Latin America Cards: Tougher Competition
Latin America cards and payment industry is
at a competitive cross-road.
BY JOHN PRICE
Over
the last decade, Latin America’s card industry has enjoyed explosive growth.
Issuers (banks and others), card networks (MasterCard, Visa & Amex), large
acquirers and processors as well as retailers have been the prime benefactors
of expanding consumer credit, which grew at CAGR levels of above 20 percent.
During this time, Brazil became the most profitable credit card market in the
world, buoyed by heavy consumer spending and some of the highest APRs found
anywhere. The single product that has driven Latin America’s card industry has
been the consumer credit card, the prized possession of the region’s aspiring
middle class.
For the incumbent players in the industry, growth has come
relatively easily, as consumers clamored for their first, then their second
consumer credit card, devoured retailer card offerings and reveled in the
consumption power that credit access entitled them.
TOUGHER, MORE DIVERSE
Going
forward, the playing field will get tougher and more diverse. Consumer credit
is reaching exhausted levels in Brazil and Chile. In both countries, falling
commodities have weakened currencies and forced more hawkish monetary policy,
especially in Brazil. Higher interest rates and climbing default levels in
Brazil now worry both retailers and banks who for almost a decade have
leveraged consumer credit through the promotion of parcelados. With consumer
credit growth at risk, issuers need to embrace other customer targets with
different products. But banks have been naturally hesitant to invest in
commercial cards, consumer pre-paid products or any forms of digital payment
products when consumer credit was running on auto-pilot for so many years.
Issuer complacency has invited new competitors into these emerging product
spaces.
Open loop pre-paid card issuers include a number of entrepreneurs who have focused on large scale accounts in government and corporate client circles. If new names can win over the most brand conservative customers, smaller clients will be even easier to gain. In digital wallets, PayPal is the dominant player in Mexico and growing aggressively in Brazil. New competitors in Brazil have grown out of the internet merchant communities, such as UOL’s PagSeguro who sell digital wallets as a bolt-on product to a new e-commerce sites. Mobile Network Operators (MNOs), who long ago mastered the art of low cost acquisition of mass consumers, can easily outflank traditional issuers with mobile money products. As those customers load more credit onto their phone bills, their purchases will encroach upon the territory of traditional credit and debit cards, still dominated by banks.
COMPELLING ADVANTAGE
Where
banks continue to hold a compelling advantage is the issuance of commercial
credit and debit cards including the still underexploited purchase cards for
corporations and business card for SMEs. Banks already serve these companies as
customers of other products. Margins remain healthy and non- traditional
issuers struggle to compete. However, banks need to hire and train far more
salesmen to evangelize these products among their business clients, many of
whom are skeptical about issuing cards to mid-level employees or remain loyal
to consumer cards in their wallet (SME owners).
For card networks, the challenge is two-fold: i) will the uptake in commercial, pre-paid, digital payments and other new products be fast enough and profitable enough to off-set slowing consumer credit growth? And ii) which of the multitude of new products is likely to most succeed – i.e. where should they place their bets? Issuing banks also share these two challenges but cards are only part of their product mix so they choose to delegate the burden of product development to the card networks.
UNRECOGNIZABLE LANDSCAPE
Ten
years from now, Latin America’s card and payment landscape will be
unrecognizable. The region is home to well-financed and run MNOs, acquirers and
retailers, all of whom have shown a willingness to vertically integrate into
payments as a way to expand their revenue (MNOs), defend their volumes
(acquirers) or strengthen customer loyalty (retailers).
For technology
companies in the payment space, any global strategy must include Brazil and
Mexico, and once those two markets are conquered, most look to Colombia, Chile,
Peru and Argentina next.
In short, the competitive landscape is broadening both
for issuing banks and card networks.
John Price is the managing director of Americas Market Intelligence and a 22-year veteran of Latin American competitive intelligence and strategy consulting. jprice@americasmi.com
This is an excerpt of a new white paper from Americas Market Intelligence. Republished with permission.