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  1. Country Surveys
December 19, 2013

Country Survey: Brazil

Brazil has moved steadily towards the use of cards and payments, encouraged by the growth in online shopping. The high unbanked sector is expected to further drive the adoption of prepaid cards, CI finds from its latest research.

By Verdict Staff

Brazil has moved steadily towards the use of cards and payments, encouraged by the growth in online shopping. The high unbanked sector is expected to further drive the adoption of prepaid cards, CI finds from its latest research.

The Brazilian cards and payments industry grew during the review period (2008-2012) at a CAGR of 8.97%, to reach 540.7m cards in circulation, and transactions value BRL1.8trn (US$917.1bn) by the end of 2012. Changing lifestyle demographics, the increased popularity of online shopping and higher disposable income per capita supported growth in the number of cards in circulation.
Consumer preferences are expected to change the card payments channel’s dynamics over the forecast period. The Brazilian middle classes have an average age of 34 years and distinct preferences compared to traditional middle-class populations. Brazilian customers are also becoming increasingly averse to credit-fueled spending. These factors prompted the diversification of the market and contributed to the emergence and growth of the prepaid and charge card categories.

Nominal growth for credit and debit cards, with prepaid and charge cards driving the overall channel

The debit and credit card categories are mature and are expected to record nominal growth over the forecast period; the debit cards category is expected to post a CAGR of 2.64% and the credit cards category is expected to record a CAGR of 5.34% in volume terms. The prepaid and charge cards categories are expected to be the prime drivers of the card payments channel. The charge cards category is expected to grow at a CAGR of 7.20% and the prepaid cards category is expected to grow at a CAGR of 8.64% in volume terms over the forecast period.
A key factor that encouraged the growth of the prepaid cards category is the government legislation that levied a 6.4% charge on all foreign transactions made through credit cards issued in Brazil. As prepaid cards are preloaded with Brazilian real, transactions made through them are treated as domestic payments and have a lower tax rate of 0.38%. This has resulted in a large-scale subscription of prepaid cards. Another factor is a preference among consumers for debt-free payments, with ongoing economic uncertainty in the country.

Growth of online commerce, tourism and retail sales volume to drive cards and payments industry

The growth of the card payments channel will be driven by the growth of online commerce, tourism, new product offerings, retail sales volume and private-label cards. High internet penetration is expected to promote online commerce, which, in turn, is expected to drive growth in the card payments channel. A large tourist inflow into the country is expected to fuel demand for travel and transit cards.
Evolving regulatory framework to increase competition in the cards and payments industry
The regulatory landscape in the cards and payments industry is undergoing significant changes, and the stance of the Central Bank of Brazil (CBB) is to pursue steps that promote competition in the industry. One of the moves by the CBB in this direction is the enforcement of the ‘no surcharge’ rule. The card payments channel is also governed by specific regulations related to the foreign exchange market. The prepaid cards category is less regulated as the category is still evolving in Brazil, though stricter rules are expected as the category expands.

Competitive marketing and pricing strategies

With the rise of competitive pressure, banks and issuers are developing marketing and pricing strategies with the aim of attracting larger customer bases. Offers such as cashback, discounts at retail outlets, rewards points and insurance cover are used to expand customer bases. Banks also segment their customers to maximize the potential to increase market share. Banks such as Banco Santander, Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and Brazil’s Banco Bradesco have launched credit cards that specifically target low-income groups, government employees and the unbanked population.
Banks have also established a range of corporate cards designed to meet the specific needs of businesses. Visa has formed a strategic partnership with Brazilian development bank BNDES and Brazil’s Banco Bradesco to offer e-procurement cards to businesses.

Emergence of EMV cards, near-field communication (NFC) and contactless payments

EMV cards, NFC and contactless payments are expected to drive growth on the card payments channel. The launch of EMV cards in Brazil by Banco Santander in 2011 brought about a secure and internationally accepted credit and debit cards transaction system. EMV cards follow international standards and are accepted globally. Nokia has teamed up with PagSeguro to bring NFC payments into Brazil. The payment channel infrastructure and security of card payments is expected to improve with the emergence of new technology such as biometric technology and anti-skimming technology.

