trends in electronic payment instruments 2011 - Afi [PDF]

Tecnocom Report

TRENDS IN ELECTRONIC PAYMENT INSTRUMENTS 2011

Prepared by

Tecnocom is an international Spanish company listed in the Spanish Stock Exchange Market since 1987. In 2006, Tecnocom started a corporate growth process aiming to become a leader in the Spanish IT market. Tecnocom is one of the five top IT companies in Spain (around 400 million EUR of revenue) with wide expertise in high level technology operations such as banking payment systems or automation systems. Its regional presence includes Spain, Portugal and Latin America (Chile, Colombia, Mexico, Peru, Brazil, Costa Rica and Dominican Republic).

Copyright 2011 Telecomunicaciones y Energía, S.A. All rights reserved Tecnocom and its logo are trademarks of Telecomunicaciones y Energía, S.A. Graphic design www.gcarrousel.com

Tecnocom Report

TRENDS IN ELECTRONIC PAYMENT INSTRUMENTS 2011

Tecnocom Report: TRENDS IN ELECTRONIC PAYMENT INSTRUMENTS 2011

Foreword It is Tecnocom’s pleasure to present this first edition of our report on trends in electronic payment instruments in Spain and Latin America. The ambition behind this piece of work is to provide the financial sector in general and the payment services segment in particular with the knowledge built up by Tecnocom during its more than 15 years leading the payment services industry. Tecnocom has acquired extensive IT consultancy know-how, developed proprietary solutions and implemented payment process management systems for the leading banks and financial institutions in Spain and Latin America. Tecnocom has selected two prestigious partners to assist it with preparing this report:Afi, Analistas Financieros Internacionales, and The Cocktail Analysis. The result is exhaustive analysis of the current situation and outlook for payment services in the short and medium term. When determining the strategic approach to this report, we set ourselves two key objectives. Firstly, to cover, as extensively as possible, all the markets where Tecnocom operates. We quickly identified the socio-economic and technological factors, including the levels of banking service and mobile telephony penetration that determine each country’s propensity to adopt the various payment instruments and their specific usage. To this end, and in order to guarantee the integrity of the information presented, we chose to focus our analysis on Brazil, Chile, Colombia, Mexico, Peru, the Dominican Republic and Spain. The second objective established was to create a metric that enables users to directly compare the level of development of electronic payment methods in the various countries analyzed. This goal was achieved by designing a synthetic indicator encompassing what we deem to be the most important variables. We have named it the i Tecnocom Indicator of demand for electronic payment methods. The annual update and publication of this report will allow us to establish this metric as a benchmark indicator and tool encapsulating quantitative and qualitative ICT sector know-how. We trust that the outcome of this initiative is of interest to you and is of assistance in your line of work, as this will pave the way for establishing the report as an anticipated and valued source of reference in the world of electronic payments, the banking and finance sector and the ICT industry.

Javier Martin Chief Executive Officer of Tecnocom

4

In recent years we have been observing a gradual shift away from paper-based instruments to electronic alternatives that encompass a broad spectrum of technologies ranging from cards to mobile payments. The migration towards the use of electronic payment methods owes largely to the efforts made by the financial institutions to stimulate and intensify the use of ICT in retail payment systems. System upgrades have enabled deposit takers, payment processors and payment gateways to introduce new payment instruments and lower the costs of processing existing instruments. Unquestionably, this is excellent news for Spain and Latin America since development of efficient infrastructure that facilitates electronic payments is key to a country’s financial growth and progress. Although penetration of banking services in Spain is among the highest in the world, the country still has a long way to go in adopting alternative non-cash electronic options. In Latin America the dual challenge is to maintain the healthy pace of growth sustained in credit card usage while making further progress on bringing more citizens into the banking fold. Beyond the user-friendliness and security that electronic payment instruments afford individuals, they can also be used to bolster financial inclusion and even to make businesses and public entities more productive. For example, channeling salary and public subsidy payments through electronic instruments has the potential to drastically reduce the costs of running these processes. Tecnocom has entrusted Afi, Analistas Financieros Internacionales, with the task of performing an ambitious piece of analysis that mirrors developments in electronic payment instruments and should provide a fertile starting point for tracking developments year after year in a sector whose prospects are unbeatable. We are convinced that the work distilled here constitutes the ideal platform for getting to know the specific opportunities and challenges facing the sector from 2012.

Emilio Ontiveros President of Afi, Analistas Financieros Internacionales

5


Acknowledgements This report would not have been possible without the help of a large number of professionals from the payment services sector. We would like to extend our special thanks to: Brazil: Adriana Aderaldo de Góes (Caixa Econômica Federal); Marcelo de Araújo Noronha (Bradesco); Clau Duarte (Santander); Mardilson Fernandes Queiroz (Central Bank of Brazil); Denilson Gonçalves Molina (Banco do Brasil); Maria Izabel Gribel de Castro (Banco do Brasil); Rogério Antônio Lucca (Central Bank of Brazil); Daso Maranhão Coimbra (Central Bank of Brazil); Edison Pacheco de Aquino Junior (Santander); Cicero Przendsiuk (Banco do Brasil); Alexandre Rappaport (Bradesco); José Antonio de Souza (Caixa Econômica Federal). Chile: Milton Vásquez Villarroel (Scotiabank Chile). Colombia: Paula Ángel Espinosa (Bancolombia); Raúl González Cardoso (Colpatria); Margarita María Henao Cabrera (Asobancaria); Pedro Luis Villegas (Credibanco Visa). Spain: Francisco Castells (BBVA); Javier Celaya (Bankia); Miguel Ángel Domínguez Maldonado (Cajamar); Albert Figueres Moreno (Banco Sabadell); María Eugenia Lorenzo (Banco Popular); Jose Valiño (Hal Cash). Mexico: Luiz Barbosa (CEMLA); Benjamín Bernal Díez (Comisión Nacional Bancaria y de Valores); Ruth Brennan (HSBC); Jesús Alejandro Cervantes González (CEMLA); José Raúl Fernández (Banco Walmart); Jorge Fernández García Travesi (Santander); Javier Granguillhome Morfín (CEMLA); Carlos López-Moctezuma (Comisión Nacional Bancaria y de Valores); Arturo Murillo Torres (Comisión Nacional Bancaria y de Valores); Pascual O’Dogherty (Central Bank of Mexico); Sergio Salvador Sánchez (BBVA Bancomer); Juan Soledad Reyes (Scotiabank). Peru: Miguel Arce Téllez (Scotiabank); Carlos Montaño (Banco de Crédito); Víctor Roca (Central Bank of Peru); Milton Vega Bernal (Central Bank of Peru). Dominican Republic: Bruno Arcas (Procecard); Ángel A. González (Dominican Republic Central Bank); Fabiola Herrera (Dominican Republic Central Bank); Alejandro Arturo Pilar Valero (CAM).

Sadly, during preparation of this report, we learned that Ruth Brennan died in a tragic accident shortly after we had interviewed her. We would like to take this opportunity to extend our deepest condolences to her family and the entire HSBC team.

6

Index 1. Highlights of the Tecnocom Report 2011

8

2. New developments in the payments arena in 2011

11

3. Executive insights 1. Introduction 2. Current panorama in the payment services market 3. Regulations and standardization 4. The innovation in the pipeline 5. Newcomers 4. The industry in figures 1. Introduction 2. Cash 3. Checks 4. Cards 5. Credit transfers and direct debits 6. Acquisition networks: ATMs, POS terminals and banking agents 7. Internet and mobile banking 8. E-commerce payments 5. Close-up: Mobile payments 1. Introduction 2. Integration of mobile phones into the value chain 3. Trends in remote mobile payments 4. Trends in distance mobile payments 6. Use of payment instruments 1. Introduction 2. Methodology 3. Population categorization 4. Penetration of payment and bank accounts 5. Use of payment instruments 6. Reasons given for not holding credit cards 7. The mobile phone as a payment mechanism 8. Internet payments 9. Payment instrument scenario by country 10. Tecnocom Indicators and Matrices 11. Conclusions regarding demand for electronic payment methods

20 20 20 22 23 25 26 26 28 30 31 36 40 44 46 48 48 50 51 56 61 61 62 62 68 70 71 73 76 78 92 95

7


1. Highlights of the Tecnocom Report 2011 The payment services industry has been undergoing far-reaching changes of late. The sector incumbents have had to tackle new challenges posed by trends in consumer preferences, growing competition, market entry by new, non-traditional players (mobile operators, Internet companies and retailers), technological innovations and new regulations. All these developments warrant performance of a study to analyze in-depth the main trends emerging in the sector in Latin America1 and Spain. The highlights from our study are the following: • The executives interviewed emphasize that while the card issuance business has proven the most profitable for the banks, margins have contracted sharply in the acquisition business. Within the issuance segment, credit cards, the mostly widely-used form of financing in many Latin American countries, stand out. Prepaid products also present a significant growth opportunity; these instruments are being used, for example, to pay public sector salaries and subsidies in Brazil. In the acquisition business, the network’s value proposition lies with the ability to generate business intelligence with which to enhance the financial institutions’ customer behavior prediction models. • One of the recent developments most extensively alluded to by the executives interviewed for this report is the incorporation of EMV (Europay, MasterCard, Visa) chip technology into payment cards, by virtue of either sector agreements or regulatory mandates. In addition to enhanced security, these cards enable additional services such as loyalty applications. • Despite the fact that the economies analyzed remain highly dependent on cash, we are witnessing a gradual shift away from paper-based payments to electronic payments. This process is having the greatest impact on check usage, which has fallen from 36.5% of total transactions by value on an aggregate basis in 2005 to 17.9% in 2010. • Cards are the most popular non-cash payment instrument in Latin America, to the extent that they are used in half of all transactions. In recent years, the number of cards in circulation has been growing steadily, driven by the healthy economy, awareness campaigns, growing penetration of banking services and expansion of the physical payment infrastructure (ATMs and POS terminals), among other factors. The situation in Chile is noteworthy. Here, retailer credit cards, which are not regulated by the banking watchdog, outnumber mainstream bank cards by a factor of three. In Brazil it is worth highlighting the initiative taken by the leading players in the card industry to put an end to the exclusivity previously enjoyed by Cielo (formerly Visanet) and Redecard for the acquisition of the all-pervasive Visa and MasterCard payment transactions. This agreement paved the way for intensification in competition, as is demonstrated by the fact that a newcomer is already operating in the acquiring business, with another player planning to join the fray. Further proof can be found in the launch of Brazilian card scheme, Elo. • Almost five million plastic cards have disappeared in Spain in the past two years. This phenomenon may be attributable to consumers’ desire to control spending, one of the ways to do so being a reduction in the number of cards held. It is also likely that this is being influenced by the fact that the financial institutions have taken advantage of the migration over to EMV (EuropayMasterCard-Visa) chip-enabled cards, which are more expensive, to not re-issue inactive cards. • The automated clearing houses (ACH), which facilitate interbank transacting, have enabled the development of credit transfers and direct debits across Latin America. It is very likely that credit transfers will register further growth medium term thanks to growing penetration of banking services, integration of non-banking micro-finance institutions in the clearing systems and more intense use of online banking and electronic money. We are also likely to see continued growth in standing orders as this efficient instrument simplifies the reconciliation process and leaves fewer bills unpaid. • In Latin America the reach of the acquisition networks (ATMs, POS terminals and banking agents) has expanded considerably. The number and value of transactions performed using ATMs and POS terminals have increased in tandem with the development of this physical infrastructure, which in turn has driven higher payment card usage. The Latin American statistics continue to trail well behind the Spanish numbers (1,260 ATMs for every million inhabitants), albeit the latter being one of the highest readings for any developed economy. In contrast, surplus installed capacity coupled with the economic slowdown has triggered a downtrend in ATMs and POS terminals in Spain since 2008 of 4.0% and 0.5%, respectively.

1

8

The countries analyzed in depth in this study are Brazil, Chile, Colombia, Mexico, Peru and the Dominican Republic.

• Banking agents play a pivotal role in the strategy for enhancing financial system coverage and financial inclusion in Latin America. This is evident in the fact that these correspondents constitute the only channel for bank service distribution in many towns in Brazil, Colombia, Mexico and Peru. Moreover, this channel holds the key to the success of mobile banking in these towns since it is the only means for lodging and withdrawing cash. • In Spain, online banking has also been buoyant. In fact, it is currently possible to perform virtually any non-cash financial transaction through this channel in a simple and user-friendly manner. As a result, and underpinned by the fact that over 61.8% of the adult population accesses the Internet regularly, almost 42.0% of Spaniards currently use online banking services. • Alternative payment service providers are gaining ground. PayPal has become a hugely popular payment services provider among online shoppers. Other private payment systems have also emerged in assorted areas of the social networks. One such example is Facebook Credits, which to date only allows the purchase of software and other virtual goods in virtual environments. • A large number of mobile payments pilot tests have been set in motion recently. For the time being, most of the progress is happening at either end of the value chain, innovating in the acquisition and issuance of payments. However, the mobile phone opportunity will only be fully tapped when the device is also used to generate demand or as a loyalty driver. • Mobile payments fall within two categories: remote and proximity payments. Remote payments are made at a distance from a mobile device using one of the bearing channels that operate over the mobile telecommunications infrastructure. In emerging markets, the systems tend to rely on SMS or the USSD standard, because of the lower attendant costs. In developed countries consumers are migrating towards internet-enabled smartphones, permitting users to access the financial institutions’ online banking services. Proximity payments are carried out by means of a physical presence in a shop or next to a vending machine by waving their mobile device near a contactless-ready POS terminal. The most promising technology in this field is NFC (Near Field Communications). Whereas proximity payments are usually made between consumers and companies (C2B), remote payments can be either C2B or directly between consumers (P2P, e.g., money transfers). • Economic, social and technological factors, the latter notably including the levels of banking service and mobile telephony penetration, will shape each country’s propensity to adopt mobile payments and will also determine the encompassing scope of m-commerce transactions. In developing and emerging economies, where traditional banking services are not available to or accessible by large segments of the population, and where mobile telephony penetration rates are already high, mobile payments are expected to sustain rapid growth once a critical mass of users has been reached. Nevertheless, Europe and the US are expected to concentrate the bulk of mobile payments near term due to the extensive use of bank services and the relative sophistication of payment instruments. However, critical mass adoption of mobile payments will require development of technology-enabled acquisition networks, coupled with promotional campaigns to stimulate use and a user-friendly interface. • In Latin America, mobile banking has the scope to become one of the most popular payment methods because of the high mobile telephony penetration rates. Unlike in Spain, the population segments that are currently not being serviced by the financial sector are those that stand to benefit most from its development. For the time being, however, hardly any services are being specifically targeted at the unbanked. Most of the region’s major banks do provide certain mobile capabilities as part of their e-banking platforms, including the scope for payments from mobile phones, often in an attempt to retain existing customers and lower costs. • The innovations being spearheaded by non-traditional players will probably force the banks to get their acts together quickly if they don’t want to miss out on the revenue accruing from mobile payments. The majority of executives interviewed believes that mobile payments constitute the innovation with the greatest potential to disrupt the way we pay for goods and services. Within the innovation landscape it is worth highlighting two of the products that have grabbed the most headlines. Firstly, Google Wallet, which enables proximity payments using NFC technology. Secondly, Square, an application that uses a magnetic band reader connected up to a smartphone to act as a POS terminal, simultaneously offering value-added services such as detailed sales analysis, transaction location services and enhanced security options using photo ID. According to some sector executives, the advent of more players is likely to translate into increased competition, unlocking more benefits for end users. • On the regulation front, any entity participating in card processing, transmission or storage In Europe has to comply with the Payment Card Industry (PCI) Data Security Standard since the beginning of this year. These entities must possess the systems needed to encrypt the communications, databases, files and computers that handle credit and debit cards. Staying in Europe, in order to get the Single Euro Payments Area (known for its acronym, SEPA) up and running, the European Parliament and Council has established a new regulatory framework. This framework stipulates a binding timeline for migration to the single platform for credit transfers (end of 2012) and direct debits (end of 2013). Spain has transposed the European Directive regulating the electronic money business.

