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.