Brazilian credit-card networking services provider Redecard SA and its controlling shareholders raised
BY JAN SMITH
How is the card payment market poised to affect Redecard?
Redecard's IPO [came] at an opportune moment, both within the context of the card market and within a macro-economic setting. On a macro level, conditions could hardly [have been] better for creating interest in the IPO: country risk ratings are decreasing; the Real has appreciated nearly 6 percent since January and could potentially trade at R$1.85 by year's end; and the Bovespa's Novo Mercado listing is well established and favorably viewed by foreign investors. Within this context interest rates are decreasing and bolstering use of cards. Transactions grew by 20 percent in 2006 and are set to grow by at least 16 percent in 2007. Billings in local currency will grow by about 20 percent while the number of cards will expand by close to 12 percent.
Growth will continue to be strong and, in the short term, will come from the credit card market, but within five years, debit card growth will be the main engine of growth. Extended use of both types of cards will be facilitated by an expanding bank penetration rate, EMV cards that improve the card-use experience for both the consumer and the merchant, and the likely doubling of acquired merchants by 2012. Brazil already boasts the largest merchant network in the region with close to 1 million associated merchants.
What are the possibilities of third-party entering the market, either from abroad or emerging locally?
Rapid growth and positive indicators would make entry scenarios attractive but various other factors conspire against successful expansion of new players. The market, particularly in terms of merchant acquiring, is completing its first cycle of rapid growth and is poised for a period of sustained growth that is more competitive rather than expansive, and favors established players. This plays well for both Redecard and Visanet who have dominated this market for nearly twenty years. Very likely, in recognition of the enormous resources and acumen required to face established competitors, large players often well known to the American and European markets have yet to make serious inroads into the Brazilian market, and instead focused on other opportunities within the region and within the Brazilian financial services marketplace. Although historically focused only in Brazil, some of the largest and most efficient banks are Brazilian banks and they successfully held the market against foreign players. Any new arrival would require considerable investment, run high risk, and take time to seriously take a bite out of the market.
There is room however for closed-end processors and merchant acquirers who function within a limited space. Examples of opportunistic growth could come from the private label market wherein a model similar to Chile's Falabella's is emulated. The private label market represents just under 10 percent of the total card market and has some of the tightest margins, so growth opportunities would be limited. The only other card of weight in Brazil is American Express, acquired by Banco Bradesco in 2006, it also holds less than 10 percent of the market and is historically hampered by lackluster performance. It remains doubtful whether Bradesco will be able to make this card grow alongside its predominantly Visa card portfolio and, in terms of merchant acquisition, is no threat to Redecard. Thereby, this eliminates the threat of the only bank large enough to enter the business on its own and become a new presence in the market.
What is the risk of a RedeCard acquiring bank switching to Visanet?
Understanding where changes in the respective camps could come about also demonstrates why such changes are unlikely in the short term.
Most banks in Brazil are dual MasterCard and Visa issuers and none of the banks holding a stake in Redecard are bound to remain predominantly within the Redecard sphere of operations. Although on the surface this points to a potential for change, little potential actually exists. The relationships between card organization/ merchant acquirer/ card issuer are deeply interwoven and show little sign of changing. This is a considerable factor in a market where commercial and political alliances carry more weight than in the West. Banco Itau is a key regional bank for MasterCard and Citibank is a key global bank for the card organization. Both banks are therefore well assigned with Redecard through association.
Redecard has also indicated it will maintain raises in the interchange rate, thereby sweetening the reasons for banks to acquire Redecard affiliated merchants, and increasing the attractiveness of issuing cards that will run through the Redecard system.
Furthermore, almost as a form of negative reinforcement, a realigning of acquiring activities would almost surely be accompanied by a shift in issuance from Visa to MasterCard branded cards. Considering the card market is now and EMV market, substitution would cost close to US$1 per card, and represent an investment of various millions for any given bank. Any substitution in portfolio would therefore be drawn out across the lifespan of the existing card base that would be swapped for a new brand upon expiration. Migration to a competitor would involve considerable cost and the migration would therefore have to be deeply motivated by gains in interchange or merchant discount rates - something that is unlikely to change very much in the short term.
What legislative or market pressures could bring down Interchange and Merchant Discount fees and thereby directly or indirectly affect Redecard's profitability model?
The Brazilian Central Bank has stated that it will not intervene on the matters of interchange rates and merchant discount rates, but that it does suggest the market pursue competitive practices at all times. This is not an idle statement and was accompanied since 2005 by a series of benchmark studies conducted by the Central Bank. These studies have helped indicated where rates can be more competitive and where they should be kept as is in light of needing to recover investments in infrastructure and merchant terminals. The studies also found that the rates should not be brought down significantly or else expansion of the card payment network will be compromised. This would upset government efforts to formalize cash economies and increase fiscal transparency. Discourse on reducing rates, once strongly pushed by merchant organizations, is now relatively tame and no significant changes are foreseen in the next few years other than downward pressures brought about by increased market competitiveness. These changes will be offset and in turn spurred by continued growth in acquired merchants and card transactions and should therefore be regarded as positive movements when they arrive.
How will Redecard face increasing market pressure?
The company will likely continue to focus on value-added services for all merchants and particularly products and services adapted for smaller merchants. Wireless terminals and facilitated interface with accounting programs will likely be the strongest focus over the next two years. Facilitating rapid payment to merchants will be a means of increasing preference and signage for Redecard associated cards. As mobile opportunities emerge, Redecard will likely pursue opportunities with sales through cellular telephones and PDAs. Early bell-weathers of these services already exist through the company's call center and catalog specific terminals.