9


1. Highlights of the Tecnocom Report 2011

• In Latin America, the most notable regulatory developments are focused on protecting consumer rights in electronic payments, specifically in Brazil, Chile, Mexico and Peru. The changes emerging in financial service distribution with respect to ATMs and banking agents (Brazil, Mexico and Peru) are also significant. The Dominican Republic and Colombia have passed contrasting tax initiatives. Whereas the former has introduced a tax on financial assets, the latter has agreed to gradually eliminate the prevailing tax on financial movements. • From the consumer standpoint, the payments paradigm in Spain and Latin America is very diverse, with each country following its own path to date and possibly in the future. This diversity not only encompasses differing levels of financial formality and payment instrument penetration and usage but also divergent cultural preferences for immediate settlement versus paying on credit, take-up of online shopping and levels of interest in mobile payments solutions. These differences result in contrasting starting points and foreshadow potentially to idiosyncratic trajectories going forward. Brazil is highly banked and presents a marked preference for deferred credit (mainly paying it off in installments). Chile and Colombia are noteworthy for their use of debit cards and the entrenched position of retailer cards. Penetration of banking services in Mexico is intermediate, although the incidence of debit cards is relatively high (at 34.7%). Financial formality is low in Peru and the Dominican Republic and use of electronic payment methods is accordingly limited. Lastly, virtually all Spaniards are banked, albeit displaying a unique preference for electronic payment options that enable immediate settlement with only a minority opting for revolving credit schemes. • Education levels and access to computers and Internet are the best indicators of banking service penetration levels. Although gender and social segmentation also contribute to explaining why penetration is higher in some countries than others, it is the varying amount of cultural capital that determines a population’s openness to approaching financial services in general and electronic payment options in particular. • The perceived lack of a need for cards is the main reason reported by the unbanked for not holding cards, while commissions and fear of uncontrolled spending are the main reasons given by bank account holders without cards when asked this same question. • Non-users show greater interest in mobile payments in the countries that already have more established mobile payments services. These schemes are considered convenient, although those polled expressed concerns about safety and usefulness in comparison with other payment options, factors that should be considered when rolling out these services.

10

2. New developments in the payments arena in 2011 Over the past 12 months we have observed interesting developments in the electronic payments field. However, if we had to pinpoint which emerging technology the industry is pinning its hopes on, we would not hesitate in signaling mobile payments. Almost all the pilot tests of consequence announced in 2011 fall into this category, as does a significant portion of the new products launched in the marketplace. This has prompted a flurry of M&A activity as established players in the card payments chain attempt to bolster their positioning in the new mobile ecosystem. Nevertheless, the list of deals done during the year also includes other transactions that made less ripples. These latter transactions were mainly spearheaded by payment processors determined to increase their market presence or introduce new products such as prepaid cards. With respect to regulatory developments in Spain and Latin America, the biggest novelties related to consumer protection measures in the electronic payments field (Brazil, Chile, Mexico and Peru), security (the PCI standard), taxation (the Dominican Republic and Colombia), electronic money (Spain and Mexico) and distribution via ATMs and banking agents (Brazil, Mexico and Peru).

SEPTEMBER 2010 Pilot tests and new technology

CashEdge (mobile payments services provider) announces PopmoneyforSmall Business, a mobile payments service for financial institutions’ small business customers Visa begins pilot testing payWave on the iPhone in New York, New Jersey and Los Angeles Latin American electronic payments provider Cielo (formerly Visanet) buys a stake in Oi Paggo, a mobile payments provider

Corporate news

Cielo strikes an agreement with payment instruments technology provider Hypercom covering the rollout of over 30,000 Optimum terminals in Brazil Euronet Worldwide, an electronic payments supplier, closes the acquisition of Brazilian prepaid electronic products distributor Telecom Net, which operates under the Ativi trademark

Regulatory developments

Peru’s Central Bank issues Circular 028-2010, which amends the rules governing clearing houses and credit transfers, raising the ceiling on credit transfers in local currency from PEN265,000 to PEN310,000 and the ceiling on foreign currency credit transfers from USD50,000 to USD60,000 Peru issues the Code for consumer protection and defense (Law No. 29571) requiring suppliers to inform customers if product/service prices vary as a function of the payment instrument used

11



OCTOBER 2010 New products

PayPal, online payment processor, launches an iPhone app for depositing checks

IFC, a member of the World Bank Group, invests USD3 million in YellowPepper, a mobile banking and mobile payments platform supplier Tecnocom acquires 80% of Dominican Republic payment processor ProceCard, S.A. Corporate news

Movilway- Spanish company specialized in the electronic payment top-up market- reaches an agreement with Utiba Americas (supplier of mobile platforms for financing transacting targeted at mobile telephony operators and financial institutions) for the use of the latter’s m-commerce platform in order to reach new customer segments in Latin America Visa invests EUR500 million in Visa Europe, a European interbank payment processing platform that offers its European member financial institutions same-day settlement services on national payments in up to 18 different currencies


Visa and MasterCard agree with the US Department of Justice to allow merchants offer special deals and discounts in order to stimulate card usage

NOVEMBER 2010

Corporate news

Global Payments, a provider of electronic payment processing solutions, and “la Caixa” agree to set up a joint venture to offer payment acquisition and processing services to merchants in Spain Brazil’s Central Bank issues Circular No. 3512 stipulating the minimum amounts of their outstanding balances that credit card holders must pay off monthly: 15% from June 2011 and 20% from December 2011


Brazil’s National Monetary Council passes Resolution No. 3919 establishing new rules governing the fees chargeable for financial institution services, disclosure requirements for credit card statements and the classes of commissions that financial institutions marketing certain basic credit cards can charge and demand, taking effect on March 1, 2011 Chilean Bank Supervisor, the SBIF, issues Circular No. 3511 including instructions concerning the policies and processes governing early credit settlements and credit refinancing The SBIF issues Circular No. 3513 regarding good contracting practice, establishing guidelines concerning the policies for signing up for sector products, including payment instruments Mexico’s Central Bank issues Circular 34/2010 regarding credit cards in order to protect card holders’ rights

12

DECEMBER 2010 Pilot tests and new technology

Corporate news


End of the first large-scale mobile payments pilot test in Spain in Sitges and sponsored by “la Caixa”, Telefónica and Visa Banco Bradesco reaches an agreement with Western Union for marketing the latter’s money transfer services in Brazil Citi’s Credicard and Bancorp’s Elavon sign a binding agreement to set up a new company in the Brazilian payment acquisition business Visa Europa promises the EU to reduce multilateral interchange fees (MIFs) on immediate debit card transactions for cross-border transactions in the European Economic Area (EEA) and national transactions in nine EEA member states. The new fee scheme is in line with the commitments assumed unilaterally by MasterCard on April 1, 2009 Colombia’s Congress approves Law 1430 which provides for the gradual elimination of the socalled levy on financial movements, with definitive eradication slated for 2018 Peru’s Central Bank issues Circular No. 046-2010 establishing new reporting requirements for non-cash payment instruments and channels and the fees charged for interbank transfers

JANUARY 2011

New products

Banco Sabadell launches Instant Check, a check and promissory note lodging service and the first mobile-based remote deposit capture service in Europe Starbucks announces the launch of mobile payments using smartphones in its outlets across the US Telefónica and MasterCard set up a joint venture to offer mobile-based financial services in Latin America

Corporate news


Megapay, a division of Hong Kong based Megaword devoted to cloud computing, strikes an agreement with Brazilian mobile services provider MJV for the provision of mobile payments in Brazil Effective from January 1, any entity participating in card processing, transmission or storage has to comply with PCI DSS (the acronym for the Payment Cards Industry Data Security Standard), which means they must have the systems needed to encrypt the communications, databases, files and computers that handle credit and debit cards Colombia’s Central Bank issues regulations governing the currency settlement and clearing system and its players The Peruvian Bank Supervisor, the SBS, issues Resolution No. 2108 establishing basic deposit accounts that may be opened at non-banking correspondents using specialist POS terminals

13



FEBRUARY 2011 MoneyGram International and Movistar Remesas launch a money transfer service by which money can be sent from Movistar Remesa’s national networks to MoneyGram’s international network New products

MoneyGram International and Visa launch the first cash-to-Visa account program for remittances from the United States to Mexico NYCE, a electronic payments network, announces it will offer Cashedge Popmoney to its 3,000 financial institution clients Visa buys PlaySpan, a payment platform for digital goods in online games, for USD190 million Fiserv, a provider of technology solutions for financial services, acquires Mobile Commerce (M-Com)

Corporate news

Square completes a new round of financing, raising USD27.5 million in a deal led by Sequoia Capital Allpago, a Brazilian payment services provider, reaches an agreement with Germany’s Pay. On, a payment transaction processor, for use of its processing services Brazil’s National Monetary Council amends and consolidates the rules governing banking agents Colombia’s Congress passes Law 1442/ 2011 enacting the “Agreement regarding postal payment services” signed in Geneva on August 12, 2008


The Central Bank of Mexico issues Circular 6/2011 amending an earlier circular and regulating the rules for providing services via ATM networks A regional payment network covering Central America and the Dominican Republic (SIP for its acronym in Spanish) takes effect Brazil’s Central Bank issues Resolution 3954 allowing banking agents to intervene in the card application process, among other measures

14

MARCH 2011 American Express launches a service in the US – Serve - that permits consumers and small companies to make purchases, P2P payments and transfers to third parties using Android and iPhone devices, through Facebook and at www.serve.com In Spain PayPal announces the launch of its conventional credit card that enables payments in any store accepting PayPal or Visa payments New products

“la Caixa” and PayPal reach an exclusive one-year agreement by virtue of which: (i) “la Caixa”’s merchant customers can accept PayPal payments; and (ii) the latter service will be integrated into ”la Caixa”’s e-banking platform Global online payment services provider 2Checkout.com adds 13 foreign currencies to its payment suite MasterCard, in association with Travelex, introduces the Cash Passport prepaid card in the travel segment Hal Cash launches its service in Mexico Tecnocom signs a strategic alliance with Credibanco, the company that administers the Visa Colombia payments system Visa reaches an agreement with payment services providers Fiserv and CashEdge for the creation of a P2P payment service for Visa clients

Corporate news

American Express and Foursquare agree to allow AmEx card holders to register their cards in the Foursquare system, providing access to the special deals on offer by system members Spain’s main MNOs (Telefónica Movistar, Vodafone and Orange) agree to work together to standardize the NFC technology experience BuscaPé, the Brazilian website owned by Napster, the digital music provider, acquires a majority interest in DineroMail, the Latin American online payments platform


The Central Bank of Mexico issues Circular 8/2011 amending Circular 2019/95 requiring entities to submit information regarding the fees charges for their various payments-related services, including any proposed changes to these fees/charges before they are applied or disclosed

15



APRIL 2011 MasterCard launches Moneysend in Mexico, a card-to-card (MasterCard) money transfer service

New products

Payments technology company, Clear2Pay, launches the Unified Domestic Payments Americas solution that allows wire and ACH payment processing on one single platform Bradesco, Banco do Brasil and Caixa Econômica Federal start to market Elo-branded credit and debit cards, which are accepted by the merchants affiliated with the Cielo acquisition network Rede Banricompras begins to capture MasterCard transactions in Brazil, thereby expanding the number of companies that capture transactions with this franchise, which until 2010 operated exclusively with Redecard Visa invests in Square, providing the latter with important backing

Corporate news

Pay Pal buys mobile payments start-up Fig Card Tenderoo-a Spanish developer of a system for authorizing and validating electronic transactions- receives a EUR1.2 million investment


The Central Reserve Bank of Peru issues Circular No. 011-2011 establishing the regulations governing credit transfer clearing houses and establishing a maximum time limit of 30 minutes for crediting funds into the recipient's account

MAY 2011 Pilot tests and new technology

Bank of America, JPMorgan Chase and Wells Fargo announce the creation of clearXchange, a platform to enable their customers to transfer money by keying in a mobile telephone number or an e-mail address Google launches its Google Wallet, an electronic wallet that allows mobile payments over NFC-enabled devices, to which end it has allied with MasterCard and Citigroup Square launches the Square Register point-of-sale application for Apple iPads

New products

Privalia announces Privalia Mobile, the first Spanish company to allow mobile payments for purchases using PayPal PayPal introduces the Digital River World Payments solution for processing online payments in Brazil and Mexico MasterCard, Banco PanAmericano and Rev Worldwide (payment services provider) launch the MasterCard PanAmericano prepaid card US payments technology supplier FIS begins to process Elo-branded cards under the Fidelity Processadora e Serviços joint venture Cielo buys Braspag, a Brazilian e-commerce payments processor

Corporate news

Telemundo, producer of content for Hispanic audiences in the US, and mun2, part of the former group, agree with payment services supplier Western Union to market two new co-branded prepaid cards to Hispanics in the US that can also be used wherever MasterCard debit cards are accepted InComm, specialized in prepaid and gift card sales and marketing, enters an agreement with Unik, a company devoted to payments administration and processing, to offer segments of the Brazilian retail market solutions to the management and promotion of prepaid card sales

16

JUNE 2011 Pilot tests and new technology

American Express and Foursquare Lab offer special coupons for card holders

New products

In Spain, Rêv Worldwide launches the Prepaid Rêv MasterCard and the Prepaid Internet Rêv MasterCard, the first prepaid cards not associated with a bank account The Western Union Company signs an agreement for the acquisition of Finint, one of Europe’s leading money transfer agent networks Square receives a USD100 million investment with Kleiner Perkins Caufield & Byers as lead investor Visa Inc. acquires South Africa’s Fundamo, a provider of mobile financial services platforms for developing economy MNOs and financial institutions for USD100 million

Corporate news

Visa signs a new long-term commercial contract with Monitise plc, a provider of mobile money solutions for financial institutions Fiserv purchases Cashedge for USD465 million Intuit (a joint venture between Citi and SK Telecom) buys the Mobile Money Ventures platform with a view to reinforcing its mobile banking capabilities BBVA announces a USD2 billion investment program in Mexico to upgrade its ATMs and boost mobile banking Pay.On and DineroMail, a Latin American online payments platform, sign an agreement for the joint provision of services in Latin America Colombia’s Superintendent of Banks issues clarifications on certain aspects of certified check processing


The Dominican Republic passes Law No. 139-11 to increase tax revenue via measures that include a tax on the financial assets of institutions classified as multiple service banks, savings and loan associations, savings and loan banks and credit corporations in excess of DOP700 million (~USD18 million) of 1% per annum, calculated as a percentage of total available financial assets The Central Bank of Mexico issues Circular 14/2011 affecting multiple service banks and stipulating four classes of deposit accounts with the ultimate aim of stimulating access to financial services

17



JULY 2011 PayPal announces a new phone-to-phone NFC-based payments system Pilot tests and new technology

U.S Bank presents MasterCard PayPass VITAband, a wristband that that combines emergency contact and medical information with allowing users to ‘tap and go’ when making purchases at merchants that accept contactless payments

New products

Facebook forces companies developing games for the social networking giant to only accept payments in Facebook Credits, the company’s virtual currency

Corporate news

eBay acquires Zong, a platform that allows users to charge their online purchases to their mobile phone accounts, for USD240 million in order to reinforce PayPal Isis reinforces its position in the mobile payments services arena by reaching an agreement with the main card issuers in the US: Visa, MasterCard, American Express and Discover The Peruvian Bank Supervisor, the SBS, issues Resolution No. 7897-2011 amending disclosure and transparency requirements in contracts executed with financial system users


Spain passes Law 21/2011 on electronic money, transposing Directive 2009/110/EC of the European parliament and of the Council of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions into Spanish law The Central Bank of Mexico issues Circular 1/2006 Bis 41 on development banking, stipulating four classes of deposit accounts in order to stimulate financial inclusion

AUGUST 2011 New products

Corporate news

18

Nokia announces that all its phones will be equipped with NFC contactless technology Erply, a POS terminal technology and inventory management solutions provider, launches a credit card reader for the iPhone and iPad Google announces the purchase of US cellphone maker Motorola Mobility for USD12.5 billion in cash, the company’s biggest acquisition to date. Among other capabilities, the acquisition will allow Google to control the development of handsets that are compatible with its NFCenabled Google Wallet payment scheme

SEPTEMBER 2011 Pilot tests and new technology

PayPal unveils its outlook for mobile payments at SIBOS, emphasizing the role to be played by barcodes and QR codes in simplifying payment acquisition at the merchant end Safetypay, a system that facilitates payments between consumers, online establishments and banks, becomes the first company in Spain to receive Bank of Spain authorization to operate as a payment entity

New products

Google Wallet launches in the US Visa Europe announces two new mobile payments services: Visa Mobile Person-to-Person Payments and Visa Alerts PayPal discloses its plans for the launch of new services including mobile payments, bar code scanning, store inventory searches and personalized geolocation-based offers Visa joins the Google Wallet project

Corporate news

Skrill, a European online payments provider, teams up with DineroMail, an online payments platform in Latin America, to add local Latin American payment methods to its global digital payment suite BBVA opens an office in Silicon Valley in order to identify emerging technology trends in areas considered key to business development Tecnocom and Evendor reach an agreement for the joint distribution of probabilistic fraud detection, prevention, management and control solutions for payment processing centers


The European Commission open an antitrust investigation into the e-payments standardization process being developed by the European Payments Council to ensure that the system does not unduly restrict market access by new entrants

19


3. Executive insights 1. Introduction The electronic payments market is currently hugely dynamic. On the one hand, the reconfiguration of the financial sector on the heels of the ongoing international crisis is having a direct impact on the business. Perhaps more importantly, however, the technological and business innovations unfolding are stimulating competition and opening up a whole new field of possibilities for established players and newcomers alike. In this chapter we distil the vision of some of the sector’s top executives whom we called on for their expertise and assistance with this report through interviews and surveys in Latin America and Spain. Their opinions point us in the direction of the key sector trends and the outlook for the months ahead in specific areas such as regulatory developments, new products and newcomers.

