the support personnel costs.
The vendors for the required services would be:
1.- Circle
We selected Circle as our stablecoin provider and anchor for USD-based transactions. Paystreme and the Guru platform will settle transactions from any digital currency onto USDC when possible and then onto FIAT. It will allow our clients to eliminate the price volatility risk of traditional cryptocurrencies. Also, by building on Stellar, we will be able to replace the USDC token with a local currency stable coin with relative ease.
2.- Bank of America
BoA will be the financial institution selected to handle FIAT transfers. Having a prestigious financial institution supporting the FIAT side of the operations will transmit security to potential customers in LatAm.
3.- Coinqvest
A white label digital currency company used to carry out transactions within the Stellar network. The application communicates via API with Coinqvest, and self-hosted checkouts live on our servers, giving us complete control over branding and the entire payment process.
4.- AWS
The leading cloud platform provider where our application will be running. We will contract the service in a pay-per-use fashion.
5.-Blue Guava
Outsourcing company responsible for the development and implementation of the platform. As a relevant experience, we can mention that they were responsible for developing and deploying HBO GO on several continents, supporting over 2 million concurring users.
Threats and opportunities
We developed a SWOT analysis to evaluate our competitive position and to develop strategic planning:
Strengths:
- The company has a strong management team with ample experience operating businesses in the region.
- The team has proven experience developing robust, scalable solutions capable of operating in multiple continents and supporting millions of concurring users.
- The company has proven experience integrating solutions into old legacy billing systems in the region.
- The team has proven experience dealing with the complex regulatory framework required to operate a fintech in the United States of America.
- The company is passionate about creating mass adoption of digital currencies to create a more inclusive world and provide equal opportunities for all.
Weaknesses:
- We have limited resources to fund software development and operations.
- The company has limited experience with the intricacies of payment solutions for utility companies. We are in the process of adding a payments consultant to the team to bridge this gap.
- Telco billing systems are not prepared to integrate with sophisticated payment systems as the one described previously.
Opportunities:
- We are in a transformational moment in Latin America with the mass adoption of smartphones and alternative payment methods: digital currency payments promote financial inclusion without necessarily relying on a banking relationship. In many countries, they are easier and faster than a banking option.
- There are approximately 365 million prepaid customers in the four industries we targeted who have little or no access to traditional payment rails, accounting for over $79 billion of revenue a year. Payments innovations like Paystreme will provide utility companies unprecedented opportunities to adapt their business models to local conditions.
- Local currency depreciation against the dollar provides a strong incentive for users to hold digital currencies and utility companies to promote digital currency payments. They have lower transaction fees, are faster, and can be easily converted to more stable alternatives.
- We anticipate consolidation in fintech by large banks and local players in the next couple of years, which will provide an excellent growth opportunity for Wallet Guru.
Threats:
- Regulation is one of the greatest threats to the business. Local governments have not regulated fintech and will likely begin to do so sooner than later. However, given the benefits that financial inclusion provides to society through increased economic activity and taxation, we believe that regulation will be favorable for the industry.
- Due to price volatility and lack of understanding, part of the general population does not trust crypto and digital currencies, which might be an obstacle to mass adoption.
- High transaction fees of some blockchains might give users negative experiences when paying with digital currencies.
- A significant threat is that Stellar could fail to become the blockchain of choice for CBDCs in the region, hindering our growth and adoption objectives.
Competition
As we mentioned previously, the payments market has been in a transformational moment. The population adopted alternative payment methods to purchase goods and services during lockdowns. These payment methods are led by fintech companies and, in one case, by the Brazilian government. However, none of these initiatives are targeting large utility companies, and to our knowledge, none are working on a project with streaming payment capabilities. For the sake of our analysis, we will briefly describe them:
Pix in Brazil
The Brazilian instant payment system was the payment method with the highest growth rate in LatAm's e-commerce. It has been considered by many experts a revolution as it was used by half of the population only 11 months after launch in late 2020. We believe it serves as an example of the openness the population has to use new, free, simple, real-time payment methods. This payment alternative is oriented toward real-time payments but does not support digital currencies and offers the level of functionality provided by Paystreme.
Mercado Pago
Launched in 2003, the company is the market leader and offers payment processing and gateway services to mobile payment processing and credit cards. It has catered its solutions to retail payments by offering QR code payments at points of sale. Their fees can vary depending on their service and range from 6.39% for credit cards to as low as 0.8% when using QR codes and their wallet. Theis business model is a closed-loop system that requires merchants and consumers to use the same platform in local currency and does not support digital currencies. Local currency based payment systems face constant devaluations vs. stronger currencies like the USD, which inevitably leads to losing the purchasing power of consumers.
Other Stablecoin providers: Airtm and Reserve
They are both US-pegged stable-coin providers focusing on LatAm catering to peer-to-peer payments. They have made some progress in growing their closed ecosystems. They do not, however, provide scalable payment processing solutions for businesses.
Marketing and sales
We will divide our marketing and sales campaign into two stages. We will focus our initial efforts on utility companies. Our marketing intentions to target utility companies in this stage will allow us to gain critical mass in a short time. They will eventually allow us to expand to other industries. After gaining traction, we will implement the second stage of our strategy, which will consist of strong marketing and sales campaigns to a broader industry range and even direct-to-consumers targeting.
Some key and effective marketing tactics will consist of but are not limited to:
- Co-op campaigns with utility companies
- Online Marketing
- Social Media Optimization
- Promotional Codes
- Engaging with Press and Industry Influencers
- Co-op marketing initiatives with utility companies to promote the use of the platform
Marketing will be a key and prominent component in driving sales and creating brand awareness. As an international business with a global customer base, we intend to strategically use funds to support carrying out marketing strategies worldwide.
Relationships
Wallet Guru's Management has vast experience operating businesses of all sizes in the region for decades. Our long trajectory has allowed us to establish direct relationships with many of the targeted utility companies' decision-makers, enabling us to fast-track our marketing and sales processes.
