Credit Cards - Brazil

HEADLINES

• The number of credit card transactions to increase by 10% in 2010

• New regulations bring down the VisaNet and Redecard duopoly in acquiring

• Transaction value to grow by 22% in 2010

• Itaú Unibanco remains in the leading position

• The number of credit card transactions is expected to grow by 118% during the forecast period

TRENDS

• New regulations from the Central Bank stipulate the end of contracts by which merchants are obligated to exclusively operate through Redecard or Visanet. Redecard does the acquiring for MasterCard while Visanet does so for Visa. Currently, Redecard and Visanet dominate the market leaving no room for other acquirers to enter or gain a foothold. From July 2010 merchants will be able to choose between different acquirers and to accept different credit cards besides MasterCard and Visa. In preparation for the new environment, Visanet changed its name to Cielo and plans to acquire merchants for MasterCard and American Express brands among others. Conversely, Redecard starts operating with Visa in July 2010.

• Credit cards growth continues to be stimulated by domestic consumption. In spite of the financial crisis, income gains were observed in 2009 along with increased consumer credit, including card lending. Income gains and rising employment are expected to continue, particularly among low income consumer groups. According to Associação Comercial de São Paulo (São Paulo Retail Association), there is still room for expanding family consumption among classes C, D and E (lower income segments). The market research institute Data Popular, specialising in lower income consumer groups, reports that for every 100 card users, 18 belong to upper income segments A and B, 60 are from class C and the remaining 22 from lower segments, D and E.

• Regional card brands benefit from a combination of market factors, namely: improved economic conditions among lower income consumers and new regulations from the Central Bank. As the adoption of credit cards becomes more widespread among lower income consumers, regional brands attempt to fill the gap left by large banks and go after consumer groups not targeted by the international brands, specifically, MasterCard and Visa. Previously, the typical card holder profile was higher income individuals living in large cities and adopting urban lifestyles. Not anymore. For example, the Oboé card, from Ceará, is accepted in approximately 3,000 merchants in the Fortaleza metropolitan area. Other brands like Sorocred, from Sorocaba in the state of São Paulo, surpassed one million card holders. Untapped lower income markets are located in small cities and are taking their first steps toward financial inclusion. Card brands catering to lower income groups tend to offer cards for free, without annual fees and with credit limits of around R$150. New regulation from the Central Bank stimulates competition and provides smaller, regional card brands with renewed opportunities.

• The number of commercial credit cards in circulation will increase by 16% in 2010. Although growth rates are expressive, the commercial cards’ base is small. In spite of commercial credit cards’ low popularity in Brazil, efforts are under way to increase their penetration, particularly among small firms. Banks like Santander, focus their credit card growth in the business sphere. Santander expects to grow its credit card business by 10% in 2010. In regard to small firms, the goal is to double the number of clients who will generate up to R$30 million within the first three years of the forecast period.

• Personal credit cards in circulation will increase by 8% in 2010 while the number of transactions will grow by 8.7%. Credit cards growth in recent years has been primarily centred on personal credit cards and family consumption.

COMPETITIVE LANDSCAPE

• The credit cards sector is dominated by the triumvirate Itaú Unibanco, Bradesco and Banco do Brasil. As growth opportunities materialize in classes C, D and E these three leading banks strive for improved market positions among lower income segments. In order to attract lower income consumers Itaú Unibanco strikes partnerships with retailers as a way to capture new customers at the point of purchase through the offer of co-branded cards. Itaú Unibanco has previously relied on the financing companies Taií and Fininvest; both with credit stores located in high traffic streets. These stores have been closed as a result of the bank’s decision to target low income customers through partnerships with retailers which are regarded by less affluent consumers, as more accessible institutions than banks.

• Bradesco, on the other hand, relies on physical presence. In addition to its 3,455 branches across Brazil, Bradesco attempts to reach lower income customers through 6,110 Banco Postal booths located inside post offices. Additionally, Bradesco has opened 1,300 micro service posts in Brazil’s hinterland. The strategy followed by Banco do Brasil includes promotional campaigns, prizes and sweep stakes as part of loyalty programmes. According to Banco do Brasil, 70% of the bank’s customer base are from social classes C and D.

