Taking cards to the next level
Chiles consumer finance and payment card market has undergone a transformation in recent years, helped by the entrance of multinational banks already present in other parts of Latin America, and infrastructure modernisation. As cheque usage has declined, debit and credit cards have benefited, as Victoria Conroy reports.
With a population of 17m as of 2009, and an emerging middle class, Chile represents an increasingly important growth spot for payment cards. During the past decade, socio-economic and cultural factors have converged to position payment cards and other forms of electronic payment as increasingly important elements of the countrys economy.
The recession of 1999 was felt keenly across Chile, but consistent economic growth since then helped to boost household incomes and widen the middle class consumer segment, which in turn drove demand for financial services. The year 2003 saw demand for consumer credit and loans grow significantly at a time when interest rates fell in tandem, and also saw the emergence of retailers as competitors to banks in the field of consumer financial services.
As of 2009, GDP per capita stood at $14,539, ranking Chile 46th in the world and the highest in the Latin America region, surpassing the much larger markets of Brazil and Mexico. GDP in real growth terms has been relatively steady over the past decade, but 2008s 4.2% growth was followed by -1.7% in 2009. However, it is estimated by the countrys central bank that GDP will reach 5.1% this year, helping to spur consumer demand for financial services.
However, non-electronic forms of payment are very much entrenched within Chilean society, with cheques being one of the most popular payment methods and seen as something of a status symbol. They can also be used as a form of credit through a scheme known as Tres Cuotas, where customers pay with three cheques post-dated at 30, 60 and 90 days.
Chile has greatly improved the efficiency of electronic transactions through a new real-time gross settlement system implemented in 2005 and through the interconnection of the countrys ATM networks. Chile has two ATM networks, Redbanc (established in 1987) and Globalnet (established in 1992).
These networks are owned by their participating banks. The two organisations announced an interconnection agreement in 2004. Transbank (established in 1993) operates a network for financial institutions that issue Visa, MasterCard, American Express and Diners Club credit cards. It also handles RedCompra, Electron and Maestro debit cards, as well as domestic bank card brands. Transbank offers an instalment payment facility for the global credit card brands, which provides interest-free terms identical to the Tres Cuotas system of postdated cheques.
The debit card market
The number of debit cards in use has risen steadily in Chile, along with the value of transactions. Debit cards are issued automatically to current account holders as part of a package of services.
The first multi-bank debit card, RedCompra, was introduced in 1995, but the bulk of the cards in force are Visa Electron and Maestro cards issued by the banks. New initiatives such as the CuentaRUT and Caja Vecina debit card programmes aimed at low-income consumers have been implemented to expand the reach of payment cards in recent years and have helped to drive growth in the sector.
From 2007, an emerging trend is that payments made with cheques are losing ground to payment cards. In 2007, the number of cheques processed fell by 3% while card transactions and e-commerce transactions grew by over 20% compared to 2006. The number of cheques cashed fell from over 259,000 in 2007 to just under 248,000 at the end of 2008. The latter number represents less than 25% of total retail transactions as of late 2008.
In October 2008, tax on cheque and debit transactions was eliminated. This had a significant impact on debit card usage, as previously people would withdraw large sums from ATMs in order to make small value cash payments, rather than make these payments with their debit cards.
Debit cards posted annual growth rates of over 40% in the number of transactions and over 50% in value from 2007 to 2008. Debit card transactions increased their total share in retail payments from 7.5% in 2007 to almost 10% in 2008.
This significant increase in debit card transactions contrasts with the drop in the use of ATMs ATM use fell almost 7% in amount and over 3% in the number of transactions in the same period. These figures suggest people are replacing ATM withdrawals with an increasing number of debit POS transactions.
In the first half of 2009, the downward trend in cheque payments steepened, falling more than 10% at the end of the first half of 2009. But despite the rapid contraction of cheque payments, cheques still hold an important position in the retail payment systems, with a share of over 90% of the total amount transferred in the retail payment system. The number of transactions, however, represents a share of only 20%.
Smart cards are set to take off in Chile as part of a concerted effort to improve security and to offer enhanced services to cardholders. Several large Chilean banks partnered with Telefónica CTC Chile in 2000 to form a company called Empresa de Tarjetas Inteligentes (Etisa), which is implementing the required infrastructure upgrades. Prepaid cards are expected to grow significantly over the next two years.
In 2009 Visa decided to associate with local banks to launch prepaid cards that can be used at more than 60,000 POS locations. The cards are aimed at people who do not qualify for a bank account and will be made available at retail locations with high footfall, such as grocery stores and kiosks.
The Chilean credit card market
Despite the prevalence of paper-based payment methods, payment card usage has grown strongly over the last five years, and credit card penetration levels are among the highest in Latin America.
Chiles credit card market is characterised by retailers having more of their own private-label cards in issue than banks, given that the qualification criteria for retail-issued cards is much less stringent than for bank-issued cards. The only qualifying criteria a retail store customer needs is the ability to perform a bank transaction before they are issued a card, whereas banks require multiple ID checks and certain income levels before approving an applicant for a credit card.
As a result, Chiles retailers have long enjoyed much greater access to the sizable unbanked population in the country. However, banks are now targeting the unbanked segment although they have some way to go before they are able to match the depth and breadth of retailer touch points with customers.
For example, several large Chilean retailers not only have a wide network of stores, but they also operate travel and insurance agencies, and enjoy richer client data streams as a result.
Indeed, growth in Chiles credit card sector is increasingly coming from low-income consumers and banks are tailoring their customer acquisition strategies accordingly.