2. Current panorama in the payment services market As we have noted in the preceding chapters, the paradigms in Spain and Latin America are markedly different. Although the various Latin American economies analyzed also differ from one country to the next, their key traits are more homogenous in so far as penetration of banking services and financial formality are still far from being universal. Francisco Castells, Director of Payment Services at BBVA, believes there are three core factors for understanding how payment services work in any country: 1) Payment services markets are very dynamic, in contrast to the traditional rigidity of the banking system. 2) The business’ lack of predictability warrants the decisive involvement of senior management, as with other off-balance sheet financial products. 3) The banking culture is one of risk aversion; some of the changes unfolding should highlight the need for a new management culture in the banking industry. The issuance business is, according to many of the executives interviewed, the segment that is most profitable for the financial institutions. Indeed, virtually all the entities issue they own payment instruments. Among these, debit card penetration is most closely correlated to penetration of banking services, as these cards are typically granted automatically when opening an account. The next most popular product is the credit card, albeit presenting nuances between Latin America, where users opt for deferred payments or revolving credit in several countries more commonly than in Spain, where the culture of settling debts monthly is more ingrained. Sergio Salvador, Managing Director of Systems and Operations at BBVA Bancomer, explains that “the credit card is a genuine financing instrument in Mexico, unlike in Spain, and seen less as a payment instrument”. Spaniards’ strong preference for paying down their debts at the end of the month means that revolving credit is still not very common. However, according to María Eugenia Lorenzo, Director of Payment Services at Banco Popular, revolving credit is the silent revolution in the payments sector. This executive notes, however, that the pure Anglo-Saxon revolving credit model accompanied by segmented marketing strategies does not work in Spain. Today, the need for flexibility and the ability to use multiple channels (mobiles, Internet, ATMs) to defer payment for purchases using any credit card is imperative. This view is shared by Albert Figueras, Director of Payment Services and Consumer Financing at Banco Sabadell, who stresses that there is a shift underway in Spain towards more flexible credit payment options. This is taking the form of one-off deferrals via Internet or SMS alerts. In these instances, Banco Sabadell is pursuing a call-me-back model and a manned call centre which has been found to be more effective as well as allowing for cross-selling opportunities. One of its star products, the SIN card (sin meaning ‘without’ in Spanish), falls under the umbrella of this strategy, emulating a strategy adopted years ago by retailers such as department store chain El Corte Inglés, by offering three months of zero per cent interest on purchases in exchange for only a small management fee. In times of crisis, customers are not only showing greater interest in more flexible credit payment schemes but also in spending control measures. Prepaid cards unquestionably have a role to play here and the sector sees this product as a high-potential growth opportunity. For starters, regulations in some countries permit the issuance of non-bearer prepaid cards subject to a balance ceiling. Luiz Barbosa, Deputy Director of CEMLA (the acronym in Spanish for the center of Latin American monetary studies, which encompasses the region’s central banks), sees this fact as crucial in markets such as Mexico where the informal economy is estimated to still account for 15% of GDP and as much as 35% of employment.

20

Another development that could well foster greater use of prepaid cards is the payment of public sector salaries and subsidiaries using this instrument, an option that is more cost efficient and secure than cash payments. In Brazil, Bolsa familia, the country’s biggest social welfare initiative, is channeled exclusively through Caixa Econômica Federal. Caixa’s José Antônio de Sousa explained to us that these subsidies can be paid into a basic savings account but that beneficiaries without an account can use a prepaid card (cartão do cidadão) solely for cash withdrawals. So far the product’s capabilities have not been expanded to include electronic payments out of fear that this would hinder penetration of banking services by competing with the debit card, although this possibility has not been ruled out. The prepaid card is also a fairly established instrument for redeeming the lunch vouchers that some Brazilian companies provide to their staff. Denilson Gonçalves Molina, who runs the cards business at Banco do Brasil, sees prepaid cards taking off in three formats: (i) lunch vouchers, already being marketed by Bradesco, Banco do Brasil and Santander in collaboration with Sodexho; the VTM card (Visa TravelMoney), pioneered by Banco do Brasil, whose numbers are doubling monthly; and (iii) plastic and virtual GPR cards (general purchase rechargeable cards), also sustaining rapid growth, albeit falling short of their potential due to the lack of e-money regulations in Brazil. In Spain, according to Miguel Ángel Domínguez, COO at Cajamar, virtual prepaid cards, used to make online purchases, compete with other payment services such as PayPal and telepay coupons, which are purchased using cards but then do not require customer identification vis-à-vis the merchant. One of the most noteworthy national idiosyncrasies in the payments services field is the incidence of credit card issuance by retailers, the ultimate example being Chile, where the number of store cards easily outstrips the number of mainstream bank cards. These retailers select their customer bases in-store and sometimes take on all the roles of card issuer, acquirer and processor in-house. Brazil has products not found elsewhere. Edison Pacheco, Director of Cards at Santander Brazil, told us that the Brazilian payments landscape includes two unique products in addition to the run-of-the-mill credit, charge and debit cards. In-store financing arrangements account for almost half of all transactions; thanks to relatively higher interchange fees (up to 6%), purchases can be divided into as many installments as the merchant is willing to offer, although the risk is born by the issuer. This practice is so deeply embedded into Brazilian culture that the issuers have not been able to eliminate it. The second distinctive product is the hybrid card which combines in a single card a private label card (store-branded card) with a mainstream bank card that can be used outside of the retailer. Santander markets these cards with the Esso service station chain, for example. The broad range of very similar products in the marketplace means that loyalty programs are growing in importance and sophistication. Raúl Fernández, Deputy Director of Deposit Products at Banco Walmart (Mexico) tailors his entity's strategy to the unbanked and the underbanked. Within this segment, the most popular option is the ‘cash back’ offer (shoppers earn cash back on purchases) and the ‘cash rebate’ program (3% on credit card purchases and 1% on debit card purchases) at the Walmart group. The group abandoned its points program following a disappointing take-up. Card loyalty programs are also undergoing change in Spain. María Eugenia Lorenzo of Banco Popular notes that most pointsbased programs have been gradually phased out with the exception of American Express’ membership rewards program which is targeted at the high-end of the market and has the strong and unique appeal that the points can be exchanged for air miles. The trend in Spain is also towards cash back schemes and affinity cards in collaboration with a group of merchants. Almost all the experts consulted, in Spain and in Latin America alike, agree that the payment instrument issuance business is currently more profitable that the acquisition business. BBVA’s Francisco Castells notes that the payments industry in general, and the acquisition business in particular, has sustained sharp margin erosion. He says that strictly speaking, the acquisition business is loss-making but that it is the intelligence it provides that is key. “In customer-centric industries”, he goes on, “the ability to predict customer behavior is crucial. Predictive models can come up against a wall: shifts in consumer behavior. And payment instruments are the way to track these changes and anticipate road bumps. In Mexico, BBVA Bancomer already has a highly developed predictive model that takes effect 10 days after the first statement.” Nevertheless, in rapidly growing markets such as Brazil (where the electronic payments market is expected to double in the next five years), where deregulation of the acquisition segment dates to just 2009, new acquisition networks are still being built. Alexandre Rappaport, who runs the card business at Bradesco, indicates that two-thirds of cards issued in Brazil can only be used nationally. The launch of the elo gateway, together with Banco do Brasil and Caixa, in an attempt to emulate the successes reaped by other national schemes such as Itaú’s Hipercard (7% market share) makes sense when viewed against this backdrop. Edison Pacheco, from Santander Brazil, adds that his bank has been developing its own acquisition network since 2010 because the entity sees a growth opportunity and potential loyalty driver among business and merchant customers in this arena.

21


3. Executive Insights

In many instances, the value of the acquisition network lies with the ability to generate business intelligence with which to enhance the financial institutions’ customer behavior prediction models. Albert Figueras, Director of Payment Services and Consumer Financing at Banco Sabadell, sees huge upside to application of data mining technology to card records, albeit stressing the restrictions posed by data protection regulations. Card holders must expressly authorize the use of their personal information for marketing purposes. New product or service users are now being prompted to provide this authorization but the data protection agency imposes certain limitations. The Spanish executives believe that the outsourcing agreement announced by ”la Caixa” in 2011 (51% of its payments acquisition business is now in the hands of Global Payments) will mark a before and after in the acquisition segment. Although many entities have ruled this particular formula out, they are actively looking for other ways to turn this loss-making business around. For example, Banco Sabadell is running a pilot test in hotels and restaurants using a new POS-PC with a keyboard that can be leased in exchange for waiving the interchange fee. One frequent complaint is that the large merchants negotiate the interchange fee down to a minimum with all the banks, making the situation untenable and warranting a shift towards a value-added services model. Other entities, such as Cajamar, have focused their strategy on retaining customers in times of crisis, systematically lowering the fees they charge merchants to below their own interchange fees. This does not help make the acquisition business profitable but does set the entity apart in terms of its loyalty strategy. As far as payment processing in Spain is concerned, Banco Popular’s María Eugenia Lorenzo believes that entities will take a fresh look at the schemes under which they collaborate with other processors by leveraging SEPA licenses, a development that she believes could prove one of the key trends in the years to come and one that could trigger M&A activity and the scope for concentrating payments processing for multinationals in a single country within the single payment area.

3. Regulations and standardization It is well known that a considerable part of the entities’ efforts on the technology front are devoted to complying with prevailing regulations and adopting international standards. Judging by the executives’ insight, the past couple of years have been shaped by intensive activity in this respect, with further change on the horizon. One of the developments most commonly alluded to by the executives interviewed is the incorporation of EMV chip technology into payment cards, by virtue of either sector agreements or regulatory mandates. Benjamín Bernal, Managing Director of Operating and Technology Risk Supervision at the CNBV, Mexico’s banking and securities commission, told us how the more recent regulatory reforms undertaken in his country have been centered on introducing certain changes to the Transparency Act in order to open up the playing field in switches (particularly with respect to the relationships between clearing houses). In February 2010, Mexico also passed the second edition of the electronic banking regulations (including amendments to the rules governing mobile banking and payments, the use of dynamic passwords, biometry, etc.), which is considered more exhaustive than the 2006 edition. With respect to chip technology such as the EMV standard, Benjamín Bernal refers to the migration of electronic payment instruments such as POS terminals and ATMs. ATM migration is a three-phase process in Mexico: phase one will be completed by February 2012 and only includes ATMs considered high-risk (typically located in isolated spots). Phase two will encompass the medium-risk ATMs (September 2013), with all of Mexico’s ATMs slated for migration by September 2014. Migration of POS terminals, meanwhile, must be completed by July 2011. The so-called liability shift will take place from January 2013, which is when card issuers will become solely responsible for all magnetic card transactions authorized that are questioned by card holders, as has been the case in Europe since 2005. In general, the Mexican banks are meeting these deadlines. Ruth Brennan, Managing Director of Technology and Operations for HSBC in Mexico, tells use that the entity’s EMV migration will be 85% complete by the end of 2011 and fully complete by the end of 2012. At any rate, in 2010 the high incidence of ATM fraud in Mexico had already prompted introduction of an additional PIN for ATM cash withdrawals. Some executives, such as Scotiabank Mexico’s Juan Soledad Reyes, notes that the security gains only offset the higher issuance costs (estimated at roughly 30%) in the upper segments of the market, adding regretfully that the full potential of EMV technology is not being exploited to introduce loyalty drivers, for example.

22

Paula Ángel, who manages debit and credit products at Bancolombia, explains that the EMV regulations were introduced in Colombia under External Circular 052 of 2007, the same piece of legislation that introduced other security features such as one-time passwords (OTPs) in e-banking. In contrast, more recent regulatory changes, such as External Circular 022 of 2010 (transaction security and quality standards), the introduction of rules establishing the interbank interchange fee and the Tax Reform Act (extending application of the financial movement tax to card transacting) have had a bigger impact on the Colombia’s payments industry development of late. Interchange fee regulations have had a crucial influence on the Colombian sector in recent months. To quote Pedro Luis Villegas Ramírez, Vice-president of Systems and Operations at Credibanco (Colombia), “the highest-impact regulatory change this year has been the payment instrument interchange fee rules and this will also be the case in the year ahead”. The situation in Mexico is similar. Jorge Fernández García Travesi, Executive Director of Technology for Santander, explains that the biggest regulatory changes during the past year were introduced by the central bank in the form of circulars that regulate the application of fees and commissions (such as article 52 of the Transparency Act and chapter X of the CNBV Circular) but also mobile banking account and banking correspondent regulations. BBVA Bancomer’s Sergio Salvador adds another item to the list of upcoming regulatory requirements in Mexico. From 2013 on, customers will be required to pay down at least 1.5% of revolving credit balances monthly so that the outstanding balance is paid off within no more than 60. In Brazil, the spotlight over the coming months will be placed on fee schemes now that the payments processing segment has been deregulated, moving towards multi-brand, open architecture. Santander’s Edison Pacheco believes that the Brazilian authorities will pass new fee regulations (for example, entities will not be allowed to charge customers for joining a loyalty program) and it is possible that they will create a payment instrument targeted at boosting financial inclusion among the unbanked (a sort of basic card akin to the basic savings account formula). This situation in Spain is not very different from that in Latin America, at least with respect to regulatory trends in the interchange fee arena. Javier Celaya, Director of Payment Instruments at Bankia, says that surcharging is on Europe’s political agenda because of the need to transpose the European directive permitting the practice; however, the European authorities now fear that the practice could hurt the end consumer, with some airlines already charging ludicrous fees to process card payments for ticket reservations. The other burning issue flagged by Celaya is the possible introduction of ceilings on interchange fees which raises a host of regulatory arbitration issues due to the difficulty in applying national regulations to e-commerce and discriminatory treatment of newcomers such as Google, which could be carved out. Lastly, the financial institutions are obliged to comply with the Payments Card Industry Data Security Standard (PCI-DSS). Cajamar’s Miguel Ángel Domínguez notes that adaptation to this standard is lagging somewhat in Spain, although Cajamar itself, which processes payments for other banks, is set to become the first PCI-compliant entity.

4. The innovation in the pipeline Our choice of mobile payments as the core theme at the heart of this Tecnocom 2011 Report is no coincidence, as is borne out by the answers given by sector executives when asked about the most important innovations coming our way in the short to medium term in the payments industry: the mobile phone was the common denominator from Peru to Spain, and indeed virtually all of the countries analyzed. Bancolombia’s Paula Ángel believes that because the payments industry is in a constant state of flux, coupled with the fact that one of her entity’s priorities is increase the penetration of banking services and provide growing numbers of citizens with access to financial services, technologies that increase the use of financial products, such as Internet, mobile phones, POS terminals and other products that pave the way for mass adoption (prepaid and co-branded cards, etc.) will inevitably be analyzed and ultimately adopted by Bancolombia.

