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July 21, 2011

Brazil’s retail bubble could burst

Sheena Rossiter looks at the credit card market in Brazil and find that while personal debts are rising, issuers are continuing to feed the market with new cards

By Verdict Staff

As Brazil’s economy booms, personal debts are rising, and retailers are issuing vast numbers of credit cards in order to further boost footfall into stores. But now the government is starting to act, writes Sheena Rossiter

Charts showing credit in Brazil data There has been lot of talk lately of Brazil’s so-called forming credit bubble, and that the bubble is set to burst. Some allegations have even gone as far as saying that Brazil’s mounting consumer debts may be the root of the problem and could stall the country’s progress right in its tracks, with Brazil’s Central Bank expecting 28% of Brazilians’ disposable income will go to serving debts by the end of the year – that’s more than double other developing nations where less than 10% of household incomes are dedicated to paying off debts.

Credit now makes up nearly 50% as a percentage of the country’s GDP, up from 24% in 2003 at the beginning of the Luiz Inácio “Lula” da Silva administration which elevated around 40m Brazilians from poverty. And the expansion of getting the new middle-class away from cash, cheque and boletos (a common invoicing method of payment used in Brazil) and on to electronic payments has been growing quickly.

Even with all this talk of a credit bubble forming and potentially bursting, it hasn’t stopped banks from wanting to issue more credit cards. Especially in the retail market where the so-called “hybrid” card has been born.


Looking at the facts

The $190bn credit card industry in Brazil continues to grow. By the end of last year, there was a total of 628m payment cards in circulation in Brazil, with 36% of those cards having been issued in the retail market space. The figure is a 7% increase from 2005 when store cards amounted to 29% of the cards in circulation in the country.  According to the Brazilian Association of Credit Cards and Services for Businesses (ABECS), an association that oversees the electronic payment market in Brazil, an estimated 661,699 cards were issued in Brazil in July 2011 and it’s estimated that about a third (238,725) of those cards were issued in the retail sector. In comparison to the same period a year before, there was about a 12% increase in the number of retail payment cards issued.

Retail cards took in an estimated 118,536 transactions that totalled approximately R$6.641m in July 2011  – making for an estimated year-on-year increase of 13% in transactions and a 20% increase in spending.

Brazil’s emerging middle class, more commonly known as Classes C, D and E in Brazil’s five-tiered A to E income ranking structure, now has access to credit which was once only available to the country’s elite. And this segment of the population is big on retail-issued credit cards that offer benefits to their consumers.

There was no shortage of talk about Brazil’s booming retail market at the Cards & Payment Identification 2011 conference back in May in Brazil’s financial hub, Sao Paulo.

“Those who know how to give credit to the C, D and E Classes have the opportunity to have gold in their hand,” says Denis Piovesan, commercial director of cards at Banco Losango.

Retailers are looking to gain market share among Brazil’s new consumers and are trying to keep customers loyal by issuing payment cards. According to ABECS survey that interviewed 1916 Brazilians across all social classes and throughout the country, 41% of respondents from Class D and E population in Brazil were using electronic payments in 2010, up from 36% in 2009 results. 13% of such respondents were holders of retail payment cards, a 2% drop from 2009.

Class C Brazilians, on the other hand, are consuming more than ever and have been a big market driver in the consumer sector. The ABECS survey showed that 67% of Class C Brazilians used electronic payments in 2010, a 3% increase from the year before. However, they are big customers of retail payment cards with 27% using the product. It’s a figure that might seem low, but Class A and B Brazilians made up the largest percentage of store card holders in 2010 with 30% of the total – an 8% drop from 2009.

It is evident that many retailers are trying to gain more consumers through this new social inclusion and are trying and keep them loyal by giving consumers incentives to sign up for a store payment card. Traditionally, Brazilian retailers offer customers lay-away deals, which allows consumers to buy what they want and to pay for the product in installments over an extended period of around 10 months. Customers who have opted for the installment plans usually come from the C, D or E class.

“If you don’t give your customers credit, you’re going to lose all of your customers,” says Guilherme Oliveira, an equities portfolio manager at Itau Asset Management, which invests in the Class C retailer Hering Store.

Oliveira explains the tradition of allowing Brazilians to buy everything from socks to cars on installment plans started after Plano Real was implemented in 1994, the economic policy that put an end to Brazil’s age of hyper-inflation. He says installment plans were put in place to make consumer goods and services accessible to the whole population. This is despite such plans sometimes having interest rates attached to them, sometimes making the product more expensive than if customers were to just buy it out-right (at times almost double the original price). Now retailers are combining the former wave of social including for the lower classes, installment plans, with the new wave of social inclusion: electronic payments.


