Retailers store card programmes play a major role in Latin Americas payments industry, since so many Latin American consumers do not qualify for bank-issued credit cards. But store card issuers are facing competition from banks prospecting for cardholders at lower socio-economic levels. Robin Arnfield reports.
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"The segments that Latin American store card issuers address are low-income consumers who may only now be getting bank accounts, and also the unbanked," says Alan Leach, director of UK-based market research firm Finaccord. "This focus on lower-income segments is a primary factor driving the growth of banks owned by Latin American retailers and also banking joint ventures between banks and retailers."
In Argentina, Brazil, Mexico and Peru, for example, where a very large percentage of the population is unbanked, retailers charge extremely high interest rates to store cardholders without bank accounts, to cover default risks.
"Installment loans, where cardholders pay the principal plus interest over a set period, are common, as they are easier to understand than revolving credit," says Ali Raza, executive vice-president at US-based consultancy Speer & Associates.
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By GlobalDataRaza says that Latin American store cards generally have high charge-off rates.
"But if your interest rate is 70% and your charge-off rate is 20%, you can afford to make some losses provided you have a big customer base," he says. "Latin American store card issuers have perfected a model of underwriting loans and managing credit for customers who are outside the mainstream banking market, which works very well."
However, financial regulators in countries such as Brazil and Mexico are looking at curbing the interest rates charged by store cards and bank-issued credit cards.
"These rates are deemed to be excessive and over and above the actual cost and risks of providing credit," Raza says.
Banks
With their cards and in-store financing, Latin American retailers provide a way to bring unbanked consumers into the financial services arena.
"As they have massive databases containing their store-cardholders and consumer finance clients credit histories, Latin American retailers often market additional financial services to these customers such as savings accounts through a captive (or subsidiary) bank," Raza says. "Examples include Mexico- and Central America-based Azteca Bank, a subsidiary of Mexican retailer Grupo Elektra, and Banco Ripley, owned by Chilean retailer Ripley."
Raza says Latin American banks are waking up to the opportunities of offering cards to low-income consumers.
"Were seeing Latin American banks acquiring retailers private-label card portfolios in order to widen their customer base to lower socio-economic levels," he says. "In some cases, banks will change the branding on the private-label cards they buy and integrate the cards with their own brand.
"In other cases, banks will keep the private-label card brand separate from their own brand, for two reasons: lower-income segments are uncomfortable dealing with mainstream banks; and major banks dont want to dilute their brand through association with lower-income lending."
Raza warns that, as banks descend to lower socio-economic levels, they need to learn how to market cards to these segments, and manage credit risk.
"Banks need to learn from retailers and consumer finance providers how to do this," Raza says.
Richard Speer, Speer & Associates chairman, says that the Brazilian governments plans to curb excessive interest rates charged by store card issuers may result in a growth in cards alliances between Brazilian retailers and banks.
"There are already several joint ventures between the large retailers and banks, for example, Magazine Luiza with Itaú Unibanco, and Casas Bahia with Bradesco," he says.
Scotiabank
In January 2011, Bloombergreported that Canadas Scotiabank plans to offer in-store consumer loans and credit cards through partnerships with Mexican retailers to unbanked and underbanked consumers. Scotiabank already has consumer-finance operations in Peru, Chile, Guatemala and the Dominican Republic, Bloomberg noted.
In February 2011, Scotiabank acquired Pronto!, Uruguays third-largest consumer finance company. Pronto! offers personal loans and Visa-branded credit cards through 600 retail outlets, and has 200,000 clients.
Scotiabank announced in December 2010 that it planned to buy Nuevo Banco Comercial, Uruguays fourth-largest private bank and its largest credit card issuer.
Cross-border retailers
A characteristic of large Latin American retailers is to operate in more than one country, and provide store cards in the countries where they have retail subsidiaries. Retailers in this category include C&A, Falabella, Ripley, WalMart, Carrefour, Cencosud, and Elektra. Through Banco Azteca, Elektra offers credit cards in Mexico, Panama, Guatemala, Honduras, Peru, Brazil and El Salvador.
"Carrefour issues cards through joint venture companies co-owned with BNP-Paribass Cetelem consumer finance arm in Argentina and Brazil," says Leach. "In Brazil, Carrefour and Cetelems joint venture is Banco CSF (Carrefour Soluções Financeiras), while their Argentine joint venture is Banco de Servicios Financieros, with 449,000 credit cards in issue in Argentina in September 2010."
Cetelem offers retailer co-branded credit cards in Argentina and Brazil under its Aura brand as well as in 15 other countries outside Latin America. In Brazil, it also offers co-branded MasterCards.
In March 2011, Dow Jones reported that major Brazilian banks including Bradesco and Banco do Brasil are interested in bidding for the 49% stake in Carrefours Brazilian consumer finance arm held by Cetelem.
"Cencosud issues store cards in Chile, Argentina, Brazil and Peru, and has recently re-launched its loyalty scheme using the Nectar brand in Chile," says Leach.
In Chile, its home country, Cencosud had 1.39m active store cards in December 2010, according to Chilean banking regulator SBIF.