23


3. Executive Insights

Although he sees significant upside, Fabiola Herrera, Director of Payment Instruments at the Dominican Republic’s central bank, believes her country is lagging in terms of adoption of mobile payments, as the existing platforms were only introduced one year ago and were initially targeted at banked citizens, despite the fact that the biggest potential could lie with offering mobile-based financial services to those who otherwise would not have access thereto. This same argument is put forward by Jorge Fernández García Travesi at Santander Mexico, who claims that “the mobile payments and applications arena will certainly be the highest impact development over the coming years. Not only on account of the ability to provide financial and payments services over mobile phones, but also because of the scope for boosting financial inclusion in emerging economies.” Banco Walmart is one of the first banking entities to specifically target the unbanked in Mexico. Raúl Fernández is convinced that the mobile phone presents a big opportunity in Mexico. Banco Walmart knows that the mobile payments scene is about to explode and is looking at its options in this field, one of the entity’s priorities over the coming months. Benjamín Bernal, from the CNBV, the sponsor of one of Latin America’s most comprehensive mobile payments regulatory frameworks, goes one step further, even daring to give some dates: he estimates that a significant number of customers will have migrated to combined mobile-correspondent banking technology within 18 to 24 months. Brazil, cradle to the pioneering Oi Paggo service, displays equal amounts of skepticism and optimism with respect to mobile payments. Bradesco’s Alexandre Rappaport claims that the outlook for mobile payments remains uncertain because many people thought this system would be a one-stop solution when in reality these platforms currently only make sense for specific transactions in specific segments. José Antônio de Sousa, from Caixa Econômica Federal, remarks that Brazil’s development ministry is preparing guidelines on mobile financial services for the unbanked. FEBRABAN (Brazil’s banking confederation) is also working on an m-payments model to be presented to the central bank over the coming months. In the current climate, it looks as if remote payments present more upside short term than contactless payments where it will take longer to bring the technology to large segments of the population. In 2011 Caixa itself ran an SMS-based m-payments pilot test in collaboration with Redecard (MasterCard) and Vivo, initially in Brasilia, Sao Paulo and Fortaleza. Even though Banco do Brasil, another of the major Brazilian banks partially owned by the state, took its first steps in the world of mobile payments some six years ago, transacting through this channel remains marginal. Denilson Gonçalves Molina, who runs the entity’s card business, believes that growth in mobile payments will require closer cooperation among the various agents and an interoperability effort. Against this backdrop, Banco do Brasil itself has a joint venture with Oi Paggo for the issuance of physical or virtual cards that can be used from mobile phones. The country’s leading payments processors, Cielo and Redecard, plan to start work on upgrading their acquisition networks to accommodate mobile payments at the end of 2011. If deployment goes to schedule, the market should be poised for take-off by the end of 2012. From a strictly regulatory standpoint, Daso Coimbra, who works at Brazil’s central bank, indicates that the m-payments model will not entail major system changes in so far as the existing infrastructure is already card-based. The taskforce looking into this issue at FEBRABAN is trying to come up with an interoperable platform for the country’s financial institutions, in all likelihood based on the automatic clearing house and under the central bank’s supervision. Hal Cash, a platform that enables money transfers to be withdrawn from ATMs is one of the frontrunners in Spain in the use of the mobile phone for making payments and sending money. José Valiño, Chairman of Hal Cash, was sold from the outset on the role to be carved out by the mobile phone in remittances because the formal alternatives (SWIFT and money transfer operators) were comparatively more expensive. Nevertheless, mobile payments in Spain are expected to find more fertile ground on another front. Bankia’s Javier Celaya sums up the sentiment of the sector majority when he says that NFC will emerge as the most successful mobile technology in the country, warning that for this to happen, development of the contactless payment market, already underway in Europe, is a prerequisite. Although the business case does not stand up in the short term it is nevertheless a necessary defense strategy. As a result, mobile payments are a priority, even for an entity in the midst of integration such as Bankia. Banco Sabadell’s Albert Figueras expresses a similar opinion when he claims that contactless payments constitute a core strategic focus for 2011 and 2012, noting that development of this technology is vital for the widespread use of NFC-enabled mobile phones. That being said, Albert Figueras believes that these applications’ real value proposition (loyalty programs, private label cards, etc.) has yet to be properly tapped.

24

5. Newcomers In a market as dynamic as the payments industry it is not surprising that such a large number of players from a broad range of sectors (retailers, MNOs, Internet players, etc.) are trying to get into the playing field to vie with the incumbents. BBVA’s Francisco Castells sees somewhat of a bubble forming in the payments services industry: everyone is looking to get in, not because it is a profitable business but rather because they are looking to flesh out their consumer behavior models with an associated payment scheme. Chart 1: Payments ecosystem according to Francisco Castells, Managing Director of Payment Services at BBVA

ISSUANCE BUSINESS

Traditional

Non-traditional

TELCOS

BANKS CONVERGENCE SPACE

Non-traditional

ACQUISITION BUSINESS

Traditional

ONLINE PAYMENT PLATFORMS

VIRTUAL CURRENCIES

Castells signals PayPal as the first entity which, as a newcomer, has tried to expand beyond its sphere of influence, penetrating the frontier marked by the traditional players by unifying all existing ecosystems for its customers. Against this backdrop, the payment acquisition networks of the legacy players is the most highly valued asset when it comes to looking for new partners. Selfinstallable acquirers such as Square nevertheless pose a threat as this company’s wireless technology allows rapid deployment of an acquisition network at limited cost for the service provider. Most sector executives believe that cash is the biggest enemy in the payments business as the newcomers can change the market but they will never break it. Bankia’s Javier Celaya cites the advent of ING in Spain, with its innovative retail banking model as an example of how a newcomer can introduce new concepts into a mature and highly competitive market. The conclusions on the other side of the Atlantic are broadly similar. Jorge Fernández García Travesi of Santander Mexico believes that ultimately the entrance of more players is likely to translate into increased competition, unlocking more benefits for end users. He cautions however that credit authorization is an entirely different game, one which has been studied minutely by the banks, to which some newcomers are arriving without a track record. Carlos Montaño, a specialist in IT architecture at Banco de Crédito del Perú (BCP), is concerned by the influx of new non-banking players in the payments market, even though prevailing legislation in Peru does not allow this for the time being. This is why retail chains such as Ripley and Falabella have had to set up banks to operate in this segment. In his opinion, it is the financial agents that should spearhead development of the new payment alternatives by innovating or adopting new solutions.

25


4. The industry in figures 1. Introduction In this chapter, we analyze the shifts taking place in the low-value payment processing industry in Latin America and Spain in recent months. Before getting into the numbers, it is important to highlight the fact that it is hard to make comparisons across the various countries because of the various financial systems’ idiosyncratic characteristics and practices and also because the size of the economies (measured in terms of gross domestic product (GDP)) varies considerably from one country to the next. However, there are certain common traits and trends. One of the most noteworthy areas of common ground is the growing incorporation of information and communications technology (ICT) into retail payment systems by financial institutions. Technological innovation in low-value payment services has created opportunities for deposit takers, payment processors and payment gateways to introduce new payment instruments and/or lower existing processing costs. In recent years, new payment instruments have been introduced into consumers’ everyday transactions. In addition to diversifying the range of credit and debit cards marketed, the players have been developing new products such as e-wallets, direct interbank credit and debit and Internet/mobile transacting, some of which were already being used extensively in Spain and other European countries before being rolled out in Latin America. The significant growth in the use of e-payment systems has been accompanied by investment in automatic teller machines (ATMs), point of sale (POS) terminals and online platforms, coupled with reinforcement of non-banking correspondent networks. The gradual substitution of paper-based payment instruments has taken place against this backdrop of industry modernization. Whereas the amount of cash in circulation2 continues to represent a scant 1.5% of all payment processing methods used in Latin America by value (USD166.55 billion), the use of checks has plummeted from 36.5% of total transactions by value in 2005 to 17.9% in 2010 (USD1,992.94 billion). The automated clearing houses (ACH) have allowed individuals, companies and governments to gradually migrate from checks to electronic payments and collections, even permitting transacting when the issuer and recipient hold accounts at different banks. Due to the growing use of these systems, credit transfers have increased substantially, jumping from 60.0% of transactions by value to 76.7% (USD8,561.29 billion) in just five years, as illustrated in Chart 2. Moreover, the use of cards has been increasing in keeping with the initiatives taken by governments and financial institutions to increase the penetration of banking services and in line with growth in the number of ATMs and POS terminals. The value of the payments industry totaled USD11,162.09 billion in Latin America in 2010, implying a compound annual growth rate of 17.8% since 2005, when the value of payment services fell short of the USD5 billion mark. Chart 2: Value of payment transactions in Latin America3 between 2005 and 2010 by instrument (USD, billions)

12,000

11,162.09 1.5%

10,000

17.9% 3.7%

8,000 6,000

0.2% Cash (M0)

4,918.72

4,000

1.5%

36.5%

Checks 76.7%

2.1%

2,000

Cards Direct debits

60.0%

Credit transfers

0 2005

2010

Source: central banks and bank supervisors.

2 3

26

Cash in circulation (M0) encompasses the notes and coins used habitually to make payments and the money held by banks in their vaults and on deposit at the corresponding central bank. For the purposes of this chapter’s analysis, Latin America encompasses Brazil, Chile, Colombia, Mexico, Peru and the Dominican Republic.

The figures provided in Chart 2 do not constitute an accurate reflection of the use of the various payment means since the value of credit transfers (which include wage payments, for example) is frequently significantly higher than the sums involved in direct debits (an instrument typically used, after all, to pay for utilities such as electricity, phone or water bills which are, by definition, far lower-value) or card payments. To get a more accurate picture, therefore, we need to look at transaction volumes (Chart 3), which shows a similar pattern of gradual migration from paper-based payments to more efficient and modern methods. This phenomenon is clearly illustrated in the trend in check usage: the penetration of checks has dropped from around one-third of total non-cash payments in 2005 to just 10.8% in 2010 (1.52 billion transactions). In contrast, credit transfers have been gaining ground and are currently used in 31.5% of transactions (4.36 billion payments), up from 24.8% in 2005. Despite considerable growth in the use of card transfers, cards remain the method of choice, being used in 57.6% of all transactions (8.08 billion transactions). Note that notwithstanding the significant reliance on cash in these countries, the above analysis does not include this payment method due to the lack of reliable information on its usage.

Chart 3: Number of payment transactions in Latin America in 2005 and 2010 (millions)

2005

2010

1,516.89

2,348.02

1,844.02

4,362.59 4.99

8,078.40

3,253.48

Credit transfers

Direct debits

Cards

74.24

Checks


The developments of low-value payment processing methods in Spain, as in Latin America, is closely correlated to ICT developments, which have fostered productivity enhancements and technological innovation to the point that we can now safely report that technology constitutes one of the bedrocks of the payments industry. Against this backdrop, it is no surprise that the pattern in Spain, where the value of payments made using retail banking instruments totaled EUR1.87 trillion in 2010, tracks that observed in the rest of the countries under analysis, with electronic payment methods (credit transfers, direct debits, standing orders and credit and debit cards) gaining market share over paper-based instruments (checks), as is evidenced by Chart 4. Despite the similarities, there are also significant differences, most notably the faster growth in total payments by value in Latin America compared to Spain (CAGR of 17.8% in Latin America versus 3.5% in Spain). This undoubtedly reflects the fact that economic growth in Latin America has outpaced that of Spain. However, it is also attributable to more subtle and profound shifts, including growth of the banking system, growing penetration of card usage, greater acceptance and use of new payment instruments, regulatory changes, the entrance of new non-bank payment service providers, aggressive growth in the physical infrastructure supporting electronic payments (non-bank ATMs, POS terminals and banking agents) and the growing use of online banking platforms.

27


4. The industry in figures

Chart 4: Value of payment transactions in Spain between 2005 and 2010 by instrument (EUR, billions)

2,000 1,800

3.3%

1,600

8.6%

1,000 800 600

34.5%

3.9%

5.1% 4.5%

5.1% 16.9%

0.5%

Cash (M0) Others** Bills*

15.8%

400 200

0.2%

20.2%

1,400 1,200

1,874.11

1,820.60

Checks 47.7%

Cards Direct debits

33.7%

Credit transfers

0 2005

2010

Source: Bank of Spain. *Bills are credit notes which can be collected (if due) or which must be paid (if drawn) at maturity. **Includes the fuel check and travel check subsystems and assorted transactions.

2. Cash Cash payments (coins and notes) are generally associated with low-value transactions due to their unique characteristics. On the one hand, cash payments are a form of legal tender that does not require identification; on the other, cash payments imply immediate and definitive settlement of a payment without requiring the involvement of a financial institution, thereby eliminating credit risk4. Consumers in Latin America, are highly dependent on cash payments. This is evident in the fact that growth in the notes and coins in the hands of the public has outpaced growth in the number of cards issued by financial institutions. Despite this widespread trend, there are significant differences across the countries analyzed, as is demonstrated by the cash preference ratio5, which is as high as 29.3 in Peru, a lower 14.5 in Colombia and only 5.3 in Chile6. Even though a broad spectrum of factors is responsible for shaping the trend in demand for money, certain variables are key. Money demand theory7 says there is a close correlation between money in circulation and economic activity. There is also an inverse correlation with inflation (since holding cash leads to a loss of purchasing power) and the nominal interest rate (the higher the rate, the greater the cost of opportunity of holding funds in cash instead of seeking higher remuneration from higher yielding financial assets). Chart 5, which depicts the growth in coins and notes in circulation in the six countries analyzed mapped against the Afi LatAm GDP index, shows the positive correlation between these two variables. It is important to point out that in order to draw comparisons across the six countries in our study, the data displayed in Chart 5 are shown in US dollars; accordingly, the value of the cash may be affected by the rates of exchange between each currency and the dollar.

4 5 6 7

28

Hwang, J. and Guadamillas, M., Chapter VI, Main trends in payment instruments and infrastructure usage in selected Latin American countries. Balancing cooperation and competition in retail payment systems, Lessons from Latin American case studies, November 2008. The public’s cash preference ratio is obtained by dividing the amount of cash in the hands of the public by local-currency liquidity in the banking system. Choy, M. and Roca, V., Trends in low-value payment systems in Peru, Central Bank of Peru. Weekly Payments, Amsterdam, October 2010. Economists have developed a variety of models which formally describe the reasons why individuals keep money in their possession; these models constitute so-called money demand theory.

Another factor that affects demand for cash is the cost of transacting using alternative payment methods. Measures such as the tax on financial movements (GMF for its acronym in Spanish) in Colombia stimulate the use of cash and hinder the development and penetration of electronic payments as users attempt to minimize the number of transactions by holding large cash balances.

80

160

70

140

60

120

50

100

40

80

30

60

20

40

10

20

0

Brazil Indixes (base 2005=100)

Cash circulation

Chart 5: Cash in circulation in Latin America, 2005-2010 (USD billion)

Chile Colombia Mexico Peru Dominican Rep. Afi LatAm GDP index

0 2005

2006

2007

2008

2009

Afi LatAm exchange rate index

2010


In Spain, consumers continue to show a preference for cash payments for several reasons, with tradition cited as an important factor by the European Central Bank8. This preference has not been affected by the growth in payment cards, since the existence of a widespread ATM network (Spain has one of the highest numbers of ATMs per capita in the EU) permits fast and easy cash withdrawals. On the other hand, merchants tend to see card payment processing of low-value transactions as more cumbersome and expensive than cash, another factor which may be deterring card use. As a result, as shown in Table 1, between 2005 and 2010 the volume of coins and notes in circulation has been steadily rising. October 2008 marked a clear-cut spike, as many people withdrew their savings from their bank accounts when they lost confidence in the financial system in the wake of the collapse of Lehman Brothers and the attendant deterioration of the financial crisis. At present EUR95.5 billion of cash is in circulation in Spain. This figure is expected to continue to increase, barring disruptive innovation that could spur a turnaround, as could happen in the event of critical mass adoption of mobile wallets. Table 1: Cash in circulation in Spain (EUR billion) and annual growth (%), 2005-2010

Coins and notes in circulation Annual growth

2005

2006

2007

2008

2009

2010

59.36

65.93

70.92

79.44

91.74

95.50

11.1%

7.6%

12.0%

15.5%

4.1%

Source: Bank of Spain.

8

European Central Bank Blue Book, Payment and securities settlement systems in the European Union. Euro area countries, August 2007.

29



3. Checks As noted elsewhere in this report, the use of checks is clearly in decline (see Table 2), with the sole exception of Peru, where the number of payments transacted with checks has increased at an annual rate of 1.1% between 2005 and 2010. The value of payments transacted using checks has increased in Brazil, Colombia and Peru, although it is worth noting that compound annual growth in this metric in Brazil and Colombia has lagged the rate of inflation. The growth in the use of checks in Peru should not be misconstrued: in this country, checks are used mainly for intercompany payments and they are gradually being replaced by other payment methods. This is evident in the fact that between 2005 and 2010, credit transfers cleared through the electronic clearing house (CCE for its Spanish acronym) grew at a compound annual rate of 47.3% and 40.8% by value and number of transactions, respectively, while the growth in check usage has been far slower, at 7.4% and 1.1%, by value and number, respectively. Another telltale sign of the check’s inexorable decline is that in Peru, as in the other countries analyzed, this payment method is losing market share. Payments transacted using checks have fallen significantly from 82.6% of total payments by value in 2005 to 68.9% just five years on. It is worth noting the measures taken in the past to deter its use. In the 1980s, checks were levied with a 1% tax; although this tax was repealed in 1992, use of the check never recovered to prior levels. As for the average amount per check written in the six Latin American countries studied, there is no common pattern to speak of. This simply demonstrates the fact that economic and social factors, the regulatory framework and the product range on offer all affect average transaction sizes. Lastly, the results are also skewed somewhat by exchange rate effects. Table 2: Use of checks in Latin America and Spain Number of transactions (millions)

Value (USD billions)

Average transaction size (USD)

2010 Brazil

Number of transactions

Value

CAGR 2005-2010

1,109.00

708.96

639.28

-9.6%

1.6%

208.30

676.97

3,250.05

-5.5%

-7.1%

36.34

229.28

6,308.53

-9.5%

3.3%

126.16

269.60

2,137.03

-5.2%

-0.2%

8.38

55.10

6,577.57

1.1%

7.4%

Dominican Republic

28.71

53.04

1,847.22

-5.3%

-3.6%

Spain

70.87

507.63

7,162.52

-8.1%

0.0%

Chile Colombia Mexico Peru

* Growth between 2008 and 2010.


