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PLASTIC EXPLOSION

Credit card use is skyrocketing among Latin Americans, spurring retail sales from Mexico’s Rio Grande to the Patagonia

By María Bird Picó

When purchase and cash activity for all credit card products are lumped together, transaction volume in Latin America rose to more than $50 billion in 2005, an amount 40 percent higher than the previous year. Miami-based InfoAmericas, a market research firm that specializes in the Latin American market, reports that the region has 120 million-plus general-purpose credit cards in circulation and more than 1 million merchants who take them.

During the past four years, the Latin American and Caribbean region has been the fastest-growing area for MasterCard. The number of MasterCard-branded credit products there increased 30.2 percent last year, for a total of 74.1 million in the territory. For the fifth consecutive year, MasterCard reports double-digit growth in gross dollar volume, up 32.5 percent to $98 billion. Gross volume includes purchases and cash transactions.

Visa International did not have figures for 2005 at press time, but as of September, Latin America’s gross volume was up 39 percent for the company when compared with the same period in 2004. Visa has some 57 million credit cards there.

“A main and key factor in the region’s growth is the constant development of products and platforms that has allowed Visa-issuing banks to penetrate different segments of the market and socioeconomic classes that in the past did not use credit cards,” said Vicente Echebeste, vice president of consumption products for Visa Latin America and the Caribbean.

Major retailers and some banks, like Peru’s Banco del Trabajo, have rolled out the credit red carpet to the middle and lower-middle social sectors, and these have responded enthusiastically. “There has been a proliferation of not only traditional cards, such as Visa, MasterCard, American Express and Diners, but also of in-house credit cards,” said Max Chion, general manager of the Lima-based Banco del Trabajo, Peru’s fourth-largest issuer of credit cards.

“The credit cards circulating in our economy nowadays are covering all possible aspects of consumption and empowering consumers to choose the retail product best suited to their needs,” said Chion. “The market is so diversified now that any retail player with a critical mass of frequent clients is kind of forced to offer its own credit card product.”

Echebeste says he believes consumers are also increasingly attracted to the benefits of not having to carry cash. But the payback is not an exclusive benefit of cardholders, he points out, citing a recent study that says a growth of 10 percent in electronic payments spurs consumption by half a percentage point. Thanks to lower operating costs, electronic payments can generate savings of up to 1 percent of an economy’s GDP.

Latin American retail and mall executives say the benefits of plastic are rippling throughout the region. Venezuela-based Graffiti, a chain of family fashion stores, reports that 60 percent of purchases there are made with a credit card. At Jardin Plaza Shopping, in Cali, Colombia, roughly 60 percent of purchases are made with a credit or debit card. In the case of the Peruvian Ace Home Center, a five-store home improvement chain, credit cards account for almost half of all sales.

“Credit cards have become an important business factor for us,” said Poldi Weil, Ace’s commercial director.

Paul Weeks, a retail analyst at the São Paulo office of Cushman & Wakefield Semco, says that consumer credit and higher employment rates fueled demand for goods in Brazil even when the economy’s growth rate slowed to 3.5 percent last year, from 5 percent in 2004. In 2005 shopping center sales were up 4.8 percent, a figure already adjusted for inflation. “This was the best result in the past five years,” said Weeks.

Citing numbers published by Brazil-based Credicard, Weeks says credit card sales last year were up 27 percent over the previous year, Brazil’s biggest expansion of credit during the past six years.

In the past, credit cards were the domain of Latin America’s wealthy classes, but they have now moved into the middle and lower-middle classes, says Jan Smith Ramos, InfoAmericas director of financial services. He says there are also aggressive efforts to offer better terms to participating merchants and increase the number of point-of-sale card terminals. In Mexico, for instance, last year the banking industry announced a $250 million plan to expand the point-of-sale terminal network to 475,000 by 2010.

“Credit cards are also more attractive to consumers as interest rates have fallen to nearly a three-decade low,” said Smith Ramos. “Interest rates remain considerably high in Latin America when compared with the United States, but by Latin American standards they are seen as good deals.”

Chion says the risk once involved in issuing credit has gone down in Peru, thanks to better systems for checking credit. “Ten years ago you simply reviewed a client’s salary stub, estimated the family income, expenses and debt, and issued your decision,” he said. “Nowadays, thanks to credit bureaus and greater access to consumers’ information, you can approve a credit card in 20 minutes.”

Banco del Trabajo’s strategy in the credit card market has been to target the low and middle socioeconomic groups. One of its products is a credit card with a limited credit line that can be as low as $15. This is an attractive incentive for clients who hold informal jobs as gardeners and maids and have no means of proving their incomes to start building up a credit history, says Chion.

According to a 2004 InfoAmericas study, Mexican, Brazilian and Argentinean cardholders are willing to pay interest rates up to 25 percent higher than the market average to obtain a credit card. “Credit cards are the first, and in many instances, only form of credit many consumers can obtain,” said Smith Ramos.

In Mexico, for instance, consumers can now obtain cards with interest rates in the low 20s, while the benchmark in Brazil ranges between 30 percent and 35 percent. Although these rates would turn off consumers in other developed countries, in Latin America they are considered reasonable in light of even higher rates in the past and the limited availability of consumer credit, says Smith Ramos. In many of these countries, a mortgage rate of between 15 percent and 20 percent is considered a good deal.

