For Citi, HSBC, Scotiabank, BBVA and Santander, the Latin American cards market represents a major opportunity. They are keen to tap growing demand for credit cards among the regions middle-class consumers. Robin Arnfield reports
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For multinational banks, the Latin American credit cards business is strategically important, says Ali Raza, executive vice president at US-based consultancy Speer & Associates. Their Latin American cards operations are very profitable for them in terms of fees, interest charges, and the third-party insurance products they sell to cardholders. Also, issuing credit cards helps multinationals promote their brand in the region. Credit cards offer a more effective way to carry out lifestyle marketing to different consumer segments than current accounts or savings accounts do.
Andreas Suma, senior director, Latin America at US-based cards analytics firm FICO, says multinationals face regional competition from major domestic Brazilian banks such as Itaú Unibanco. Itaú has cards operations in Argentina, Chile, Paraguay and Uruguay, Suma says. It also owns start-up Mexican credit card issuer Itaucard Mexico (formerly called Tarjetas Unisoluciones).
Segmentation
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By GlobalDataFranklin Santarelli, Fitch Ratings managing director, Latin American financial institutions, says multinational credit card issuers focus on higher-income segments in Latin America than local issuers do. In Mexico, Citis Banamex subsidiary and BBVA Bancomer target the A, B and C+ segments, he says.
Specialist lenders such as Banco Azteca offer credit cards to low-income consumers in Mexico. In Brazil, Santander offers credit cards to the A, B and C+ segments, while HSBC targets A, B, C and C-.
In Brazil, there has been growth in credit card issuing not just to affluent Brazilian consumers, but to the countrys new middle-class, Santarelli says. In recent years, some 40 million Brazilian consumers have joined the middle-class and entered the banking system. Mexico has also seen significant growth in low-income consumers migrating to the middle-class.
Brazilian banks offer new middle-class consumers credit cards with low limits, Santarelli says. But getting a credit card may not be the first priority for the newly-banked, as they may prefer instalment loans repaid from their salaries.
In Latin America, multinationals prefer to issue credit cards as part of a package of products they sell to regular banking customers, such as mortgages and loans, Santarelli says. They realise the new middle-class represents a pool of customers who will eventually become more affluent and have a greater demand for banking products such as credit cards.
Several multinationals are now prospecting within the emerging middle-class, says Raza. The next big credit card growth wave will come from this group, as the higher-income segments get saturated.
Regulators
Raza warns that regulatory changes may curb the profitability of multinationals Latin American credit card portfolios. By European or US standards, the fees and interest rates charged by Latin American issuers are very high (refers to domestic issuers and multinationals), he says. Latin American regulators are getting concerned about excessive fees and interest rates, and theres also concern that consumers may be getting over-extended on their credit cards.
In 2010, Mexican and Brazilian regulators imposed curbs on the fees that credit card issuers can charge their customers. In July 2011, the federal prosecutors office in Rio de Janeiro filed civil charges against HSBC Brasil, Banco Santander Brasil and Itaú, seeking compensation of BRL 1bn ($623m) for what the prosecutor alleged were illegal fees charged to customers from 2008 to 2010. The amount includes interest, penalties and the original fees, which covered credit card charges as well as other banking fees, Bloomberg reported.
Another challenge to multinationals credit card portfolio profitability is low transaction volumes. At a high level, there are 1.251.5 transactions per credit card per month in Latin America, compared to 3.0-3.25 in Canada and Europe, and Latin American balances are lower, says Raza. This indicates a tremendous card activation and usage opportunity in Latin America, while highlighting the need for issuers to compete with cash. But the challenge for issuers is to balance aggressive expansion of their credit card lending with adherence to their risk management guidelines.
Platforms
A trend FICO has observed is that multinationals are putting their various Latin American cards operations on a single IT platform which has common standards and practices across the region. Citi, BBVA, Scotiabank and HSBC have all moved to regional platforms for their cards operations in Latin America, says Suma.
Running their Latin American cards businesses on a global or regional platform provides multinationals with much-needed capacity for scaling up, says Raza. It also allows them to take marketing, fraud management and technology expertise theyve acquired in other markets and apply this knowhow in Latin America. They can deploy more robust and innovative technology and better analytics capability to compete with domestic issuers.
Raza admits that domestic Latin American banks are catching up with the multinationals in terms of cards management technology, but stresses that it is particularly in marketing that multinationals have the edge over domestic banks. Most multinationals have co-branded card portfolios, for example with airlines, such as the AAdvantage cards that Citi issues with American Airlines around the world, says Raza.
For a major airline or for an oil company such as Exxon, a partnership with a multinational bank is a good way to get its co-branded cards into multiple Latin American markets. HSBC can offer co-branded cards with British Airways in Latin America more effectively than a local issuer. Theres also the aspirational brand value of cards issued by North American or European banks, and Latin Americans like brands. Also, many Latin Americans have a strong affinity with Spain, which gives Santander and BBVA an advantage.
For high-end cardholders, multinationals can offer attractive rewards programmes. Citi or Scotiabank, for example, can offer a very strategic regional airport lounge programme, which a local bank may find hard to achieve, Raza says. In Mexico City, Citi has an airport lounge reserved solely for its high-end credit card customers.