Retailers cashing in on credit

Clothing stores have been among the biggest retailers to start issuing store cards in a joint partnership with banks and credit card issuers (such as Visa and MasterCard). This type of hybrid card is a change from the traditional two-player model which involved banks crediting merchants for purchases made on the issuers’ cards. These store cards can act like a credit card and can be used freely at any store – and even allow cardholders to take out cash from ATM machines.

Hering, which sells basic clothing to Brazilians from Class A to C, has launched a payment card in conjunction with Visa and Banco Losango. A spokesman from Visa quoted Central Bank rules, which state only financial institutions, such as a bank, can issue Visa and MasterCard credit cards. Hering is trying to attract consumers to use its store card is by offering customers the first five installments interest-free. This is in combination with its already affordable prices which have made it a strong brand among Class C consumers.

Fellow clothing retailer Lojas Renner has sent out a free payment cards to one million of its 17.5m customers back in December. The retailer, which has had loyalty cards since the 1970s, sent off its first MasterCard or Visa that can be accepted by any commercial establishment in Brazil. The free card allows customers to pay for the first five installments tax- and interest-free, and the card can be ordered for dependents over the age of 12. Lojas Renner will be responsible for the management of the card and credit is being handled by the bank Santander, as is required by law.

Retailers are keen to cut down costs by cutting out the extra player involved in issuing store payment cards: the banks. Clothing store Riachuelo, part of the Guararapes group, already managed to set up its own bank back in 2008, Midway Financeira, after it got the approval to be financial agent for the group from the Central Bank. The store credit card that Midway Financeira issues for Riachuelo allows the company to keep larger shares in the gains of its operations.

Lojas Renner is also looking to go down the same path as Riachuelo by starting up its own bank. It is currently waiting on approval from the Central Bank.

With many retailers looking to open their own financial institution, there has been a race by the banks to partner up with retailers who are looking to launch a store credit card but who don’t have the capacity to do it without a bank of their own.

A big hybrid card deal as of late is the Casas Bahia card, a home appliances and furniture store that targets Class C Brazilians. Casas Bahia dominates the electronics and home appliances market, with about 23% of the market share. Its nearest competitor, Magazine Luiza, has around 9% of market share.

In June the Casas Bahia Visa card announced a partnership with Banco Bradesco after heavy competition from another large Brazilian bank, Itaú Bradesco. During this time, the volume of cards issued for the store went up 50%. This is one way Bradesco has proved to be the leading bank in the retail credit card sector with more than 30 partner networks and with around 50m cards issued from the bank to retailers.

And even for retailers that already have their own financial institution, some banks are looking at alternative routes to get into the retail card space. In April, Itaú  bought 49%  of Carrefour Financial Solutions at a price of R$725m. Itaú’s stake in the Brazil-based operations of the retailer give the bank access to 7.7m accounts and to a loan portfolio totalling R$2.2bn.


Using retail credit cards are a regional marketing tool

A major reason why retailers like Carrefour and Riachuelo are keen to issue their own credit cards is because it functions as a marketing gateway to the new class of consumers. Retailers now have database of direct access to see what consumers are buying both at their stores, and everywhere else.

“We need to know what people are buying inside Carrefour, and what they are buying outside and where,” says Ricardo da Cruz Barreto, business director at Carrefour Financial Solutions.

“The emerging middle-class is going to make a difference in the coming years in Brazil. They are the new retail market.”

But most retailers have recognised that, even though giving credit to Brazil’s C, D and E classes could be their golden ticket, there is a risk involved with these populations not knowing how to deal with extra available credit which they have never had before.

The Central Bank has seen some warning signs of consumer credit running too high and it recently tighten up regulation around credit cards. As of June, the minimum payment to pay-off credit card debts went up from 10% to 15%, and by the end of the year will reach 20%. Tariffs have also changed. Consumers will only pay an annual fee for a duplicate card, cash withdrawals, bill payments and for emergency requested credit limits. The new rules only apply to cards issued in the month of June and for all other cards issued the rules will change over in December.

Another recent proposal by Brazilian law makers expects competition to increase in the credit card industry after the senate approved a bill that would reduce fees charged on credit card purchases at an average of 4% per sale price in the middle of July. The increased government intervention in the credit card sector is feared to curb growth and investment in the industry.

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