It is worth singling out Chile, where consumers still use checks extensively. Among the factors contributing to the continued high use of this instrument in Chile we would highlight, firstly, its relatively security as payment instrument, as drawing a check on insufficient funds in Chile is punishable with a prison sentence; secondly, checks are somewhat of a status symbol in light of the hoops that consumers have to jump through to be issued a checkbook; and, lastly, the entrenched use of checks as a means of credit using the so-called Tres cuotas (three payments) scheme, which allows payment in the form of three post-dated checks, at 30, 60 and 90 days.9 Despite the fact that checks are falling out of favor in the Dominican Republic, the country’s central bank, under the aegis of the Payment System Reform Initiative (SIPARD for its Spanish acronym), has changed the format of checks issued by natural and legal persons in order to adapt them to international security standards and agreements. As a result, since 30 April 2010 all checkbooks are made following the new guidelines. In addition to enhancing security, the new rules will cut the period for effecting payments from one week to one day once the various phases of the SIPARD initiative are fully implemented.

9

30

Assessing payment systems in Latin America, Economist Intelligence Unit, May 2005.

In Spain, as in the rest of Latin America, the use of checks has been falling in tandem with the steady growth in electronic payment methods. This is evident in the fact that checks and promissory notes have gone from accounting for 38% of transacting in all payment instruments (including cash) in 2005 to 21% five years on. The main reasons why checks continue to play a meaningful role include: (i) entrenched consumer habits which are hard to shift; (ii) the fact that beneficiaries (and not the person writing the check) assume the check cashing commissions; and (iii) the legal obligations associated with checksfn. European Central Bank Blue Book, Payment and securities settlement systems in the European Union10.

4. Cards After cash, cards are the next most widely used payment method in Latin America. Indeed, cards are used in 57.6% of transactions at the aggregate level (across all six countries analyzed); this percentage rises to 81.5% in the case of Mexico. The reported use of cards in Chile, on the other hand, is significantly below average (16.6%) due to the preference for checks, on the one hand, and the fact that the statistics compiled by the Chilean Bank Supervisor (the SBIF) do not include store cards, which in Chile garner the lion’s share of the card market, leaving bank cards in the shade. The number of payment cards in issue has risen in recent years. The factors driving this growth include: (i) healthy economic growth, in general, and a strong performance by the retail sector, in particular; (ii) growth in disposable income among population segments C and D11, boosting consumption in these categories along with growth in the use of cards as a means of payment; (iii) a substitution phenomenon with debit and credit cards gradually displacing the use of cash and checks, as the former are perceived to be safer and more widely accepted; (iv) information campaigns by the banks, by retailers and by the international card networks; (v) increasing penetration of banking services; and (vi) expansion of the physical infrastructure (ATMs and POS terminals). Against such a favorable backdrop, it is hardly surprising that the average payment transacted using cards has been on the rise (with the exception of Mexico, hit harder by the global slowdown). For example, in Peru and Brazil, the average transaction size has doubled in the past five years to USD60.4 and USD49.6, respectively. Chart 7 illustrates the decline in the number of credit cards in issue per 1,000 inhabitants in Chile as a result of regulatory changes. The number of cards reported to be in use in Chile in 2008 had fallen significantly (by 32%) on prior years. The new criteria only compute cards that are ready for transacting, leaving unactivated cards out of the statistics. These changes mask the real growth in the number of active credit cards according to the SBIF. Two factors are believed to have contributed to this growth: (i) the fact that cards can be used in a growing number of establishments; and (ii) intense promotion on the part of institutions allowing interest-free (retailer prices) payment in three installments (and even up to six). Another SBIF rule worth highlighting introduces changes with respect to plain language and transparency requirements for mass consumer banking contracts, which are designed to foster use of electronic payment methods12. Changes in the disclosures on payment channels and instruments that financial institutions are required to provide to the Peruvian Central Bank (BCRP) have had similar consequences to those outlined above with respect to Chile. Were it not for these changes, card numbers in Peru would also show growth, in part because firms specializing in consumer credit have been granting lowerincome consumers access to bank credit13. Staying in Peru, the national bank supervisor (SBS for its Spanish acronym) recently approved a regulation (No. 7897-2011) similarly amending disclosure and transparency requirements in contracts executed with financial system users. The goal of this regulation is to ensure that banks comply with their obligation to adequately inform their customers about the fees and charges they will be charged for each product so that they can chose the product or service that best suits their requirements based on full information about their terms and conditions. The expectation is that easier and more direct access to information will prompt card holders (and other financial product users) to use electronic payment methods more extensively in the coming years.

10 European Central Bank Blue Book, Payment and securities settlement systems in the European Union. Euro area countries, August 2007. 11 Segments “A”, “B” and “C1” represent the highest income brackets; “C2” and “C3” encompass the middle class; segment "D" refers to the lowest income segments, while segment "E" is the poorest population grouping. 12 Circular No. 3,513, of 15 November 2010, regarding good contracting practices, which in turn amends Circular No. 3,505 of 22 September 2010. 13 Choy, M. and Roca, V., Trends in low-value payment systems in Peru, Central Bank of Peru. Weekly Payments, Amsterdam, October 2010.

31



Developments in Brazil are another matter entirely. Following the release of a report by the Brazilian central bank14 that found that the card system was highly concentrated, the card industry opted to self-regulate, introducing the following changes: (i) opening up the acquiring business to newcomers; (ii) interoperability across POS terminals; (iii) neutral clearing and settling of payments transacted using cards; (iv) reinforcement of local debit card systems; and (v) transparency in determining the interchange fee. With respect to (i) above, it is worth highlighting the fact that the industry agreed the terms of a commitment, which put an end (with effect from 30 June 2010) to the exclusive arrangements formerly held by Cielo (formerly Visanet, controlled by Bradesco and Banco do Brasil) and Redecard (controlled by Itaú Unibanco) for capturing Visa and MasterCard transactions, respectively; between them, these acquirers controlled 90% of the market. Following the relaxation of entry barriers, Banco Santander launched its own acquirer - Santander Conta Integrada – in March 2010. A few months later, in December 2010, Credicard (a Citigroup subsidiary) and Elavon (a Bancorp Elavon division) signed an agreement to set up a joint venture to act as acquirer in the Brazilian market. Another example of how competition has intensified in this market can be found in the launch of credit, debit and prepaid cards under the Elo trademark by Bradesco, Banco do Brasil and Caixa Econômica Federal in April 2010. These card issuers aim to capture 15% of the market within five years. Chart 6: Number of debit cards in circulation per 1,000 inhabitants in Latin America and Spain, 2005-2010 1,200 Brazil

1,000

Chile

800

Colombia 600

Mexico

400

Peru Dominican Republic

200

Spain 0 2005

2006

2007

2008

2009

2010


Another fact that stands out in analyzing Chart 6 is that the number of debit cards per 1,000 inhabitants is significantly higher in Brazil than in Spain. The higher penetration of banking services in Spain relative to Brazil (close to 100% against 60%) would argue in favor of a higher card penetration in the former. However, the Brazilian central bank’s explanations for the active card statistics unravel this paradox. In 2009 (latest figure available), of the 221.4 million debit cards issued, only one quarter (57.7 million) were active. Something similar applies to credit cards issued:only 74.9 million of the 152.3 million cards issued are active15. Using these statistics as a more accurate reflection of the penetration of payment cards in Brazil shows that the number of active debit cards per 1,000 inhabitants is 301, while the number of active credit cards is 391, both of which metrics are significantly below the Spanish equivalents of 658 and 936, respectively. The Brazilian central bank’s statistical records also show the slowdown in the pace of growth in active cards. Although the number of active payment cards continued to grow in Brazil in 2009, the pace of growth eased by 2.7% in comparison with 2007 in the case of debit cards and by 7.2% for credit cards.

14 Report on the Brazilian Payment Card Industry. Statistical Update, 2008/2009. Department of Banking Transactions and Payment Systems, Payment Systems Division, Central Bank of Brazil. 2010. 15 Report on the Brazilian Payment Card Industry. Statistical Update, 2008/2009. Department of Banking Transactions and Payment Systems, Payment Systems Division, Central Bank of Brazil. 2010.

32

Chart 7: Number of credit cards in circulation per 1,000 inhabitants in Latin America and Spain, 2005-2010

1,000 900

Brazil

800 700

Chile

600

Colombia

500

Mexico

400

Peru

300 200

Dominican Republic

100

Spain

0 2005

2006

2007

2008

2009

2010


As illustrated in Chart 6 and Chart 7, the number of plastic cards in circulation in Latin America (across the six countries analyzed) has been trending clearly upward. This growth is expected to continue in these countries medium term as more of the population begins to use banking services. Debit cards outnumber credit cards in Latin America (Table 3) due to the fact that the former are frequently granted automatically when opening a savings account, while robust credit scores are required to obtain the latter. Unfortunately, it is impossible to precisely quantify growth at the aggregate level for each card category due to the changes in reporting methodologies mentioned earlier in this section. That being said, it looks as if credit cards have been sustaining more dynamic growth in Brazil and Colombia, in contrast to the trend witnessed in the Dominican Republic and Mexico. The passing of a bill in Mexico in August 2010 (the Credit Institutions Act) requiring card issuers to market a new credit card format termed “basic” to cater to the lower-income segments of the population is expected to boost card usage at a time of stagnating segment growth. These cards are issued at no cost and are not allowed to carry the same charges as are standard in other card categories. The maximum permitted credit on a basic card will be USD926 and they can only be used to purchase goods and services (i.e., not to withdraw cash). The Mexican administration also passed a credit card circular in November 2010 from which we would highlight two aspects. Firstly, the standardization of the rules for allowing card holders to authorize payments directly from their credit cards for recurring payments for goods and services vis-à-vis the rules for standing orders using debit cards. Here the idea is to facilitate card applications, complaints about unauthorized charges and swift and secure service cancellation, all of which is likely to stimulate credit card usage. Secondly, the new regulations increase the minimum credit card payment for each installment gradually from January 2011 until 2012, so that debts will be paid off more quickly. With this initiative, the Mexican central bank is attempting to ensure that credit card debts are paid down within a reasonable timeframe. It is worth noting that in 2009, Banco Santander revised its debit card numbers downwards for this country.

33



Chart 8: Number of credit and debit cards in circulation per 1,000 inhabitants in Latin America, 2007-2010

350,000,000

340,463,689 321,985,504

300,000,000

303,460,358 265,918,300

250,000,000

219,434,125

200,000,000 159,647,455

150,000,000

193,633,420 180,389,999

Debit cards Credit cards

100,000,000 50,000,000 0 2007

2008

2009

2010


Chart 8 illustrates the clear-cut upward trend in plastic cards in the six Latin American countries analyzed. This growth is expected to continue in these countries medium term as more of the population begins to use banking services. In this respect, at times it seems as if the major retailers are better positioned than the banks to exploit this market. Banco Walmart has already dug in its heels in Mexico, setting up ‘mini-branches’ in the close to 1,300 stores run by the chain in this country. We should point out that a significant segment of the low-income population remains underbanked; these consumers shop daily in Walmart. These ‘mini-branches’ promote new accounts, even though money deposits and withdrawals are effected through the roughly 20 cash registers found in every store and which serve as correspondent ATMs16. The key to success will lie with Banco Walmart’s ability to encourage the use of payment cards. Table 3: Number of credit and debit cards in circulation, Latin America and Spain, 2010 Country

Debit cards

Credit cards

226,141,000

175,437,000

Chile

11,374,443

4,887,405

Colombia

15,101,345

8,240,506

Mexico

75,165,015

22,397,055

Peru

9,458,509

6,687,764

Dominican Republic

3,223,377

1,784,395

28,620,000

42,960,000

Brazil

Spain


16 CGAP, Technology Program, Country Note: Mexico, March 2011.

34

Unlike in Latin America, in Spain credit cards have been more commonplace than debit cards since 2005. This may well reflect the fact that a significant portion of the population continues to use savings books (the so-called cartilla) instead of debit cards. It is worth highlighting that the crisis has triggered the elimination of almost five million plastic cards in the past two years, with the number of payment cards dropping from 76,390,000 in 2008 to 71,580,000 two years later. Several factors are responsible for this phenomenon. On the one hand, consumers tightening their belts and eliminating cards is one of the ways they are achieving this. On the other hand, the financial sector has taken advantage of the migration away from traditional magnetic cards to the more expensive EMV smart or chip cards (Europay-MasterCard International-Visa International Integrated Circuit Card Specifications) to not re-issue less active cards17. Another noteworthy difference between Spain and Latin America is the fact that in the former the average payment at POS terminals has fallen from EUR52.1 per transaction in 2005 to EUR44.1 in 2010. This downward trend suggests that cards are increasingly being used for lower-value transactions. The other likely reason underpinning the fall is the economic crisis, as the biggest drop in average transaction size took place in 2009 (5.7%) when the average ticket fell to EUR44.8 from EUR47.6 a year earlier.

SPOTLIGHT 1: RETAILER CREDIT CARDS IN CHILE AND BRASIL The credit cards marketed by the biggest retail chains, such as Falabella and Ripley, dominate the payment card market in Chile and boast 98% instrument recognition. These cards, whose use was traditionally restricted to making purchases in the issuing chain’s establishments, have been extending their reach over time through a combination of open and closed systems. These cards are usually free of charge and often offer the possibility of paying for goods and services in installments, with or without financing charges. The penetration of these cards is remarkable, with 16 million units active in 2010, 3.3 times the number of bank credit cards. On the other hand, the average payment transacted using store cards (USD58) is significantly lower than payments processed using mainstream bank cards (USD101). Part of the success of these plastic cards relative to their traditional bank counterparts lies with the retailers’ ability to tailor their credit terms by product and service purchased. Thus, terms are varied depending on whether the credit is used to buy food or electronic goods, for example. Moreover, these products can be personalized for all forms of financing and payment consolidation requirements, evidencing their ability to adapt to consumers’ evolving needs. This flexibility requires highly specialized credit card administration systems endowed with features that enable personalization and customization. According to a Working Paper put out by the Chilean Central Bank18, the success of these cards is attributable to several factors. The Working Paper’s authors highlight the country’s high incidence of unbanked or underbanked citizens, which prompted the department store chains to step into the breach to cover demand for consumer credit, which was not being satisfied by the banks. Secondly, the crisis in the banking system in the 1980s curbed the banks’ appetite for assuming risk and venturing into new business lines. Thirdly, the Working Paper cites the asymmetric enforcement of financial regulations, as cards issued by retailers are not supervised by the banking watchdog (SBIF). Lastly, the Paper notes that the department store chains possess more complete and in-depth intelligence on consumer payment habits and have known how to leverage and manage this information very astutely. There are also retailer card programs in Brazil for which outstanding balances can be settled between one and two months after purchase or in installments, typically interest-free. As it is not possible to settle the debts incurred on these kinds of cards by correspondence, customers have to go to the physical establishments to pay in cash, by check or using their debit cards. As with debit and credit cards, the number of these cards in circulation in recent years has surged from 97.5 million in 2005 to 196.5 million in 2009 (most recent figure available), which translates into annual growth of 19.1%. In 2009, around 1.1 billion transactions were processed using store cards for an aggregate value of USD29.8 billion, yielding an average transaction size of USD27.1.

17 Mars, A., The number of payment cards falls to lowest level since 2005, published in El País, July 4, 2011. 18 Montero, J.P. and Tarziján, J., The success of department stores in Chile: Regulation or good management?, Central Bank of Chile, Working Papers, No. 565, March 2010.