In Peru credit cards carry rates ranging between 40 percent and 80 percent, rates that Chion says are down about 30 percent from three years ago. Although they may still seem high, in Peru there are no application, renewal and annual fees, which boosts the real cost of credit cards issued in other countries with a lower interest rate, according to Chion.

Besides a stronger economy and higher wages, the other reason behind the steady decline in interest rates is a lower delinquency rate, thanks to credit assessment tools that allow card companies to “cherry pick” clients, says Chion. In Peru, there is still room in urban areas for credit card companies to expand their customer base, but the real opportunities are in the rural areas, he adds. “The main reason why the use of credit cards has not exploded outside of the main cities is because there are not enough merchants that accept credit cards,” he said. “But this should change in the coming years.”

It appears to be changing already. Sixty percent of the credit cards issued by Banco del Trabajo are for consumers outside of Lima. He expects more interest from merchants as they become aware of the positive impact credit cards are having on retail sales. Peru’s GDP grew by 6 percentage points last year; some consultants and economists estimate that between 1.5 and 2.5 of those percentage points are the result of greater access to consumer credit, Chion points out. “Part of our policy is to bet on the future by issuing credit cards to our clients, knowing that in the near future there will be a proliferation of credit cards in the rest of the country,” said Chion.

Another factor contributing to the growing penetration of credit cards, estimated to be used by 15 percent of Latin America’s population, is the development of consumer credit bureaus that have improved access to reliable information on consumers. Like other executives, Smith Ramos says he, too, believes that the growth in popularity of credit cards issued by big and growing retailers such as the Chilean Falabella and Ripley department stores, and the Mexican Liverpool, El Palacio de Hierro and Elektra chains, is forcing credit card issuers to lower the costs for both the consumers and the merchants and to reach out to the less affluent. According to Smith Ramos, retail sales in Mexico are up 20 percent, a growth generally attributed to greater access to credit cards.

Credit cards are increasingly important to retailers, Chion says, citing as an example Metro, which has a supermarket and hypermarket format. Forty percent of Metro’s sales are paid for in cash, and 20 percent with the Metro credit card. The rest gets financed with other cards, such as MasterCard, Visa and the credit card of Ripley, a Chilean department store chain with shops in Peru. Ripley has an agreement with other Peruvian retailers to accept its credit card.

In Colombia, Falabella launched its CMR Falabella credit card last year, well ahead of the debut of the department store, which takes place later this year. The company also owns a 49 percent stake in Home Center, one of Colombia’s leading home improvement chains. CMR Falabella can be used at Home Center and the Carrefour hypermarkets in that country.

“When Falabella came in offering favorable terms and rates, banks responded by lowering their rates,” said Sandra Tenorio, general manager of the Cali-based Jardin Plaza Shopping. “A keen competition among credit card issuers has also pushed down or eliminated some of the fees charged to merchants.” Financial institutions in Colombia have recovered their substantial investment in the credit card infrastructure — this includes such things as point-of-sale terminals — and are lowering operational costs to the merchants, according to Smith Ramos.

If Colombia follows Chile’s model, there is good news awaiting consumers and retailers there. Thanks to in-house credit cards, Chile has one of the highest, if not the highest, credit card penetration rates in Latin America. According to Santiago-based FigueroaRoig, Chile, which has a population of 16 million, boasts 11.6 million credit cards, 8.8 million of which are in-house cards issued by retailers that enjoy little regulation by the government. Following the lead of Falabella, large-format retailers like department stores, hypermarkets and home improvement stores have carved a niche by offering credit to socioeconomic groups with little access to credit. In fact, 70 percent of their sales are paid with a credit card.

Eighty percent of Chilean credit card holders have a retailer card, while the rest have traditional credit cards issued by financial institutions. Of last year’s $25 billion in retail sales, $10 billion were made with a credit card. Of that amount, $7.8 billion were rung up with an in-house credit card.

“The lower socioeconomic groups only have access to the retailers’ credit cards; that has allowed them to improve their quality of life with access to durable goods,” said FigueroaRoig partner Renato Figueroa. “These credit cards are being accepted at numerous other retailers and can even be used to pay for health care, education, government taxes, insurance, travel, plastic surgery and for cash advances.” Last year, credit card purchases in Chile were up 22 percent from the previous year, says Figueroa.

In neighboring Peru, where several Chilean retailers operate and have launched credit cards, the Asociación de Bancos del Perú reports that there were 3.9 million credit cards as of Jan. 31 — 30 percent more than in 2003. Over the same period, gross volume shot up 75 percent to $1.3 billion.

“Plastic as a payment method has become a currency of common use,” said Chion. With a network of 83 branches, this private bank was the first in that country to target the lower socioeconomic classes with credit cards. As of December, the bank had issued 558,314 credit cards, 12 percent of the country’s credit card pie.

Even with these significant inroads, credit card companies are quick to note that the market is in a relatively early stage of development. Only about 30 percent of Latin Americans have a bank account. According to Smith Ramos, there is a strong correlation between the possession of bank accounts and credit cards.

“Once you become a banking client, there is more information about you,” he said. “You become more susceptible to credit card offers. Also, banks’ debit cards are often these clients’ first experience with plastic.”

Judging by recent developments in the region, they will not likely be the last.

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