• Regional cards brands also compete for low income customers within their influence area. For example, Avista credit card, from Espírito Santo, focuses its competitive strategy on low income segments. Avista offers credit cards free of charge which are accepted in 15,000 establishments, primarily drugstores and grocery retailers where low income consumers make 70% of their purchases, according to research conducted by the company. Avista does not operate through POS terminals and transactions are approved over the telephone or the internet. Most merchants perceive the R$50 monthly charge for the POS terminal as an excessive cost. Therefore, in order to acquire such establishments the telephone and the internet became viable alternatives.

• With the end of exclusivity rights from Redecard and Visanet (Cielo) other companies are targeting the acquiring business. Santander, for example, in partnership with the Brazilian processor GetNet now operates in acquiring for MasterCard, Visa and other regional card brands such as Sorocred and GoodCard. According to Santander, the idea is not to solely operate in the acquiring business but rather, to develop relationships between the bank and the commercial establishments looking to gain market share among businesses.

• Itau Unibanco announced a partnership with Redecard, controlled by Itau Unibanco, to operate the Hipercard brand which has 13 million cards in circulation. Through the partnership, Redecard consolidates a multi brand platform, after the end of its exclusivity contract with MasterCard and, expands to the Northeast and South regions where Hipercard has significant penetration. Currently, Hipercard has an exclusivity contract with Walmart and, as such, cannot be adopted by other grocery retailers. The contractual obligation with Walmart hinders Hipercard’s ability to expand nationally even with Redecard operating across the whole country.

• Redecard launched a nationwide advertising campaign in March 2010 aiming at merchants and hoping to reinforce the company’s attributes. The campaign expects to highlight Redecard’s technological expertise and to portray it as a multi-brand and multi-service company. So far, Redecard’s image has been closely linked to the MasterCard brand. Specialist publications from the financial cards industry carry print advertisements along with general reading high circulation magazines. The campaign is also on television and online.

• Banco Panamericano, from Grupo Silvio Santos, currently undertakes several initiatives in an attempt to increase its market participation. One such initiative includes the introduction of a co-branded credit card aimed at pet shops and pet megastores. The bank’s positioning strategy aims to increase its presence in every popular venue. As such, pet shops and pet megastores constitute distribution channels where different consumer segments make their purchases, including upper income segments, middle income groups as well as less affluent segments . The new product called Cartão Pet Shop (Pet Shop Card) can be issued on site, at the pet shop and it can be printed with a picture of the cardholder and their pet on it. Credit limits are pre- approved and benefits include loyalty programs and discounts in more than 50,000 affiliated merchants.

PROSPECTS

• Following the lead from Santander, other companies are expected to enter the acquiring business. Large banks and large retailers are the most probable candidates given the scale of the necessary investments to enter the acquiring business, dominated by Redecard and Cielo which hold more than one million establishments each. Banco Panamericano from Grupo Silvio Santos, announced its intention to operate co-branded cards in partnership with grocery retailers aiming, primarily, at lower income segments. With R$55 million in investments, Banco Panamericano plans to acquire 100 grocery retailers during its first year in the business.

• As competition intensifies under the new rules, it is expected that retailers will benefit from lower costs and better customer service when dealing with card companies. Market specialists anticipate that card companies will charge lower fees and improve services to merchants. It is expected that fees charged over each sales transaction will drop by 15%. Currently, sales transaction fees constitute, on average, 5% of the sale value. Additionally the rental payment for POS terminals, between R$55 and R$85 is also expected to fall. Merchants are optimistic that competition will translate into better services, such as newer POS equipment and more expedite maintenance services.

• It is expected that credit card growth will continue to be fuelled by lower income segments. In spite of C, D and E class consumers’ relatively low ticket value, market volume is regarded as phenomenal by industry specialists. However, future growth may face a couple of obstacles. So far, access to card lending has been fast and easy for low income consumers, mostly, through retailers. However, as lower income consumers acquire more financial know-how, it can be expected that they will look for less expensive credit through other lending sources besides credit cards. According to the trade association Anefac, credit cards present the highest interest rates, with APRs of 238.3%, whereas banks, for instance, offer consumer credit alternatives for 33.7% per year.

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