Debit cards work well in the Brazilian card market but credit cards flounder because of consumer default and a lack of infrastructure in the market, as we noted in a research report on the BRIC countries. We opined about how the market was transitioning to a higher level of non-cash consumer payments, as the economy was beginning to falter beginning in 2014. Bank accounts for consumers is still relatively low, with only 68%, compared to 79% in China. Debit cards, however, outpaced credit by 2:1.
As the economy continues to stumble, The Brazilian Report indicates skyrocketing interest rates. While you may see a slight uplift in the U.S. and U.K markets, consider this:
- Annual consumer rates for credit cards topped 270 percent for unpaid balances.
- As Brazil suffered its worst economic crisis in history, the banks raised credit card rates to a stunning 500 percent per annum on unpaid bills.
- With Brazilians relying on credit an paying for everything from everyday goods to luxury items in installments, massive interest rates are being embedded into these payments.
This makes U.S. payday lending seem cheap. It is hard to get consumer purchasing up again when rates are so high.
- Therefore, it’s not so much the level of debt that is hurting Brazilian consumers, rather than the percentage of interest paid from disposable in come.
- When looking at the Brazilian economy, low debt levels can be misleading because high-interest rates are not being taken into consideration.
Forbes looked at some of the local rates a couple of years ago. Ouch! Envision this not a banker’s dream but rather a banker’s nightmare.
- HSBC Brasil: 462.8%
- Bradesco: 502.6%
- Santander Brasil: 510%
- Itau Unibanco: 632%
When you can justify rates like these, high credit losses demand these usurious rates.
It becomes a vicious cycle. The economy is poor, and credit risk is high, so people do not have available credit to spend, which makes the economy worse and people more cautious about spending.
This is one of the wonders of global payment cards. A plastic card works consistently at the point of sale to complete a transaction, but what goes on behind the scenes is quite different.
The U.S. CARD Act of 2009 eliminated dynamic pricing, which might seem to be a worthwhile goal in this market!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