Chiles banking regulator, SBIF, said that in the fourth quarter of 2009, credit card transactions, including cash advances, purchases and service fees, rose 19% to CLP1.07bn ($2.1m) compared to the same period in 2008. During the fourth quarter of 2009, Visa was the most widely-used credit card in Chile, followed closely by MasterCard, with American Express and Diners Club, according to SBIF.
Transactions with MasterCard totalled CLP529.64bn, followed by Visa at CLP481.60bn, American Express at CLP38.60bn and Diners Club with CLP18.40bn. Credit cards from Chiles biggest bank in terms of lending were Banco Santander-Chile, used for CLP375.90bn in transactions, followed by Banco de Chile with CLP342.12bn in transactions.
Private-label credit cards issued by retailers include open-loop cards that are accepted at multiple stores, as well as closed-loop single-retailer cards. Retail cards are originally issued to low-income individuals without access to bank credit, and in spite of the much larger number of retail cards in force, bank-issued credit cards capture about one-half of total credit card payments.
Data published by the SBIF indicate there are 22m active non-bank cards, or more than four times the number of active bank cards.
Banco Santander Chile
Banco Santander Chile is the largest bank in the country with assets totalling $40.9bn as of December 2009. It has the largest network in the country with 497 branches and 1,917 ATMs.
In 2009, its net income totalled CLP431.25bn, despite higher provision expenses (up 14.4% from 2008) and deflation which hurt margins. In the fourth quarter of 2009, fees from credit, debit and ATM cards rose 19.9% compared to 2008, reflecting increased card usage and the successful launch of three credit card products in 2009.
As of December 2009, the bank, which has a market share of 33.1% in credit cards in Chile, generated 38.2% of purchases in the country. Purchases were up 22.9% from 2008 compared to 8.1% for the rest of the market, excluding Santander. Santander Chile ranks number one in Chile in terms of purchases with credit cards with approximately 19% of the market, including non-bank lenders.
Banco de Chile
In 2009 Banco de Chile recorded net income of CLP258bn compared to CLP347.43bn in 2008. Fees increased year-on-year by CLP15bn or 6.5%, driven by its subsidiaries and traditional banking services.
Throughout 2008, the banks fee income was driven mainly from credit cards, current accounts and insurance sales. Generation of higher fee income from credit cards was reinforced by growth in the current account holder base and successful marketing strategies such as new co-branding agreements.
Its Travel Club credit card, which is available on the Visa and MasterCard platforms, incorporates a loyalty programme that rewards cardholders for all purchases, with points redeemable at the banks online catalogue of rewards. The card also offers international travel assistance, insurance benefits and instalment options.
Banco de Credito E Inversiones (BCI)
In the third quarter of 2009, BCIs net income was CLP109.21bn, a drop of 15.6% compared to the CLP129.44bn recorded in 2008. Total loans amounted to CLP8.8trn, giving BCI a market share of 12.80%.
In terms of risk, loan loss provisions stood at 2.16% in the third quarter of 2009, representing an increase compared to previous quarters but comparing favourably with the 2.37% shown by the Chilean financial system for the same period. As of the third quarter of 2009, BCI had 1.57m debit cards in circulation and 318,264 credit cards. Credit cards have grown strongly over the past couple of years, given that they totalled 278,595 in the third quarter of 2008.
In 2008, BCI devised a strategy called Emerging Banking which is targeted at consumer segments that are not traditionally fulfilled by banks.
During 2009, BCI created the Multybox, a self-service station with touch-screen technology, where customers can pay bills, refund mobile phones, make money transfers and access other financial products.
Banco del Estado de Chile
Banco Estado is the third-largest bank in Chile with assets of $29.6bn as of September 2009, and a market share of 16.6% based on outstanding loans. It has over 7m customers and 11m savings accounts. Banco Estado also boasts a high number of internet banking customers. Between December 2008 and June 2009 the number of internet banking customers increased by over 60% to nearly 588,000 users.
During 2008, Estado recorded 60% growth in the number of credit card customers to over 280,000. In the same year, the number of people with electronic chequebooks grew by 15.5%, while the number of low-income-targeted CuentaRUT accounts doubled to over 1.2m active accounts this had risen to over twom by the end of 2009. Seven out of 10 customers who had a CuentaRUT account had never accessed financial services before. A transaction study conducted in August 2009 found that 47% of purchases with debit cards correspond to CuentaRUT accounts. The bank is aiming to have over threem accounts by the end of 2010. As a result of this increase, the state-owned bank holds the largest debit card market share with over 36%.
CorpBancas main current account product is the Integral account through which customers are provided with a range of services including ATM cards, a credit line, Visa, MasterCard and American Express-branded credit cards and internet banking services.
As of December 2008, the bank had over 68,000 retail current accounts, an increase of 15.6% compared to 2007.
As of December 2008, the bank had approximately 246,000 credit cards issued under the brand name CorpBanca, an increase of 9.4% compared to 2007.
The banks promotions such as discounts on gasoline purchases have enabled the bank to drive up transaction volumes and usage rates. During the fourth quarter of 2008, the usage rate for the banks cards was 46.4%, while the industrys average was 36.5%.
As of December 2008, the bank had approximately 35,000 credit cards issued under the brand name Banco Condell.
The banking division of retail giant Falabella, Banco Falabella launched its first credit card in Chile in 1980, and as of September 2009 had over 2.4m active credit card accounts.
Banco Falabellas gross loans in Chile comprised over 40% of the $2.96bn of gross loans recorded by the group as of September 2009.