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October 11, 2016

US acquirers target Latin America

US acquirers have shown considerable interest in the Latin American cards market over the last 15 years, particularly Brazil and Mexico. Despite recent economic uncertainty, there are still opportunities for the US acquirers active in the region, First Data, Elavon, EVO Payments International, Evertec and Global Payments. Robin Arnfield reports

By Verdict Staff

US acquirers have shown considerable interest in the Latin American cards market over the last 15 years, particularly Brazil and Mexico. Despite recent economic uncertainty, there are still opportunities for the US acquirers active in the region, First Data, Elavon, EVO Payments International, Evertec and Global Payments. Robin Arnfield reports

"B2B and B2C payments volume  in Latin America has shown strong increases over the years, making the region a mature and stable market for growth opportunities,” says Beth Horowitz Steel, a partner at U.S. consultancy Glenbrook Partners.

According to Janinne Dall’Orto, a Senior Manager specializing in merchant acquiring at US consultancy First Annapolis Consulting, healthy growth rates and recent regulatory activity by some Latin American governments continue to attract acquirer interest in the region.

“E-commerce and face-to-face sales volume in the region have been growing at impressive rates in the largest markets,” Dall’Orto wrote in the August 2016 issue of First Annapolis’ Navigator newsletter. “However, the markets still exhibit some challenges, such as poor delivery infrastructure  affecting e-commerce transactions, low POS penetration in most markets, and a clear preference for cash payments in the region.”

Dall’Orto tells CI that most Latin American countries are still dominated by cash transactions and low levels of banking penetration. “These markets have been growing their card sales volume at a very high rate for e-commerce and for face-to-face transactions, but it is an uphill battle against cash,” she says. “Also card acceptance is concentrated in the cities, and smaller merchants tend to prefer cash as they don’t want to enter the formal economy.”

Latin America accounts for 7%  of the estimated 270 billion global card payments in 2015, and will account for 7% of the forecast 417 billion global card payments in 2021.

Danielle Tierney, a senior analyst at US-based Aite Group, says Mexico is currently a more attractive market for U.S. banks and payments companies than Brazil. “Brazil’s economy has been consistently poor for the last 3-4 years,” says Tierney. “The US economic recovery has been good for Mexico as its domestic economy is coupled with the U.S., and Mexico’s economic growth has been good for the payments industry as people do more purchasing. From an economic perspective, Mexico is a much more attractive market than Brazil, but it’s much smaller than Brazil.”

Strategies

“The strategy of all incoming acquirers in Latin America will be to push beyond large merchants into the middle of the pyramid, where there are still plenty of mid-size merchants operating solely in cash,” says Lindsay Lehr, Senior Director at U.S.-based Americas Market Intelligence. ‘Offering easy-to-use e-commerce solutions, especially for non-tech savvy merchants, and partnering with local PSPs (payment service providers) to this end, should also be a prominent feature of acquirer strategies in Latin America.”

Lehr says that, in order to compete in e-commerce and the rapidly growing app economy in Latin America, U.S. acquirers will increasingly need to forge partnerships with local gateways and PSPs to acquire merchants on their behalf. “Small and mid-size companies are opening online stores in droves in all markets and it isn’t feasible, or profitable, for acquirers to serve them directly,” she says. “Working with regional PSPs who serve multiple Latin American markets may be a smart strategy to easily springboard from one market to the next; so far, no major U.S. acquirers in the region are doing this.”

“Merchants, especially e-merchants, are seeking secure ways to increase sales and reach new customers,” says Horowitz Steel. “Additionally, many bricks-and-mortar merchants themselves moved into new countries by partnering with another well-known brand in that market. Acquirers, in turn, needed to support their existing merchants as they moved into multiple markets.”

“As a way to serve their merchant clients with multi-country, pan-regional and/or global operations, acquirers often deploy the partnership model as a market entry strategy,” Horowitz Steel says. “For example, a U.S. acquirer who partners with an in-market payment gateway (versus applying for local licenses and becoming registered in a country or region), can have immediate access to that market’s payment environment – via one system integration with one provider – and have accelerated access to consumers, businesses and associated bank accounts broadly across that market. Critical capabilities such as FX, local risk management and compliance functions are more efficiently accessed by the acquirers' merchant customer in a shorter period of time and with less complexity.”

