BY MATT GANTZ
Throughout Latin America, the unbanked population has remained stubbornly high for decades. Many consumers remain distrustful of financial institutions after years of hyper inflation, high interest rates and commission fees. As well, the lack of ATM and POS terminals in rural and periphery urban areas has constrained growth of banking services.
During the past decade, however, strong GDP growth, falling unemployment and growing consumer expenditure boosted the industry. In countries like Brazil, the growth and increased purchasing power of the new middle class has spurred an attractive new market for fast-moving consumer goods. Consequently, demand for credit to finance these purchases has skyrocketed. In Latin America during 2004-2009, financial cards in circulation had a Compound Annual Growth Rate of 15 percent (CAGR), while gross consumer lending expanded 20 percent CAGR.
While banks have primarily been responsible for extending consumer finance products to the general populace during these years, non-financial institutions, most often, retailers, have also played an enormous role.
Retailers possess distinct advantages over banks. Outlet penetration is much higher, especially outside of urban areas, meaning that consumers are more familiar with retailers than banks. As Latin American consumers often visit a limited network of retailers for their shopping needs, additional banking services within those outlets are viewed as a convenient option. For retailers, their extensive knowledge on consumer purchase histories and shopping habits make the jump into consumer lending a natural choice.
The growing role that retailers are playing in the financial cards and consumer lending markets is reflected in the rapid increase of banked population in Latin America (Argentina, Brazil, Chile, Colombia, Mexico, Venezuela), which has grown 49 percent during the period 2004-2009. With greater familiarity of retailers, lower and middle income consumers are increasingly choosing this channel when searching for their first financial card or line of credit.
CHILE AND BRAZIL
In Chile, the top four issuers in credit cards in circulation in 2009 are retailers, controlling 77 percent of the market. Retailers, like Promotora CMR Falabella SA, CAR SA and Cencosud Administradora de Tarjetas SA have had enormous success reaching the newly banked population, issuing credit cards with soft lending standards compared to retail banks. These retailers have developed their own rewards programs and maintained customer loyalty by offering significant discounts and promotions through card purchases.
Meanwhile, in Brazil, Pão de Açúcar, part of Cia Brasileira de Distribuição SA (Ponto Frio, Extra and the recently acquired Casas Bahia) has been concentrating on the growing lower middle class offering easy to access durables lending. The credit approval process is much more lenient than what is found at a commercial bank, helping solidify the retailer’s reputation with low and middle income consumers that have had trouble taking out loans in the past. Pão de Açúcar, as well as other major retailers like Carrefour, Ponto Frio, Extra and Casas Bahia, is extending their installment plans for the upcoming holiday period, targeting their cardholders and borrowers as well as attracting new buyers. The Central Bank of Brazil notes that the average installment plan for purchases of consumer appliances and electronics through October of 2009 is 513 days. During the same time period in 2008, the average plan reached 488 days. Even during a year of slowing economic growth, retailers have not significantly tightened their credit restrictions.
Banks are facing the challenge, posed by retailers, by diversifying their financial products and partnering with retailers in order to reach the unbanked population. Financial institutions would be wise to follow strategies, such as those from Banco Bradesco SA and Caixa Econômica Federal in Brazil, which have actively begun to court the unbanked contingent. Bradesco, created the ‘Banco Postal’, which transforms post offices into ‘correspondentes bancários’, enabling banks to offer basic services targeted at low- and middle-income consumers. Caixa Econômica Federal created the Conta Caixa Fácil, which allows the opening of a bank account with no income requirements. Customers receive a debit card, through which they can make up to four cash withdrawals and account consultations, free, each month. Conta Caixa Fácil currently has 9 million customers, primarily beneficiaries of the government’s social program Bolsa Família and pensioners. Such initiatives indicate a vast market for banks with regard to consumer lending and credit services.
In Mexico, major retailers like Wal-Mart, Chedraui and Famsa have established themselves in card emission and lending, filling the large gap where consumers have been unable to attain credit from banks. Retail banks will mirror the strategies used by these retailers in 2010 when they partner up, not with large hypermarkets and supermarkets, but with convenience stores, pharmacies and gas stations in order to reach the low and middle classes. Major banks, such as Bancomer, Banamex, HSBC and Banorte have plans to operate through these third-party retailers in order to offer cash/check deposit and withdrawal, as well as the ability to pay utility bills. The retailer will act as a representative of the bank, offering more convenient service locations for existing customers, but also becoming more visible to low- and middle-income consumers that frequently pass through these outlets. As well, these partnerships allow banks to expand their presence, while saving money that would otherwise be spent on building and maintaining a new bank branch. This is especially preferable during an economic downturn that prevents large scale investment. While ensuring security is a legitimate concern in expanding through these retail channels, major players feel that correspondent banking will greatly increase their visibility with an underserved consumer segment.
While growth in financial cards in circulation remained in double digits in Brazil, there was a considerable slowdown throughout the rest of Latin America due to the global recession. Retailers felt the impact, as delinquent accounts rose, often from the same group of consumers that drove growth during the economic boom during 2003-2008. In Mexico, for example, non-performing loans in card lending increased to 15 percent particularly affecting retailers like Wal-Mart de México SA de CV, Almacenes Coppel SA de CV and Elektra SA de CV, Grupo.
For the future, greater oversight and regulation is needed with more efficient credit scoring mechanisms to price risk. Excessive interest rates and commissions need to be reined in, and this would be aided by greater competition between banks and non-bank lenders. Most importantly, consumers need to become more familiar with the financial products being offered and better understand terms of agreements. Throughout Latin America, it is common for first time borrowers to accept the first offer they receive. Consumers need to shop around for more competitive rates. Here, government should step in, in order to increase access to information on lenders, especially given that the growth in financial cards and lending will be concentrated in a consumer segment that has little to no credit history and may be susceptible to taking on too heavy a debt burden.
Still, the debt to GDP ratio throughout most Latin American countries is low when compared to the economies of North America and Western Europe, indicating that the overall burden on consumers is not extreme. While greater caution needs to be taken by both lenders and borrowers, the sizable unbanked population represents a strong future growth market for both bank and non-bank lenders.
Matt Ganz is a research analyst at Euromonitor International. This article was written for Latin Business Chronicle.
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