LAC has always been a unique credit card market. Risks are high, and returns are protected with substantial interest rate spreads. Consumer take-up on credit cards is low; some markets have less than 20% penetration. Why the big credit card investment?
You can find out plenty about the market in Mercator Research that will publish by the end of July. Here are a few tidbits:
- Financial inclusion is improving, but it has a long way to go.
- Many new fintechs, including Mercado Pago, PagSeguro, and Rappi have created momentum in the market
- Investors are active in the market. SoftBank, a multi (multi) billion investment firm is bullish about the market.
Their latest investment is Creditas. TechCrunch reports Softbank just invested $231 million in Creditas. It has one of those startup stories everyone loves.
- After 12 years working for banks and consulting firms on the digital transformation of financial services, Creditas founder Sergio Furio finally found a problem he felt he could build a business around.
- Over dinner with his Brazilian wife one night in 2011, she casually mentioned that consumers in her country were paying more than 200 percent interest rates on consumer loans.
We can vouch for the 200% interest; our research found that interest is closer to 300% in Brazil. Imagine.You buy a $1,000 television, pay it out over six months, and spend about $2,500.
And, why? There is no shortage of banks. Top brands like Citi, HSBC, Santander, Scotiabank, have been lending there for years. Healthy local banks like Itau have mastered the market.
The issue is that fraud rates are high. Some interest rates are four times and five times U.S. fraud losses. And, credit losses, Ay! (Or Ai! In Brazil) Loss rates are off the charts.
Claritas is an asset-based lender. You can place your car or house for security on a loan. This helps reduce credit and fraud, hence, consumers can find a cheaper financing source.
We don’t know if this model will bring Claritas towards secured cards, which we believe would be a breakthrough in this market. (See here for our recent review of secured cards). We have not seen a successful secured card program in LAC but think it would benefit both urban and rural customers. Secured cards can be a path to financial inclusion with real bank accounts attached, not closed loop digital accounts.
Assuming market stability, which is never guaranteed in LAC, credit has plenty of room to grow and Softbank’s funding provides a solid path for success.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