Deregulation

Brazil, Chile, Colombia and Mexico are examples of Latin American countries where regulators have taken action to promote increased competition in acquiring.

Brazil

In July 2010, the Brazilian Central Bank (Banco Central do Brasil) removed the ban on a single acquirer processing both Visa and MasterCard transactions, but left intact acquirers’ exclusive rights to handle domestic card brands.

The ban had resulted in a parallel monopoly (also known as a duopoly), whereby Redecard (now called Rede) had exclusive rights to MasterCard acquiring, and VisaNet (now called Cielo) exclusively acquired Visa cards. Redecard is controlled by Itaú Unibanco, while Cielo is controlled by Banco do Brasil and Bradesco.

The two largest domestic card brands issued in Brazil are Elo and Hipercard. In April 2010, Banco do Brasil and Bradesco founded Elo as a domestic card scheme competing with Visa and MasterCard in Brazil.

Elo, whose cards are also issued by Brazilian government-owned savings bank Caixa Econômica Federal, was originally exclusively acquired by Cielo. Itaú's Hipercard brand was originally acquired exclusively by Rede. The exclusivity in domestic card brand acquiring was lifted in 2014 by Cielo and Rede under pressure from the Central Bank.

Market share

Despite the deregulation of acquiring, the Brazilian market is still dominated by Cielo and Rede. According to Brazilian payments industry portal Pagamentos.me, in January 2016 Cielo had 53.4% of the Brazilian acquiring market; Rede 34.3%; GetNet, a subsidiary of Banco Santander Brasil, 8.6%; Vero, a subsidiary of regional bank Banrisul, 2%  and Elavon do Brasil 1% .

The other acquirers – Global Payments, which entered Brazil in 2013 through a partnership with regional bank Banco de Brasília; and First Data, which operates the Bin acquiring platform in partnership with Bancoob (Banco Cooperativo do Brasil), have miniscule market shares, Pagamentos.me says.

In April 2016, Citigroup and U.S. Bancorp sold their investment in their money-losing Brazilian acquiring joint venture Elavon do Brasil to Stone Pagamentos, whose owners are Arpex Capital and Banco Pan (formerly PanAmericano).

U.S. Bancorp, which owns U.S.-based acquirer Elavon, Inc., and Citi had jointly owned Elavon do Brasil for five years. Reuters said Elavon do Brasil ended 2015 with negative equity of BRL 200m ($62m ), leading regulators to press for a prompt capital injection. Stone Pagamentos agreed to replenish Elavon's capital and provide additional funds for growth as part of the transaction, Reuters said. According to Brazilian press reports, Stone Pagamentos entered the Brazilian acquiring market in 2014.

In September 2013, Global Payments sold a 50% stake for $2.1m in Comercia Global Payments Brazil to Spain’s CaixaBank. In 2014 Global Payments and CaixaBank each made an additional investment of $3.9m in Comercia Global Payments Brazil. The two companies also have an acquiring joint venture in Spain called Comercia Global Payments.

“Global Payments has a very small operation in Brazil, and is trying to make inroads in e-commerce processing and to differentiate itself by targeting small merchants,” says Dall’Orto. “GetNet is slowly making progress in the Brazilian market.”

Competition

“Six years after the break-up of the Visa/MasterCard acquiring exclusivity, finally the Brazilian market is reaching an increased level of competitive aggressiveness,” says Guilherme Lima, founder of Brazilian consultancy Ponto Futuro Consultoria Estratégica. “The chief reason is the break-up of the remaining exclusivity agreements by the Central Bank – Elo and Amex for Cielo, and Hipercard for Rede. Also, the maturity and ramp-up of operations like GetNet, Stone, and First Data’s Bin have played a major role.”

Lima says that anecdotal evidence and Brazilian acquirers’ Q1 and Q2 2016 financial statements suggests that competitiveness in 2016 is at the highest level to date. “Sub-acquirers operating in the mobile and e-commerce arenas are also playing a role in the changing market landscape, as they consolidate ever-increasing volumes and place additional pressures on acquirers’ margins,” he says. “An interesting trend is that different strategies are beginning to emerge. Some acquirers such as Stone are seeking a lean, low-cost model, while incumbents, led by Cielo, are betting on value-added products and services and brand differentiation.”

