Promotions and rewards programs fuel card lending in Latin America.
BY MARCO SALAZAR
Card issuers in 2010 continued to use promotions and other strategies to spur consumption in a year that promised to show a recovery from the recent economic crisis. Issuers took advantage of the 2010 FIFA World Cup to promote sales of LCD television sets and implemented a series of other strategies that had been successful during the economic crisis. Latin America is projected to post a growth rate of 26.7% in LCD television units in 2010.
In Argentina, retailers offered 50 payment installments without interest to entice the financing of the LCD televisions. Outstanding balance for card lending in Argentina is expected to attain a compound annual growth rate (CAGR) of 13.3% between 2010 and 2015, by far the highest in Latin America. Other promotions included year-round discounts on payments with credit cards and debit cards on certain days of the week. These types of discounts were largely implemented by retailer and bank co-branded cards and will be difficult to eliminate in the future, as consumers have come to expect such promotional offerings. Despite the adverse effect of these promotions on financial card issuers, financial cards in circulation grew at a rate of 21% in 2010 while the retail value of transactions grew at a rate of 22.7% in Argentina. The forecast period does show a significant deceleration, as financial cards in circulation are expected to attain a CAGR of 8.9% and retail value of transactions is expected to attain a CAGR of 7.7% over 2010-2015.
Promotions in Colombia were also similar as they focused on offering consumers discounts on specific days of the week when consumption levels are typically low. Rewards programs were also implemented by Colombian card issuers and helped overcome consumers’ reluctance to use their financial cards, as consumers perceived to have achieved large savings from the point based reward programs. The high managing fees of financial cards in Colombia are the most deterring factors in the growth of financial card usage. Promotions have helped stimulate card usage and have resulted in Colombians obtaining multiple co-branded cards in order to leverage the different promotions and rewards programs offered by the major retailers. The growth of financial cards in circulation is a growth rate of 5.5% CAGR and a transaction retail value of 8.2% CAGR over the forecast period (2010-2015). Despite posting growth rates that are below those of Latin America, the success of financial cards in Colombia will be largely dependant on increased use of financial cards, as this will help drive down managing fees. Attaining a higher penetration of the unbanked population will be critical to the continued growth of financial cards during the forecast period.
Store card issuers, primarily the large chains of retailers, are in a desirable position in the future of financial card issuance. Store cards have are expected to post the second highest growth rate over the forecast period for all financial card categories, posting a CAGR of 10.8% for Latin America. This does not surprise many in the financial card industry as store card issuers have a much more intimate relationship with their customers. Store card issuers are mostly retailers, whose core competency is providing goods to its customers. These customers have built a relationship with the card-issuing retailers and thus trust their financial card products.
Brazil is the country with the highest forecasted growth, with a CAGR at 11.8% for Store Cards in circulation. Lower income consumers in Brazil have always been leery of traditional banks and thus have had a more trusting relationship with retailers. As a result, retailers installed a program less than 20 years ago that offered installment payment plans more commonly known as “carnês de loja” (store booklets which contain payment dates and amount due). These plans allowed retailers to build relationships with their customers and facilitated the entrance of retailers in the credit lending segment. It is still unclear as to whether store card lending will fuel the card lending category’s growth as banks have recognized the need to adapt their business models to target and acquire low income consumer groups.
This trend is also present in Chile as retailers have developed store cards in popular retail stores, who currently hold 4 of the top 6 credit card issuers in 2009, controlling approximately 74% of the credit cards in circulation and holding approximately 48% of the retail value of credit transactions. This figure is astonishing given the fact that store cards in Latin America are expected to see a 10.8% CAGR over the forecast period. The top retailers are in the midst of aggressive expansion plans that will only further increase their penetration of the Chilean market. The higher retail penetration of rural areas in comparison to banks signifies that retailers will hold an advantage over banks in terms of exposing Chileans to their financial service offerings. The rural expansion will help further increase the banked population of Chileans aged 15 years and older, which is estimated to be 81.5% in 2010. Convenience will play a key factor as consumers in rural areas will have a “one-stop shop” in which to fulfil their financial and retailing needs.
Store cards in Colombia face similar trends, but will be a more important driver in increasing the banked population, which is estimated to be the lowest in Latin America at 53.6%. Retailers and banks have increased their efforts in the past 5 years to expand banking services at retailing locations. Bancolombia currently has the largest presence in retailing locations and has been largely credited with the rise of this trend. Multibanca Colpatria has the largest banking presence in Carrefour retail outlets and also manages the co-branded Carrefour card. Banks are leveraging the relationship between Colombian consumers and major retailers, as they look to overcome consumers’ mistrust of the banking system. The partnership between banks and retailers looks to continue into the forecast as the unbanked population is a valuable target for financial services providers. Cross selling of the banked population will also help fuel the trend of banks having offices at popular retailing outlets.
The fastest growing payment channels are comprised of the Internet and mobile phones. Colombian consumers still use traditional banking locations the most, but mobile and electronic channels possess the highest growth rates. The key in this segment is infrastructure and consumer confidence. The growth rates for smart phones usage is high and the rate of broadband Internet subscribers is expected to increase by 22% in 2010. Education is the key to the determent of fraud and has been taken on by banks like Bancolombia that in 2010 launched a promotional campaign designed to educate customers on a new authentication system for its website. The trend for electronic and mobile payments favors young to middle-aged consumers as they are more adept in the technology aspect when compared with older customers, who are accustomed to the traditional banking system. Improvements in the security protocols will greatly improve penetration and a good indicator of this is that 15.8% of all cards in Colombia are Contact Smart Cards, which is third behind Brazil (15.6%) and Chile (19.2%).
An electrical supply emergency was declared in February 2010 in Venezuela that forced the government to implement an electrical rationing program. As part of the rationing program the National Banking Council was forced to modify operating hours of retail banks in shopping malls. Other measures such as reduced use of air conditioners, computer systems, and escalators aimed at reducing electricity consumption were put in place, but also contributed to the drastic reduction of consumer traffic in banking outlets. As a result, the electronic banking system thrived. In 2010, 20% of the retail value of credit card transactions was recorded without the cardholder being present. In addition it is expected that financial cards in circulation will post a 10.9% CAGR over the forecast period along with a 9.0% CAGR for retail value of financial card transactions, which is higher than the Latin America projected growth rates. It is also projected that Venezuelans will continue to use the electronic banking system as the electricity crisis forces consumers to alter their banking habits and adapt to a new way of banking. Banks are focusing their efforts on the promotion of their Internet operations by developing more secure and user-friendly websites. This will help banks reduce their operation costs and thus will allow for the creation of an additional revenue stream going into the future.
Marco Salazar is a research analyst at Euromonitor International. This article was written for Latin Business Chronicle.
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