35



5. Credit transfers and direct debits As noted earlier, the ACH systems have facilitated the development of credit transfers and direct debits across Latin America. These systems were launched in the region towards the end of the 1990s and in the early 2000s and were initially slow to gain traction. Their ramp-up was impeded by the financial crises afflicting some of the countries analyzed, the lack of legislation governing electronic payments, cultural factors, resistance by the banks to promoting ACH systems and the lack of interest on the part of consumers who were used to using cash and pulling out their checkbooks19. However, as shown in Table 4, in recent years, these payment methods have grown by value and number of transactions, indicating healthier development as consumers take advantage of the lower risk and greater efficiency of these services. In Spain, transfers are the most widely used instrument, accounting for 50.2% of aggregate payments. Table 4: Credit transfers in Latin America and Spain, 2010 Number of transactions (millions)



2010


Value

CAGR 2005-2010

Brazil

2,058.00

4,536.82

2,204.48

14.9%

19.2%

Chile

2,145.10

N/A

N/A

21.9%

N/A

Colombia

68.84

333.70

4,847.71

9.2%

17.5%

Mexico

86.85

3,668.96

42,246.33**

34.2%

18.0%

Peru

2.70

9.35

3,465.10

40.8%

47.3%

Dominican Republic

1.11

12.47

11,228.53***

20.9%

37.8%

378.41

1,196.81

3,162.69

6.4%

7.8%

Spain

Source: central banks and bank supervisors. *Growth figures for Colombia and the Dominican Republic cover 2008-2010. **The Bank of Mexico data for interbank credit transfers include low-value payment system wires (TEF for the system’s acronym in Spanish), high-value payment system orders (SPEI for this system’s acronym in Spanish) and credit card payment orders from other banks. *** In the Dominican Republic, the figures include low-value and high-value transfers.

Since Table 4 only includes interbank transfers, the figures fail to highlight the importance of this payment method, particularly in countries where it is not possible to transfer money between different banks or where a small number of large banks account for a significant portion of banking system assets, as the transfers between accounts in a given bank are not picked up in these statistics. Chart 9 illustrates the importance of intrabank versus interbank credit transfers, which are scantly material in countries such as Peru and the Dominican Republic, where they account for just 1.5% and 3.1% of the total, respectively.

19 Russell, N., Payment Systems in Latin America: Advances and Opportunities, June 2008.

36

Chart 9: Total number and percentage of interbank and intrabank transfers in a selection of Latin American countries, 2010 (millions)

7,716.00

26.7%

73.3%

Brazil

821.86

10.6%

89.4%

Mexico

54.66

35.45

1.5%

3.1%

98.5%

96.9%

Peru*

Number of credit transfers (millions)

Interbank Intrabank

Dominican Rep.

Source: central banks and bank supervisors. *The Peruvian statistics date to 2006.

In Peru, the fact that three of the main banks account for 80% of the system’s sight and savings deposits partially explains why interbank transfers are so low. However, there are other reasons why credit transfers (by number of transactions and value) are significantly lower in Peru than in other neighboring countries despite the advantages afforded by this instrument with respect to the use of cash and checks. Some of the noteworthy factors impeding the uptake of transfers include the structure of clearing service fees; the larger banks’ motivation to invest in their own networks instead of in an open network; a still-incipient financial services culture; and the existence of other payment instruments that have the effect of curtailing development of credit transfers20. Factors such as growing penetration of banking services, the incorporation of non-bank microfinance entities into the settlement system, intensification of Internet banking and e-money suggest that medium term interbank credit transfers in Peru are likely to converge to the levels witnessed in other countries in the region21. Development of this instrument is also likely to be boosted by the Income Payment Banking Act22 passed in 2010, which allows workers to choose freely which bank they wish to have their salaries paid into. This piece of legislation additionally fosters use of the financial system as a whole as it encourages payment processing using electronic means, e.g. through POS terminals, and cash withdrawals from ATMs, making workers’ payments safer and easier by eliminating the need to carry large amounts of cash. The electronic clearing house in Peru is contemplating the introduction of the so-called ‘pay button’ service, similar to that already in place in Colombia, which would allow retailers and state entities to offer their customers the choice of making virtual payments. Using the pay button option, credit transfers initiated from the portals of the retailers or the state entities would immediately, via the clearinghouse, access the financial institution where the funds for making the payment are deposited.

20 Vega Bernal, M.; Ayllón Vásquez, R. and Chavez Anyos, G.; Innovation in payment systems: The credit transfers market in Peru, presented at the Peruvian Central Bank's XXVII Economists' Forum in Lima, November 11, 12 and 13, 2009. 21 Choy, M. and Roca, V., Trends in low-value payment systems in Peru. Working Paper No. 2010-015, December 2010. 22 Supreme Decree No. 003-2010-TR, publishes on April 15, 2010 and which took effect the next day.

37



SPOTLIGHT 2: PROGRESS ON THE SINGLE EURO PAYMENTS AREA In 2009, Spain passed legislation transposing Directive 2007/64/EC of the European Parliament and of the Council that is designed to harmonize the legal framework governing payment services in the European Union (EU). The payment services contemplated are credit transfers (including standing orders), direct debits (including oneoff direct debits) and the use of credit and debit cards to pay money into or withdraw money from accounts via ATMs. This law does not regulate paper-based instruments such as checks, promissory notes or bills of exchange, which continue to be regulated under previously existing legislation and which pose challenges in terms of cross-border harmonization. The legislation avoids fostering non-electronic payment means at the Community level with the idea of nudging the payment systems market locally towards electronic instruments. In order to get the Single Euro Payments Area (known for its acronym, SEPA) up and running, the member states are required to migrate from their individual payment systems to a pan-European platform. According to the Eurosystem, this process, while progressing, is proving slow. This fact has prompted the amendment of Regulation (EC) No. 924/2009 on the technical requirements for making credit transfers and direct debits in euros, stipulating a binding timeline for migrating these payment instruments over to the single platform so that the latter will be operative by the end of 2012 for transfers and by 2013 for direct debits. This Regulation further prohibits the application of hidden charges among banks (multilateral interchange fees) for direct debits and standing orders, which are still being levied in six member states, including Spain. With respect to Eurosystem cards, the Seventh Single Euro Payments Area (SEPA) Progress Report23 indicates that from 2012 on, all new cards must incorporate EMV chip technology, with the option of adding a magnetic band to ensure compatibility in regions where the EMV standard is not widespread, as is the case in the US. The use of chip cards and a personal identification number (PIN) makes card payments more secure by enabling the use of more powerful cryptographic logarithms for card authentication. In March 2011 in Spain, the case that concerns us here, 100% of ATMs and 96% of POS terminals had already been upgraded for smart cards. However, the rate of migration of cards in circulation is trailing somewhat, at 77%24. For over three years now, the Commission has been weighing up the possibility of developing a pan-European card scheme as an alternative to the Visa and MasterCard duopoly in Europe, which would increase user choices and boost competition among gateways, payment service providers and financial institutions. The mooted new scheme would additionally contribute to maintaining efficiency levels and the relatively low charges and could ultimately boost the number of transactions processed using physical cards and reduce cash handling costs on the part of retailers and financial institutions. Currently there are three initiatives attempting to create a European card scheme, the Euro Alliance of Payment Schemes (EAPS), Monnet and PayFair. Although they are at very early stages of development, they have the backing of the Eurosystem. The key determining success factors for such an initiative include the leadership of early adopters, backing by the financial institutions that have to make sizeable investments in order to adopt a new scheme and acceptance by users, particularly merchants and consumers.

23 European Central Bank, Eurosystem, Single Euro Payments Area, Seventh Progress Report, Beyond Theory Into Practice, October 2010. 24 SEPA Migration Monitoring Commission, Statistical indicators of migration to SEPA, Chart 3 Trend in migration to the EMV standard in Spain.

38

Meanwhile, the number of direct debits (including standing orders, so entrenched in Spain) processed by the ACH systems is significantly lower than the number of credit transfers. However, direct debits are expected to become more popular as more small and large companies begin to use them. We shouldn’t forget that this instrument is more efficient as its use simplifies the reconciliation process and leaves fewer bills unpaid. Another factor that could contribute to growth in direct debits is the gradual phasing out of check usage. Given the nature of the associated payments (utilities such as phone, water and electricity bills), average payment amounts (Table 5) are considerably lower than for other non-cash payment instruments. Table 5: Direct debits in Latin America and Spain, 2010

Number of transactions (millions)



2010

Brazil*


Value

CAGR 2005-2010***

0.10

0.00

N/A

-44.5%

-100.0%

N/A

N/A

N/A

N/A

N/A

Colombia

62.38

14.95

239.61

-1.8%

17.4%

Mexico

11.54

3.01

260.51

30.2%

34.3%

N/A

N/A

N/A

N/A

N/A

0.21

7.53

35,659.23

9.2%

34.1%

1,119.61

423.61

378.35

5.7%

1.9%

Chile

Peru Dominican Republic** Spain


*Interbank direct debits in Brazil have been affected by a change in the methodology used to compile the statistics. At present, the only transactions to compute are those processed by Tecnologia Bancária S.A. (TecBan), which is why the reported figures are so low. **The Dominican Republic figures include low-value direct debits and high-value direct debits, as the financial institution can choose which settlement system to use. ***Growth figures for Colombia and the Dominican Republic cover 2008-2010.

39



SPOTLIGHT 3: BLOQUETO DE COBRANÇA In Brazil, the bloqueto de cobrança (a form of bill of exchange or draft that allows bills to be paid in at any bank) is used widely by companies when collecting bills for products provided and services rendered. They are bar-coded standardized documents representing a receivable, such as a promissory note, which can be paid before maturity at any bank branch, ATM, lottery operator or supermarket in possession of a payment agreement, and also through remote banking channels. Any person (natural or legal) can issue a bloqueto de cobrança as long as they have a bank account; all they need to do is go into their bank branch and ask. In October 2009, Brazil introduced an automated direct debit system (DDA for its acronym in Portuguese) with a view to enabling the electronic processing of bloquetos de cobrança. The system was developed and implemented by the associations of payment service providers processing bloquetos de cobrança together with the Interbank Payments Chamber (CIP), which is tasked with its operation. Electronic processing of this instrument reduces printing and mailing costs as customers can download the bills from Internet for printing. Febraban, Brazil’s Bank Federation, estimates that 2 billion of these documents are issued each year in paper and that this number could be reduced by 40%25 under the new system. Another of the advantages afforded by electronic processing of these documents is the time saved in communicating with the payer, ease of payment and higher protection against fraud. It is worth pointing out that, unlike direct debit orders, customers registered as electronic payers in the DDA can choose whether or not to pay each bill. By the end of 2009, 31 financial institutions operated in the DDA system and over 25 million customers were registered as electronic payers; of these, nearly 80% were natural persons. It is noteworthy that only 3.3% of active account holders are registered as an electronic payer26, suggesting scope for continued growth in the use of this system.

6. Acquisition networks: ATMs, POS terminals and banking agents One of the most effective ways of encouraging the use of non-cash retail payment instruments is to expand the physical infrastructure enabling payment processing, such as ATMs and POS terminals. In Latin America this infrastructure, expressed as installed capacity per million inhabitants, has risen steadily over the past five years, as illustrated in Chart 10 for ATMs and Chart 11 in the case of POS terminals. In Peru, for example, the number of ATMs has risen from 1,678 in 2005 to 4,435 in 2010, which translates into compound annual growth of 21.5%, while the number of POS terminals in Mexico has grown at a compound annual rate of 19.0% since 2005 (jumping from 201,852 terminals to 482,299 in 2010). Despite the general upward trend, the degree of infrastructure development varies substantially from one country to the next. The number of ATMs per million inhabitants in Brazil is 897, while this metric is just 153 in Peru. The Latin American statistics continue to trail well behind the Spanish numbers (1,260 ATMs for every million inhabitants), albeit the latter being one of the highest readings for any developed economy. It is also interesting to note that the number of ATMs and POS terminals has been trending lower since peaking in 2008. The reduction in the former owes largely to the restructuring of the Spanish financial sector, which has resulted in the closure of bank branches, where many of these ATMs are located.

25 CGAP, Technology Program, Country Note: Brazil, December 2010. 26 Statistical Update, 2010. Department of Banking Transactions and Payment Systems, Payment Systems Division, Central Bank of Brazil. 2010.

40

Chart 10: Number of ATMs per million inhabitants in Latin America and Spain, 2005-2010

1,600 1,400 Brazil

1,200

Chile

1,000

Colombia

800

Mexico

600

Peru

400

Dominican Rep.

200

Spain

0 2005

2006

2007

2008

2009

2010


Chart 11: Number of POS terminals per million inhabitants in a selection of Latin American countries and Spain, 2005-2010

35,000 30,000 25,000 Brazil 20,000

Colombia

15,000

Mexico

10,000

Spain

5,000 0 2005

2006

2007

2008

2009

2010


The slowdown in the pace of growth in POS terminals in Mexico in 2010 relates in part to the end of the public rollout program under which banks received incentives for installing terminals, and in part to the economic slump. The abovementioned program was financed by the Expanding the Benefits of Access to Electronic Payment Methods to Society Trust (known by its Spanish acronym FIMPE) created with the goal of promoting and extending access to electronic payment networks and fostering an electronic payment culture in the retail segment. Another singular feature of the Mexican acquisition network is the highly concentrated ownership of the physical infrastructure. As of June 2010, five banks held 79% of ATMs, these banks additionally accounting for the vast majority of accounts with associated debit cards (87%). Mexican banks see ATMs as an additional service that they provide their customers, which is why it is not unusual for them to offer their own customers better terms and conditions for using their ATMs than those offered to other banks’ customers. This explains why account holders perform 90% of their transactions at their own bank’s ATMs.

41



Before May 2010, any person using an ATM owned by a bank other than his card issuer had to pay two fees: one to his own bank (known as the ‘use of other bank ATM fee’) and another to the bank owning the ATM (called a ‘surcharge’). Since the first fee varied from bank to bank, the ATM was unable to inform users from other banks exactly what charges they were liable for. Despite the lack of full disclosure, this system had the advantage of allowing banks without extensive ATM networks to offer their customers access to the competition’s networks at relatively little cost, as the interchange fee charged by the ATM operator to the account holder’s bank was MXP7.25 (USD0.62). On the other hand, this system deterred expansion of the ATM network as a whole. In order to partially counter these limitations, the Mexican central bank stipulated at the end of 2010 that fees for interbank ATM transactions can only be charged by ATM operators and that card issuer banks cannot charge their customers for using the competition’s ATM network. Under the new scheme, ATM operators pay a fee (called the ‘inverse interbank charge’) to the card issuer banks every time a customer uses the ATM and ATM operators set the price for the service offered to card holders27. More recently, in February 2011, the Mexican central bank issued Circular 6/2011 that sets the rules under which financial institutions can jointly offer services through ATMs operated by third parties. In Colombia, Decree 2555 of July 15, 2010, encompassing and re-issuing standards governing the financial sector, insurance business and the securities markets, as well as enacting other provisions, enhances transparency by requiring the publication of information concerning open28 debit and credit card systems. The new legislation stipulates that the entities administrating these systems must publish the acquisition fee, interbank interchange fee and handling fee in the business section of a widely-read newspaper. To this end, credit acquirer and issuer entities are obliged to provide the relevant information to the administrators. This information must be itemized for each of the retail establishment categories or sectors established by the administrators of open card systems for the purposes of managing these systems. Although there are no data to support this claim to date, it is believed that this measure could stimulate the use of payment cards.

SPOTLIGHT 4: ATMS IN BRAZIL In Brazil, there are two classes of ATM: (i) open-access ATMs that can be used by any person with a payment card; and (ii) restricted-access ATMs that can only by used by holders of cards issued by the operator institution or cards belonging to the network to which the ATMs in question belong. This in turn leads to two classes of transactions: (i) shared transactions, performed using cards at ATMs belonging to a third-party network and (ii) non-shared transactions, when transacting at an ATM belonging to the institution or group to which the card issuer belongs. The percentage of open-access ATMs fell from 46.0% of the total in 2009 to 43.3% in 2010, albeit remaining significantly above the 2005 figure (34.3%). What is noteworthy, however, is the fact that despite this drop, the percentage of shared transactions rose to 18.1% of the total (617.02 billion), gaining with respect to both 2009 and 2005, when this percentage stood at just 12.9% and 7%, respectively. Against this backdrop of low ATM interoperability, it is hardly surprising that the number of transactions per ATM and per capita should be low, even though the number of ATMs per capita is by far the highest in the region (see Chart 8). A case in point: whereas in 2009 cash was withdrawn an average of 16,600 times from every Brazilian ATM, this figure was almost 38,000 in Mexico, even though transactions per person per year are still higher in Brazil (14.22) than in Mexico (11.49). With respect to interoperability with foreign networks, the Brazilian central bank hopes that the looming Football World Cup (2014) and Rio de Janeiro Olympic Games (2016) will prompt the institutions that own the ATM networks to take measures to boost interoperability between their ATM and the international networks in order to service the foreigners visiting the country.

27 Report on the Financial System, June 2010. Bank of Mexico, November 2010. 28 Low-value payment systems in which credit issuer establishments, credit acquirer establishments and system administrators engage.