CBB policies to promote competition expected to bring in new operators and increase demand

Banco Central do Brazil (CBB) has adopted a number of measures to foster competition in the card payments channel. The card payments channel in the country has been dominated by Visa and MasterCard since the 1960s. However, the CBB intervened in 2008 and clarified its intention to level the playing field for other competitors and new issuers.
Leading card acquirers Cielo and Redecard, which formerly processed transactions exclusively for Visa and MasterCard) were asked to facilitate the entry of new companies. Redecard acquired private cards from 2009 onwards; it has 25 brands that include various credit, debit and benefit cards, including both foreign and domestic companies. The removal of the earlier requirement by the CBB to separate contracts for processing MasterCard and Visa transactions also eased credit card processing. At present, major acquirers can offer both card schemes, and other new schemes can be processed under one contract. This led to a significant reduction in legal hurdles for new entrants. The regulatory changes pursued by the CBB are mainly intended to foster competition and enable the provision of cost-efficient card services to consumers. The stance of the CBB facilitated the entry of new issuers and intensified competition in the card payments channel, leading to the issuance of affordable low-cost cards to lower-income segments.

Rising popularity of Brazil as a tourist destination boosting demand for various card categories

Another major factor that makes Brazil an attractive market is its popularity as a tourist destination. The increase in tourist volume during the review period increased the demand for debit, credit and prepaid travel cards. Football and carnival fans visiting Brazil increased demand for closed-loop transit cards, which enable tourists to travel across the country without entering into cash payment-related problems.
The State Secretariat of Metropolitan Transport, São Paulo, issues the BilheteÚnico (Unified Ticket), a prepaid rechargeable smart card that enables travelers to pay for journeys within a certain period. The card can be used on metros, buses and trains, and is available for purchase online or can be bought from lottery outlets. It can be recharged online, in metro stations or at other authorized service points.
Demand for transit and travel cards is expected to grow as Brazil hosts the annual carnival and World Cup in 2014. The Brazilian government is also planning to introduce ‘Portais da Cidade’, or ‘City Gates’, which would serve as large bus terminals with an automatic payment system. Special closed-loop prepaid cards are expected to be used to make payments within this system.

Unbanked population to drive demand for prepaid cards

Despite having an advanced financial sector, the unbanked proportion of the population is significantly high. The number of unbanked Brazilians in the overall population has increased, primarily because 55% of government employees are paid in cash. Around 40% of the adult population does not use banking services, and this has added to the overall share of the unbanked population.
This creates an enormous opportunity to expand prepaid cards, which are popular among the unbanked category for making supermarket payments, mobile recharges, P2P services and other daily transactions of low value. Closed-loop and retail payment cards may prove to be convenient for customers who prefer to avoid the inconvenience associated by many with banking. Low-cost prepaid cards can also be issued to tap into the unbanked segment in rural and interior areas.

Rising penetration and infrastructure investment in rural markets to encourage new issuers

Brazil has the highest debit card penetration in Latin America. The National Payments System promoted card penetration in the country by discouraging the use of checks and increasing the interoperability of ATMs. Card penetration also improved as an increase in payment-related infrastructure for rural Brazilian municipalities. The volume of ATMs grew at a review-period CAGR of 2.75%, from 158,414 machines in 2008 to 176,550 ATMs in 2012. Card penetration in 2012 was 1.4 debit cards per inhabitant and 1.0 credit card per inhabitant. The government partnered with BNDES and the Brazilian development bank to offer credit and prepaid cards, and set up POS terminals for small businesses in interior regions of the country. These efforts are expected to improve the electronic payment infrastructure in rural regions.
Brazil introduced its domestic card operating brand, Elo, in April 2011, an attempt to break the duopoly of international operators MasterCard and Visa. Elo is jointly supported by Brazilian banking giants Banco Bradesco, Caixa Econômica Federal and Banco do Brazil. It targets all social classes within Brazil and attempts to replace checks and cash-based transactions. Domestic operating brands, such as Elo, are expected to increase card penetration as they are channeled through major banks which have better access to rural financial markets than private and new issuers. The increase in card penetration is expected to create a market for new issuers as rural consumers increase demand for value-added services and cost-effective card products.

Decline in credit-fueled spending to make credit and charge cards less attractive than prepaid cards

Brazil’s middle classes exhibit a unique saving and spending pattern that is expected to significantly influence the dynamics of the card payments channel. Credit-based consumer spending is expected to decline as consumers increasingly choose to settle existing debts. Middle and upper-middle class consumers, and all income segments with loans, are expected to show a tendency in paying off loans and exercising thrift in their spending behavior. This is expected to lead to a decline in credit or charge card-based transactions. Prepaid and debit cards are expected to be used for budgeted spending. The prepaid cards in particular will see a rise in category share as consumers restrict their spending by defining upper limits on transaction values.

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