“Cielo has been aggressive in its approach of positioning itself ‘beyond the POS terminal,’ not just spending millions on branding campaigns, but also launching new, innovative products and services,” says Lima. “These include Lio, a ‘smart POS’ (smartphone-based mobile point-of-sale device) with an open app-development platform that can host several different retail management solutions.”

“Rede is the company that lost the most market share since the 2010 break-up, including posting a year-on-year volume loss in Q2 2016, something unheard of in the Brazilian card market in the past 20 years,” says Lima. “The company is restructuring and is rolling out several initiatives, including a bold new pricing scheme for small merchants, whose effectiveness remains to be seen.”

“International acquirers have faced a number of challenges to get traction in Brazil,” says Lima. “The chief is their lack of bank distribution networks and ability to build an integrated merchant offer, as the largest banks in the Brazilian market are the incumbent acquirers’ controlling shareholders and commercial partners. Elavon is a cautionary example of international entrants’ challenges in Brazil.

Despite investing in an expensive infrastructure, Elavon never get close to achieving the necessary scale to be profitable, and was sold to Stone, which is a company with a completely different mindset. Stone is led by successful FinTech entrepreneurs, and funded by the most successful Brazilian financiers (such as billionaire Jorge Paulo Lemann), which has been growing by exploring the incumbents’ blind spots, and has a distinctive, aggressive cost-conscious culture.”

Chile

“Chile is a market that might open up in the future to foreign acquirers,” says Dall’Orto. “It has a small population but it’s one of the most developed countries in Latin America in terms of card payments volumes for the size of population.”

Traditionally, Chile has had only one acquirer/processor, Transbank, which is owned by the Chilean banks. “The regulator has not issued any regulations, but it has pressured Transbank to behave in a non-monopolistic manner and to have competitive pricing with products and services that are competitive with acquirers internationally,” says Dall’Orto. “This led Transbank to drop its prices and be more aggressive in developing new products and services. Also, Chile has a new acquirer. Multicaja has recently received a MasterCard acquiring licence in Chile and will focus on small merchants, but isn’t fully operational yet.”

According to Chilean press reports, Multicaja will enter the Chilean acquiring market by the end of 2016 or early 2017, and has 30,000 merchant clients in its network.

Colombia

“In Colombia, the regulator said it was were worried about the level of interchange fees,” says Dall’Orto. “So now the Colombian market has a system to determine the level of local interchange. This was the result of the regulator telling the players that interchange wasn’t calculated fairly. The regulator then introduced a system for fair calculation of interchange.”

Mexico

“The Mexican acquiring market is changing significantly as it is opening up to new players,” says Dall’Orto. “Traditionally, the market was dominated by bank acquirers and there were only two processors which were also the local switches in Mexico: Prosa and E-Global. Recent regulations have opened the market to non-bank acquirers and to additional local switches. Few companies have submitted applications yet, although MasterCard has recently received a domestic switch license in Mexico. I believe the Mexican acquiring market will open up significantly in the next five years due to these new regulations.”

First Data

First Data has operations in eight countries in the Caribbean and Latin America, serving clients in 32 countries across the region.

According to Dall’Orto, First Data was the first U.S. acquirer to move aggressively into Latin America. “First Data has been very active in Latin America since the early 2000s,” says Dall’Orto. “It has alliances with Scotiabank in Puerto Rico and other Caribbean islands and also in Mexico. Scotiabank refers merchants to First Data for processing and gets a share of the revenues. In Argentina, First Data bought Argencard, the MasterCard acquirer/processor, in 2006 – it only processes MasterCard in Argentina, as Visa Argentina processes Visa cards through Visanet.”

“First Data has been pursuing a strategy of going after underserved SMBs (small and mid-sized businesses) in Brazil,” says Lehr. “In 2014, First Data launched Bin in Brazil in partnership with Bancoob offering a suite of products developed for small businesses.”

Bin aims to be more affordable, more user-friendly, and more accessible than the incumbent Brazilian acquirers, says Lehr. “Brazil is a tough market,” she notes. “So far, Bin has only gained 1%  market share, and the recent exit of Elavon from Brazil pays tribute to how hard it is to do business there. This may be why First Data is also exploring other markets in Latin America, and in July 2016 announced a merchant acquiring alliance with Colombia’s largest bank Bancolombia.”