42

The volume and value of transactions performed using ATMs and POS terminals have increased in tandem with the development of the acquisition infrastructure, as can be seen in Table 6 for ATMs and Table 7 in the case of POS terminals. Table 6: ATMs in Latin America and Spain, 2010 Number of transactions (millions)



2010

Brazil Chile Colombia* Mexico Peru Dominican Republic Spain


Value

CAGR 2005-2010**

8,558.00

1122.09

131.12

4.8%

11.9%

400.64

36.39

90.84

10.2%

14.8%

470.75

64.58

137.18

-1.8%

9.1%

1,355.97

163.84

120.83

4.9%

9.8%

199.92

19.12

95.62

16.8%

16.2%

66.66

4.45

66.69

2.8%

5.6%

989.68

114.49

115.68

0.7%

2.4%

Source: central banks and bank supervisors. * The figures have been adjusted by the supervised entities. **Growth figures for Colombia and the Dominican Republic cover 2008-2010.

Table 7: POS terminals in a selection of Latin American countries and Spain, 2010 Number of transactions (millions)



2010


Value

CAGR 2005-2010*

Colombia

230.04

24.77

107.69

9.7%

-4.2%

Mexico

987.08

52.17

52.85

19.1%

19.6%

2,171.26

127.97

58.94

9.6%

6.0%

Spain

Source: central banks and bank supervisors. * Growth figures for Colombia cover 2008-2010.

43



Banking agents (also known as correspondent agents or correspondent cashiers) constitute an important channel in certain Latin American countries for increasing the points of access to the financial system. Proof of this channel’s importance is the fact that in Brazil banking agents constitute the sole banking proposition in 38% of towns (25% in Colombia, 18% in Mexico and 9%29 in Peru). As a result, this channel plays a pivotal role in the strategy for enhancing financial system coverage and financial inclusion in Latin America. Another illustrative figure is the fact that in Brazil the bulk of transfers made by the government to the 12 million impoverished families are withdrawn using this channel, specifically lottery administrators30. Although the range of transactions that can be performed through this channel varies depending on national regulations, the typical transactions include balance checking and/or movements among accounts, cash withdrawals, deposit receipt, service payments, loan installment payments, fund transfers and even basic account opening (the latter in the case of Brazil and Peru). Table 8 shows the number of agents in the countries following this model. Banking agents, which usually have an adapted POS terminal, also hold the key to mobile banking success. As noted elsewhere in this report, Latin American citizens are highly dependent on cash, particularly in the lower income segments of the population. Banking agents in areas where there are no other bank service channels are the only points where cash can be deposited and withdrawn. Among the countries analyzed with banking agents, Mexico stands out:despite being the last country to pass regulations governing banking agents (December 2009), the number of agents has already surpassed that of Colombia or Peru, where this form of banking has been in place for longer. Notwithstanding, the rates of growth in these latter two countries are buoyant, 72.7% in Colombia and 52.8% in Peru. Brazil, the pioneer in this channel, remains the Latin American country with most agents, 158,477 in 2010; transactions per correspondent ATM averaged 17,000 that year. Table 8: Banking agents in a selection of Latin American countries, 2010

Country

Year of effective launch

Year regulation was introduced

Number of banking agents*

Brazil**

2000

2000

158,477

Colombia

2007

2006

9,843

Mexico

2010

2009

9,303

Peru

2008

2005

9,204

Source: central banks, bank supervisors and the CNBVM in Mexico. * Data as of December 2010. **In the case of Brazil, 2000 is usually deemed the first year of implementation of banking agents even though the model has existed for longer.

7. Internet and mobile banking Technological innovation has enabled the banks to develop new channels that facilitate access to banking services and reduce the attendant financial infrastructure costs. Internet and mobile banking are two good examples of this phenomenon, enabling safe, swift and user-friendly monetary and non-monetary transactions. n Latin America, the use of online banking services to make payments has been clearly on the rise, as can be seen in Tabla 9. In little more than five years, the number of transactions has virtually tripled, while the amounts involved have surged almost fourfold. The growth in transaction volumes is being driven by growing user confidence, among other factors. Mexico has gone from having short of six million users in 2005 to over 14 million five years on, implying a compound annual growth rate of 19.0%31. The growth in online banking has been even more spectacular in Chile, where the compound annual growth rate is 24.9%32. Today there are more than three million registered online banking users in this country.

29 30 31 32

44

National Banking and Securities Commission (Mexico), Financial inclusion report, April 3, 2011. CGAP, Technology Program, Country Note: Brazil, December 2010. Bank of Mexico. Superintendency of Banks and Financial Institutions, Chile.

Table 9: Internet banking in a selection of Latin American countries, 2010 Number of transactions (millions)



2010

Brazil*

Value

CAGR 2005-2010***

10,571.00

6,271.60

22.9%

25.4%

2,145.10

N/A

21.9%

N/A

Colombia

133.38

695.80

20.8%

48.7%

Mexico

521.78

2,668.28

28.9%

19.4%

6.99

5.74

7.7%

17.6%

N/A

N/A

N/A

N/A

Chile

Peru** Dominican Republic Source: central banks and bank supervisors.

* Includes TED (electronic funds transfer), DOC (credit document) and intrabank credit transfers. **Only includes public service payments. ***Growth figures for Colombia and the Dominican Republic cover 2008-2010.

In Spain, online banking has also been buoyant. The financial institutions have been steadily upgrading the services on offer and it is now possible to perform virtually any non-cash financial transaction in a simple and user-friendly manner. Current functionality includes card-related operations such as expense controls, early payment, deferred payment and password changes. As a result, and underpinned by the fact that over 61,8% of the population aged between 16 and 7433 has Internet access, today almost 42,0% of Spaniards use online banking services. The mobile phone, which boasts such high penetration rates in Latin America, has the scope to become one of the most popular payment methods, particularly among the lowest income segments, which are not currently being serviced by other channels. Although mobile money services have already been rolled out in developing economies such as Kenya, South Africa, Tanzania, Philippines and India, in Latin America mobile banking is only just beginning to find its feet. Colombia is one of the region’s countries where mobile banking has made greatest inroads. This phenomenon is due to the fact that mobile telephony penetration is high (98.2 lines per 100 inhabitants) and users do not need a high-end mobile device, as many transactions can be performed using text messages. The mobile banking platform comprises eight financial institutions, two low-value networks and three mobile phone operators. The platform currently enables 27 different kinds of financial transactions that range of savings account administration to payments and money transfers34. Between 2008 and 2010, the number of monetary and non-monetary mobile banking transactions multiplied by a factor of 3.6x in Colombia, jumping from little more than 4,110,000 to over 14,775,000. Although the growth is eye-catching, the penetration of this channel remains low. For example, just 0.6% of the over 2,450 million transactions performed in 2010 were processed from mobile phones. What’s more, only 14.85% of these transactions were monetary. The country’s Financial Superintendent, Roberto Borrás, expects this growth trend to continue over the coming years35. Mobile phone transactions in Colombia have also tripled in value between 2008 and 2010, surpassing COP55 billion (over USD31 million). In the next chapter we discuss the mobile payments phenomenon in greater depth.

33 People using the Internet during the last three months according to the national statistic bureau (INE), 2010. 34 Advances in mobile banking in Colombia, Colombian Association of Financial Journalism, June 24, 2011. 35 E-banking news, “Colombia: Banking Transactions via Mobile Phones”, April 27, 2010.

45



8. E-commerce payments The consumer e-commerce business (also known as B2C) has grown in Latin America in recent years despite the adverse economic climate, as illustrated in Chart 12. Several factors have contributed to this growth: (i) on the demand side, the growth in PCs and bandwidth, coupled with the increase in the number of people willing to buy online and enhanced perception of transaction security; (ii) on the supply side, growth in the number of companies making the technology and logistics investments needed to support e-commerce platforms. These companies include the airlines and the hotels, which have invested extensively in online booking systems. One of the e-commerce niches registering fastest growth is the purchase of products from international sites, transportation costs and import duties notwithstanding. Mexico, leveraging its logistical integration with the US, is the country buying most products sold by its northern neighbor. Purchases by US immigrants also stand out, with direct purchases from online stores replacing cash remittances. TiendasElektra.com is a case in point in Mexico36. In Spain, meanwhile, B2C commerce reached EUR7.76 billion in 2009, marking year-on-year growth of 15.9%. This growth was underpinned by growth in the number of Internet users (currently 64.0% of the population aged 15 and over, compared to 58.3% the year earlier) as well as growth in the number of Internet users who shop online (from 40.3% to 41.5%), with the absolute number of Internet shoppers increasing to 10,360,792. Despite this growth, the average annual expenditure per shopper (EUR749.0) has stagnated, registering a scant 0.9% increase year-on-year in 2009 (from EUR754.0)37. Chart 12: e-Commerce in a selection of Latin American countries, 2005-2010 (USD million) 20,000 18,000 16,000 14,000

Peru

12,000

Mexico

10,000

Colombia

8,000 6,000

Chile

4,000

Brazil

2,000 0 2005

2006

2007

2008

2009

Source: AméricaEconomía Intelligence, Latin American e-commerce study, June 2010.

In recent years, PayPal has become a hugely popular payment services provider among online shoppers. This success is founded on the ease of opening an account (it takes around five minutes and information requirements are minimal) and the range of payment choices – including payments via credit card, credit transfer or using a PayPal balance - for which personal information such as current account numbers are not disclosed to the seller. For retailers, PayPal is a user-friendly and inexpensive payment solution38. At the same time, the main card gateways have developed systems such as Verified by Visa and MasterCard SecureCode that prevent CNP (card not present) fraud involving the unauthorized use of a credit or debit card number. The goal of these systems is to make online payment processing more secure.

36 AméricaEconomía Intelligence, Latin American e-commerce study, June 2010. 37 Red.es Observatory. 2010 B2C e-commerce survey, October 2010. 38 World Payments Report 2010, Capgemini, The Royal Bank of Scotland, European Financial Marketing Association.

46

Under the so-called 3-D Secure cardholder verification system, the issuing entity assigns a verification method to the enrolled card (e.g. a password selected by the cardholder, a code card provided by the issuer to the cardholder or an electronic code that changes frequently (also known as a dongle)). When making an electronic payment on the website of an enrolled e-commerce establishment, the payer is prompted to provide its card number, the card expiry date and the CVV (Card Verification Value) number. Once the system has verified that these data are correct, the buyer is automatically redirected to the website of the card issuer bank, where the shopper has to provide the information selected for cardholder verification purposes. By protecting against the unauthorized use of cards in online shopping, making the entire experience more secure, this system stimulates e-commerce at the websites enrolled in this initiative. When payment is made online to an establishment that does not have 3-D Secure verification, because cardholder identity cannot be authenticated, the latter can ask its bank to reimburse it for unauthorized payments and the bank can in turn claim these sums back from the e-commerce merchant.

47


5. Close-up: Mobile payments 1. Introduction Mobile payments currently account for the lion’s share of the media’s interest in payment service innovations. Glancing back just twelve months we can pinpoint all sorts of pilot tests and new products that facilitate payments without the use of a plastic card. The hype is reminiscent of the burst of activity observed at the beginning of the last decade when many were forecasting an aggressive growth in mobile payments. However, the take-off failed to materialize and for several years mobile payments proved an elusive promise. In the last few years, however, smart phones have erupted onto the scene thanks to a host of applications (apps) developed for the market-leading platforms (iOS, Android, Blackberry and Symbian), paving the way for unprecedented growth in mobile payments. For the purpose of defining the market, we need to distinguish between two classes of mobile payments: (i) those made remotely from a mobile device using one of the bearing channels that operate over the mobile telecommunications infrastructure; and (ii) those made in proximity, i.e., when customers pay for goods or services by means of their physical presence in a shop or next to a vending machine by placing their mobile device in front of a technology-ready point of sale (POS) terminal. While proximity payments are usually made between consumers and companies (C2B), remote payments can be either C2B (e.g. when you buy a song from an online multimedia store such as iTunes) or directly between consumers (P2P, e.g., money transfers). Table 10: Basic categorization of mobile payments

Remote payments

Proximity payments

Propitious environment

Emerging and developed economies

Developed economies

Key agents

Financial institutions, money remittance service providers, telecommunications operators, technology providers

Financial institutions, payment gateways, Internet companies, telecommunications operators, handset manufacturers, technology providers

Key technology

SMS, USSD, SIM Toolkit

NFC, QR codes

Source: in-house analysis.

It is hard to precisely predict the size of the mobile payment market because, unlike with other payments instruments such as checks or credit transfers, few central banks compile statistics on transacting through this channel. Despite this handicap and the added difficulty intrinsic in predicting the trend in mobile payments as a result of unfolding innovations in the field, Chart 13 depicts current consensus forecasts for mobile payments user and transaction numbers. The chart shows how transaction value growth is expected to outpace user growth as a result of the network effect.

48

Chart 13: Forecast mobile payment user numbers (millions) and mobile payment transaction values (USD billions)

Transaction values (USD billions)

1,200

Users (millions)

1,000

800

600

400

200

0 2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: in-house analysis, based on assorted market forecasts.

The global trend notwithstanding, not all regions will adopt mobile payments at the same pace. In developing and emerging economies, where traditional banking services are not available to or accessible by large segments of the population, and where mobile telephony penetration rates are already high, mobile payments are expected to sustain rapid growth once a critical mass of users has been reached. Nevertheless, Europe and the US are expected to concentrate the bulk of mobile payments near term due to the extensive use of bank services and the relative sophistication of payment instruments. Throughout this section, we analyze payments made using mobile phones, understood to encompass merchant payments, money transfers, wireless airtime top-ups and bill payments, among others. In all instances, the phone is involved in the initiation and/ or confirmation of the payment, regardless of whether or not the enabling technology is located in the SIM card, on the mobile device, on a sticker stuck to the device or using an application previously downloaded to the handset. This section therefore does not analyze access to mobile banking in the broader sense, an area that includes bank account management, broker applications, on-the-go ATM/branch search services, among other transactions; nor does it encompass product and service purchases using a device other than a mobile phone.

49


5. Close-up: Mobile payments

2. Integration of mobile phones into the value chain There is a growing number of mobile phone payment trials underway, which have the potential to disrupt the way we pay for goods and services. For the time being, most of the progress is happening at either end of the value chain, innovating in the acquisition and issuance of payments. However, the mobile phone opportunity will only be fully tapped when the device is also used to generate demand or as a loyalty driver, as depicted in Chart 14. Chart 14: Integration of the mobile phone into the payment services value chain

Demand generation

Acquisition

Processing and clearing

Issuance

Loyalty

Advertising on-the-go, local marketing

Mobile PoS terminal, virtual PoS terminal

Closed processing

Virtual wallets, mobile wallets

Loyalty points, third-party loyalty programs, flexible payment schemes

Source: in-house analysis.

In open ecosystems, characterized by interoperability among agents, transactions continue to be processed using legacy infrastructure, this part of the value chain being that with the least impact on mobile payments. Take for example one of the products capturing most attention in the mobile payments segment (proximity payments): Google Wallet. The US giant has joined forces with MasterCard, Citigroup and mobile phone operator Sprint to develop a mobile wallet which works as follows: a mobile phone user (it only works so far with the Nexus S) whose handset is NFC-enabled downloads the application and authorizes association between his Google prepaid card or Citibank MasterCard with Google Wallet. Each time he wants to initiate a payment he needs to place his handset before a CitiPass POS terminal, confirm the payment that comes up on the screen and authorize the purchase with a four-digit PIN number (as with conventional card payments). Once the payment has been authorized, the transaction is cleared and settled using the infrastructure that usually comes into play to process card payments. Applying the categorization made at the start of this section, most proximity mobile payments use card processing infrastructure. Another innovation to have caused a stir in the acquirer business is the Square card acceptance service. Square markets an app which uses a magnetic band reader connected up to a smartphone to act as a POS terminal, simultaneously offering value-added services such as detailed sales analysis, transaction location services and enhanced security options using photo ID. Square, whose customers are small businesses and individuals who otherwise would not have the capability to accept card payments, processed USD100 million worth of payments in July 201139. The strategic investment made in the company by Visa in April 2011 has been read as an indication that the start-up launched by Twitter co-founder Jack Dorsey could be set to become a significant player in the mobile payment industry, which has formerly been shaped by established legacy players. As with Google Wallet, payment processing takes place using the existing infrastructure. The best-known of the closed mobile payment models, is probably M-Pesa. This system, launched by mobile network operator Safaricom in Kenya (Spotlight 6), allows individuals to make mobile money transfers, a development that constitutes a social revolution in such an underbanked country as Kenya. It is usually an individual who initiates the payment. The payment may be received by another person or by a merchant with either an ordinary account (thus making the latter an ordinary network user) or a company account. At any rate, by virtue of operating as a closed system, Safaricom processes the transaction without resorting to legacy infrastructure.

39 According to Keith Rabois, COO of Square in statements cited by the Wall Street Journal, WSJ Blogs, Jack Dorsey’s Square, Twitter Add Key Execs, 25 July 2010.