Until 2009, C&A owned a captive bank, Banco Ibi, in Brazil. Bradesco bought Ibi from C&A in June 2009, under a deal giving Bradesco a 20-year exclusive right through Ibi to provide private-label cards and Visa- and MasterCard-branded credit cards to C&A. Ibis credit card operation had BRL1.288bn (US$780m) worth of receivables at 30 June 2010, up from BRL1.169bn a year earlier.
Ibi issues cards on behalf of other Brazilian retail brands such as Makro, Colombo, Clube Angeloni, Club Mapfre and Arco-Iris, as well as for C&A. According to Leach, Banco Ibi has around 20m private-label and Visa- and MasterCard-branded credit cardholders in total, the majority being in Brazil. C&A operates stores in Mexico, where its cards are also offered through Banco Ibi.
In the third quarter of 2010, Ripley saw borrowing on its Tarjeta Ripley private-label cards rise by 6% in Chile year-on-year and by 3.5% in Peru during the same period. Ripley signed up an extra 82,000 store cardholders in Chile in the third quarter of 2010, giving it a total of 6.1m cardholders in Chile and 2.3m in Peru.
As at September 2010, Falabella had 2.1m active CMR Falabella card accounts in Chile, 970,000 in Peru, 556,000 in Argentina, and 637,000 in Colombia.
Domestic-only store cards issuers
Leach highlights Perus Supermercados Peruanos and Brazils Lojas Riachuelo as major store card issuers which are only active in their home countries.
"Supermercados Peruanos issues credit cards through a captive bank, Interbank, which has around 20% of all the payment cards issued in Peru," he says. "Lojas Riachuelo owns a captive card issuer, Midway Financeira, in Brazil, and has 15m cardholders in total."
Other significant store cards issuers only operating in one country include Mexicos Chedraui, Coppel, Distribuidora Liverpool, and Grupo Famsa, all of which own captive banks; and Corporación Favorita, which issues its own payment cards in Ecuador.
Coalition store cards play important roles in Brazil and Argentina.
"Itaú Unibancos Hipercard subsidiary is very strong in the Brazilian store cards market," says Raza. "Hipercard is a domestic-only coalition private-label card that is accepted at multiple Brazilian retailers such as WalMart and Bompreço, targeting low-income consumers."
Chilean grocery retailer Distribución y Servicio (D&S) issues Presto cards through its Servicios y Administración de Créditos Comerciales Presto unit, which can be used at 50,000 retail locations (including D&S-owned stores as well as other merchants) across Chile. In January 2009, D&S was acquired by Wal-Mart.
According to SBIF, there were 492,000 active Presto cards in issue in December 2010. Presto, like Ripley and CMR Falabella cards, can be used at selected merchants other than those of the parent retail brand.
The largest player in the Argentine store card market is Banco Galicias Tarjeta Naranja (orange card) subsidiary. Originally a regional private-label card scheme, Tarjeta Naranja is now available with Visa, MasterCard and America Express logos. However, the majority of Tarjeta Naranja cards are only used in Argentina and do not bear a MasterCard or Visa logo. Around 4m Tarjeta Naranja cards were in issue in Argentina in 2010, with 100,000 Argentine merchants accepting the cards.
"Banco Galicia has launched Tarjeta Naranja in the Dominican Republic, where it has 300 retail partners, because the card brand has proved so successful in Argentina," says Raza.
Brazil
According to Richard Speer, Brazil is the most prominent store card market in Latin America. A third of the 628m Brazilian payment cards in issue in December 2010 were store cards.
At the end of 2010, there were 225.3m store cards in issue in Brazil, according to Brazilian credit card services trade association ABECS. In 2010 as a whole, there were 1.3bn store card transactions in Brazil, worth a total of BRL68.2bn.
Research carried out by Finaccord in 2010 found that 76.5% of retailers surveyed in Brazil had launched a payment card of their own, followed by 70.3% in Canada and 57.9% in Peru the latter being a country where 60% of total cards in issue are store cards. By contrast, only 24%, 25%, and 32% respectively of retailers in Uruguay, Paraguay, and Colombia offer store cards.
Finaccord surveyed 1,195 major retail brands in North and South America, and found that 634 offered their own payment card, thereby producing a region-wide penetration rate of 53.1%.
"A significant number [of retailer payment cards] continue to be issued either by the retailers themselves or by captive banks owned by those retailers," says Leach. "This means there may be significant potential for conventional card issuers, including banks, to acquire the existing cardholder portfolios of retail groups by purchasing equity stakes in their captive card issuing operations."
Finaccord says 48.7% of retailer payment card programmes in North and South America are exclusively private-label.
"12% of retailer cards are affiliated exclusively to MasterCard and 10.4% make sole use of the Visa marque, while 23% can be used on multiple networks," says Leach.
By contrast, 0.3% of cards are branded with American Express and 1.6% with Cetelems Aura marque. The remaining 3.9% of cards are linked to networks which are classified as other, such as Brazils Dacasa and Tricard networks or Chiles CMR Falabella and Presto networks. Cards in this latter category can be used at selected merchants other than those of the parent retail brand.
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See also: Agent banking in Latin America