The objective of First Data’s partnership with Bancolombia, which will start in 2017, is to target small merchants operating mostly in cash, Lehr says. “Colombia’s acquiring market is far less mature and not as competitive as Brazil’s, so First Data may be able to grab more market share in less time than in Brazil, especially via its partnership with Bancolombia,” she says. “But the challenge will be to figure out a fee structure that is acceptable to small merchants with low-value tickets that is still profitable for the (acquiring) bank. This is the major challenge for acquiring small merchants across the region.”

Elavon

Since 2010, Elavon, which is owned by U.S. Bank, has operated an acquiring joint venture in Mexico with Banco Santander called Santander Elavon Merchant Services Mexico.

Elavon also has an acquiring partnership with Santander in Puerto Rico, says Dall’Orto. “It left Brazil as Brazil, which is dominated by Cielo and Rede, is a very difficult market for international acquirers. Cielo and Rede are entrenched and are very well known brands,” she says.

Evertec

Puerto Rico-based Evertec owns and operates the ATH PIN-debit card network in Latin America and provides issuer-processing services to financial institutions in 19 Central American and Caribbean countries. In 2015, Evertec’s merchant acquiring business processed over 330 million transactions.

“Evertec has been expanding aggressively in Latin America,” says Dall’Orto. “For example, it has bought businesses in several Caribbean and Central American countries. In March 2016, Evertec acquired a 65 percent stake in a small processor in Colombia called Processa.”

In a September 2016 investor presentation, Evertec identified South America as a future expansion opportunity for the company, and said it would seek “seek corporate development initiatives such as M&A, JVs or alliances in the region.”

Dall’Orto says that Evertec’s current clients in Colombia are mostly on the issuer-processing side. “Evertec is trying to get into alliances with acquirers in Latin America, but hasn’t had much success yet,” she says. “I think Evertec will eventually start its own acquiring operations in Latin America. In May 2015, it appointed Mariana Lischner de Goldvarg as its President Latin America to focus on developing acquiring relationships in the region.”

De Goldvarg was previously President of Equifax Latin America.

EVO Payments International

In September 2015, U.S.-based EVO Payments International bought Citigroup’s Mexican acquiring business which had been conducted through Citi’s Mexican subsidiary Banamex (now called Citibanamex).

As part of the deal, EVO and Citibanamex entered a 10-year strategic marketing alliance that includes an exclusive referral arrangement covering acquiring and related products for Banamex's merchant clients. The business operates under the name Servicios de Pago Banamex operado por (provided by) EVO Payments International.

EVO says Banamex is the second largest merchant acquirer in Mexico by transaction volume with nearly 100,000 merchant locations.

“EVO has been very active in Europe,” says Dall’Orto. “In Latin America, EVO’s only operation is in Mexico. As EVO’s alliance with Banamex was only set up in 2015 and EVO is still implementing its Mexican operation, it’s very early days to know how the operation is doing.”

By purchasing Banamex’s acquiring operation, EVO established a 25 percent acquiring market share in Mexico,” says Kevin Hodges, EVO’s Chief Financial Officer. “EVO Mexico processes over US$20 billion of transaction volume across over 400 million transactions.”

In addition to its alliance with Banamex, EVO Mexico has various partnerships with third-party referral partners including integrated software vendors, gateway providers and merchant aggregators, says Hodges.

“Because of the management leadership and experienced personnel who joined EVO as part of the Banamex transaction, EVO feels well equipped to pursue further expansion into additional markets within Latin America,” says Hodges. “We see Latin America as a highly attractive region for additional investment because of the strong organic growth of card usage and acceptance. Latin America is a region of strategic importance to EVO.”

Hodges says that “EVO’s experience has been that card volumes in Mexico have grown in the mid-teens in recent years, with significantly higher growth in emerging areas like e-commerce. This development reflects increased card usage among consumers, increased card acceptance among merchants, which is being heavily encouraged by regulators, and basic growth in the Mexican economy.”

Hodges notes that the greatest challenge in the Mexican market also represents the greatest opportunity for acquirers – convincing merchants that the cost of acceptance (both in terms of the discount rate as well as the greater visibility from tax collection agencies) is more than offset by the potential for increased volume. “In Mexico, credit cards per capita lag many other Latin American markets,” he says. “We think this trend will normalize so that card volumes will reflect the incredible size of the Mexican economy.”

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