50

The innovation taking place highlights the fact that not only financial institutions can operate in the mobile payments market, as mobile phone operators and newcomers are proving capable of coming up with their own business models. As illustrated in Chart 15, financial institutions and mobile network operators (MNOs) can develop business models in which the respective roles played by these agents vary. In bank-centric models, the financial institution controls the customer relationship, while in mobile-operatorled models, the banks relinquish control to the MNO, limiting their involvement to acting as a mere depository for the floats backing the sums stored by the phone operator in its customers’ mobile accounts. The involvement of the mobile network operators, meanwhile, can range from acting as a mere data carrier to acting as a de facto bank vis-à-vis its customers. The innovations being spearheaded by Google and other non-traditional players will probably force the banks to get their act together quickly if they don’t want to miss out on the revenue accruing from mobile payments. Chart 15: Different forms of cooperation between mobile network operators and banks to create remote mobile payments schemes Transactions, applications & deposit

Transactions & deposit

Account-linked deposits

Aggregated deposit BANK

BANK

BANK

BANK

MNO MNO Carrier

MNO Applications & Carrier

MNO

Joint Venture

Financial Institution

40

Source: Afi .

3. Trends in remote mobile payments Currently the easiest way to enable remote payments continues to be through short text messaging; the main benefits of SMSenabled payments are their low cost, their extensive use by users and their compatibility with all handsets (eliminating the need to own a smart phone). This is why this system is the most popular in most emerging and developing countries, especially the poorer ones. On the downside, however, this system does not enable message encryption, implying security limitations. Further, the SMS protocol has no system for confirming message delivery/receipt, duplicating the number of messages that have to be sent, thereby increasing transaction expenses. Although not strictly-speaking payments, for over a decade premium SMS services have been enabling the acquisition of certain content and services (ring tones, images, music, games) which are subsequently charged to users’ phone bills. This system, considered a value-added service offered by the MNOs, is very limited in scope and particularly expensive with respect to authentic mobile payment services. USSD (acronym for Unstructured Supplementary Service Data) capabilities are also available on GSM phones. Although this service works very similarly to the SMS standard, the main difference is that USSD does not use an intermediate message repository. As a result, messages sent cannot be stored or forwarded, so that USSD messages that cannot be delivered are rejected. By skipping this intermediate storage step, the response time is generally faster than in SMS-based systems, which makes the USSD platform ideal for real-time telephony and instant messaging. Moreover, message senders can be 100% sure they are interacting with their own carriers. Unfortunately, the USSD standard is controlled by the MNOs, who do not always make it available to third parties.

40 Ontiveros, E., et al. “Telefonía móvil y desarrollo financiero en América Latina”, 2009. Editorial Ariel.

51



In Spain Mobipay used the USSD channel between 2001 and 2009, when it closed down. This service worked as follows: when paying using the Mobipay service, the user would receive a USSD message on his mobile phone informing him of the transaction (merchant and amount) in course and requesting authorization. The user then had to answer with a personal identification number (PIN), known only to him. Users were able to associate several cards with the one phone, albeit selecting one default option. Mobipay users, in contrast to card payers, bore the transaction costs, one of the factors that may have curtailed its take-up. Two other factors may also explain the initiative’s limited success: (i) Spain boasts a highly developed card acquisition infrastructure, making it hard for Mobipay to find a niche in the market; (ii) the company did not have a budget for marketing its service41. This Spanish initiative did however provide the seed for the service offered by Nipper in Mexico, which had the backing of the Expanding the Benefits of Access to Electronic Payment Methods to Society Trust (FIMPE for its acronym in Spanish) and investments by Telefónica Movistar and Iusacell, alongside several banks, including Bancomer, HSBC, Santander, Scotiabank and Banamex. This service was launched in 2008 but was temporarily suspended two years later due to lack of agreement on the part of the system participants. By 2010, the scheme had 8 thousand registered users; its use was limited to the purchase of mobile airtime. The user experience in SMS/USSD-based mobile payment platforms is unsophisticated, due to the lack of graphic interfaces and the fact that users have to input specific codes for each transaction, which usually vary from one institution to the next. In the more developed countries, where high-speed mobile networks are being rolled out and consumers are migrating over to smartphones42, it is looking increasingly as if the market will adopt alternative technology for enabling remote mobile payments. Smartphones bring the possibility of online browsing and app downloading, enabling users to access the online services being marketed by the financial institutions, including payments (there are many more capabilities such as financial product simulations and personal finance management tools that do not fall under the scope of this report but that nevertheless highlight the convergence between mobile payments and Internet).

SPOTLIGHT 5: MOBILE PAYMENTS – SECURITY CONSIDERATIONS The security of transactions processed using mobile handsets is a key factor, regardless of the technology used. The experts coincide that a secure mobile payment ecosystem needs to offer the following: (i) confidentiality, so that critical information cannot be accessed by an unauthorized person, process or device; (ii) integrity, in order to prevent third-party corruption of information or systems; (iii) availability, meaning that authorized users need to be able to access the system at any time; (iv) authentication to prevent fraud; (v) authorization to verify that the user is authorized to perform the requested transaction; and (vi) non-repudiation/traceability - in the event that a user denies a transaction the system needs to provide transaction proof43.

41 Mobile operators facilitating existing payment instruments: Mobipay in Spain, Sarah Rotman, CGAP Blog, March 2009. 42 In fact, the uptake of smartphones is gathering pace in both the US and Europe. In the US, 27.0% of mobile phones were smartphones by December 2010, year-on-year growth of over 10% (16.8%), while penetration in Europe stands at 31.1%, marking growth of almost 10 points. ComScore, 2010 Mobile Year in Review, February 2011. 43 Schwiderski-Grosche, S. and Knospe, H.: Secure M-commerce; Information Security Group, University of London.

52

Economic, social and technological factors, the latter notably including the levels of banking service and mobile telephony penetration, will shape each country’s propensity to adopt mobile payments and will also determine the encompassing scope of m-commerce transactions. Despite the fact that it is hard to pinpoint a generalized pattern, there are some common trends as a function of the scale of a country’s economic development and the region to which it belongs. In emerging and developing countries, the use of mobile phones to make remote payments is higher than in developed economies where there are sophisticated payment alternatives. Remote payments are particularly popular in rural areas where there is no other payment channel (branches, ATMs, banking agents, Internet). Users in these regions highly rate the real-time nature of the transaction and the fact that there is no need for displacement to make payments, thereby sidestepping direct costs and opportunity costs associated with transportation and the time involved, respectively. These users also tend to flag the fact that mobile money reduces the need to carry cash and the attendant risks of loss/theft. In these countries, the most popular transactions are person-to-person (P2P) payments and money remittances within and outside the country. As a result, the average transaction size tends to be higher than in more developed economies44, where mobile phones are ripe for use in lower-value transactions. Chart 16 depicts the breakdown of mobile payment transactions in the Philippines, a pioneering country in the adoption of mobile payments and one of the markets displaying highest usage of mobile money. As shown, the sending and receiving of money accounts for the biggest use of mobile money in the Philippines. As in other Asian countries, many young Filipinos living in rural areas emigrate to the big cities/abroad and send money back to their families frequently: almost 40% of these migrants send money at least once a week. Chart 16: Mobile money product usage in the Philippines Frequency Average Value Number of uses U.S. $ per mont Send money

52%

Receive money (domestic)

37%

Buy airtime

23%

Send and receive airtime

17%

Receive money

16%

Cashless payment Store money Receive salary Receive payment 0%

10% 6% 5% 2% 20%

40%

2.8

17

6.9

93

1.9

40

2.0

22

2.8

227

2.9

14

3.9

7

3.4

48

2.4

57

60%

45

Source: CGAP .

The surge in remittances, which last year reached USD440 billion46 worldwide, coupled with high mobile telephony penetration rates, bode well for the development of new products that use the mobile phone as a payment channel. This is the case of M-Pesa International Money Transfer in Kenya, a service that allows its registered users to receive money from the UK on their mobile phones, and M-Via, a novel micro-remittances service for sending money from the US to Mexico. The service allows low denomination remittances, which is proving popular among users who are keen to make more frequent, low-value payments. These new services point the way to growth in remittances performed using this channel. According to some estimates, in 2015 USD16 billion of remittances will be sent by mobile phone, with USD5.5 billion being received on these devices47.

44 45 46 47

World Payments Report 2010, Capgemini, The Royal Bank of Scotland, European Financial Marketing Association. GCAP, Window on the Unbanked: Mobile Money in the Philippines, December 2009. Migration and Remittances Factbook 2011, World Bank, October 2010. Mobile money in emerging markets, Berg Insight.

53



SPOTLIGHT 6: M-PESA In 2007, Safaricom, Kenya’s number one mobile operator, launched a mobile money transfer and payment service known as M-Pesa (Pesa being the Swahili word for money). The service’s users deposit money in an account associated with their mobile phones. This enables them to send mobile money using short messaging and to later convert these deposits into Kenyan shillings (cash monetization). The commissions, which are deducted from user accounts, are at the heart of the business model and are applied when cash is withdrawn or when e-money is sent. M-Pesa users can use the service to deposit and withdraw money, make P2P transfers (even to people not signed up for the service), pay bills, pay for goods and services and top up Safaricom airtime. The MNO has been expanding the service range: today, with M-Pesa International Money Transfer, it is possible to receive money from the UK virtually in real time at no cost for the beneficiary. The association with Equity Bank, meanwhile, has enabled the launch of a remunerated savings account that includes micro savings, micro loans and micro insurance services. M-Pesa is also being rolled out to other countries such as Uganda, Tanzania, Rwanda and the United Arab Emirates. The service is wildly popular in Kenya. There were 7.7 million M-Pesa accounts in May 2009, which means that, deducting for multiple accounts belonging to the same account holders and foreign account holders, 38% of Kenya’s adult population had an M-Pesa account. This percentage is likely to have increased since, as user numbers have continued to climb, reaching 14 million in May 2011. Users are very happy with the M-Pesa service: 85% report to be ‘happy’, ‘very happy’, or ‘extremely happy’ with the service. That being said, they don’t use it often: 85% of users say they use the service once a month or less. This suggests that although most users are happy with the service they are using it primarily for money transfers, which most Kenyans do not perform regularly. Don’t forget that most of the Kenyan population still lives in rural areas and there is significant migration between the rural areas and the big cities. The people (mostly young men) working in the cities were the first to adopt M-Pesa as it represented an easy, safe and cheap way to send money home to their families (wives and/or retired parents) living in the countryside48.

The field of remote mobile payments could get a huge boost from government to citizen payments (G2P). In some countries, the state is already paying subsidies and other social benefits by card, as is the case in Argentina, where the government uses prepaid cards to transfer subsidies to the 1.5 million households that benefit from the Jefas and Jefes de Hogar programs49. Meanwhile, Brazil’s biggest social welfare initiative, Bolsa Familia, is contemplating direct mobile phone payments as the method for delivering subsidies50. If this initiative materializes it would constitute a definitive boon for mobile payments as well as boosting financial service penetration in unbanked areas. The geographic reach implications would lower delivery costs and make life easier for beneficiaries. In Latin America, most of the major banks already offer certain mobile capabilities as part of their e-banking platforms, including the scope for payments from mobile phones, often in an attempt to retain existing customers and lower costs; it is less common to see services targeted at unbanked segments of the population. Nevertheless, Telefónica and MasterCard reached an agreement in January 2011 for the joint development of mobile phone financial solutions in 12 Latin American countries. The services will be provided using a mobile wallet and will include remittances, airtime top-ups, bill and merchant payments and will be usable in places that currently only accept cash, such as taxis. This service will be targeted at traditional banking service users and unbanked segments of the population alike.

48 “Poor people using mobile financial services: observations on customer usage and impact from M-Pesa”, CGAP Brief, August 2009. 49 CGAP, Government-to-Person Payments (G2P). 50 CGAP, Technology Program, Country Note: Brazil, December 2010.

54

SPOTLIGHT 7: TIGO PARAGUAY Despite the success and promise of the M-Pesa initiative, it is not easy to define a business model that can build the critical mass needed to make remote mobile payments a viable service. One of the biggest challenges is the lack of market intelligence about the needs and preferences of potential users (unbanked), making it harder to design products and services that cater to their needs. A good example in Latin America of the challenges inherent in coming up with the right business model is Tigo Paraguay. This mobile phone operator, a Millicom group subsidiary, launched an e-wallet in 2008 called Tigo Cash, which allowed users to top up balances in a second account (other than the account used to pay for their mobile phone services), to make payments at affiliate merchants such as Pizza Hut and Burger King and to buy airtime. Despite lofty ambitions, the initial venture failed and had to be redesigned. In 2010 Tigo tried again, adapting the technology to the Paraguayan population’s needs and habits, coming up with Giros Tigo, which works as a national remittance service. As with the mail-based competition, the sender makes a cash deposit in a store; however the notification takes the form of a text message which immediately notifies the beneficiary of the funds; this beneficiary can then cash-out the money at any of the distribution points operated by Tigo (presence across 442 establishments) or its affiliates by simply showing the code received by SMS51. To build critical mass, particularly among the lower income segments of the population, the venture set a fixed commission of 4% per transaction, regardless of the amount sent. Transfers are capped at USD500 a go and USD2,000 a month. The average transaction size is currently USD58, compared to USD110 for the broader Paraguayan remittance system. The relatively higher transaction size for the overall remittance system reflects the fact that the conventional money transfer price scheme discourages low-value transactions. Tigo plans to roll out the service in Bolivia, Colombia, Honduras, Guatemala and El Salvador.

It is possible that the initiatives being trialed in the region could give mobile payments a boost in the coming months. In addition to the aforementioned region-wide agreement between Telefónica and MasterCard, we are seeing notable developments at the national level such as the investment made by Cielo (formerly VisaNet) and Banco do Brasil in OiPaggo, which could foster the development of new mobile payment products and services. In Mexico, where regulations governing mobile wallets and basic accounts are already in place, the president of the banking and securities market watchdog, the CNBV, Guillermo Babatz, recently said that the institution was expecting the first applications for permits to provide mobile payments services. It is also worth watching for regulatory developments in the region, which could foster the rollout of new services. In Peru, for example, the imminent passage of the Electronic Money Act will allow MNOs and financial institutions that do not take deposits to provide mobile payment services.

51 Dalmasso, J.P., The mobile ATM in Paraguay, Foromic 2010, Financial inclusion technology, Banco Interamericano de Desarrollo, November 2010.

55



SPOTLIGHT 8: HAL CASH Hal Cash is a pioneering formula for making micro payments or cash withdrawals in Spain that enables money to be sent immediately from any mobile phone. This system has been gradually extended to allow money be sent abroad. Money can currently be sent to Canada, the US, India, Morocco, Mexico, Poland and Ukraine and the service is due to be implemented in the near future in Bolivia, Peru, Colombia and the UK. This system works as follows: an order is placed at a bank branch or ATM or by phone or Internet to send money to a specific mobile number. To do so, a four-digit password is required. This password must then be notified to the money order beneficiary using any means of telecommunication. Hal Cash, meanwhile, sends an SMS to the beneficiary’s mobile phone, telling him the amount and providing him with a transaction reference number. The beneficiary has to then go to a Hal Cash affiliate ATM with the password, the transaction number received by SMS and the mobile phone number in order to retrieve his cash. According to José Valiño, President of Hal Cash, some 200,000 Hal Cash orders are executed each year, which includes P2P transfers and petty cash transfers for companies with employees located offsite; it is also used to deliver prizes associated with promotional initiatives. Hal Cash aims to reach 400,000 transactions per year shortly. So far the following institutions are system affiliates: Banesto, Bankinter, Bancaja, Novacaixagalicia, Caja Laboral, Cajamar, Popular, Caixa Penedès, Cajasol, ING Direct, Banco Guayaquil, the Euronet network and Crédit du Maroc.

4. Trends in distance mobile payments The launch of new experiences based on contactless NFC technology (Spotlight 9) has recently raised high expectations regarding the future for close-proximity mobile payments. The main advantage afforded by contactless mobile payments is their user-friendliness for customers and merchants alike. This enhancement of the payment process usually paves the way for larger volumes of lower-value transactions. In a recent pilot study conducted in Sitges (Spain) in 2010 and 2011 using NFC technology, users increased e-transacting by 30%, while average purchases per card user rose 23%. The average transaction size was EUR30, although the most highly populated bracket (17%) included transactions of EUR5 or under. In all, 60% of transactions were for EUR20 or less. Pilot tests such as these suggest that close-proximity mobile payment schemes may be ideally suited to merchants that experience heavy footfall, such as cafeterias, fast-food chains, public transport and newsstands, because purchases below a certain threshold (say between EUR10 and EUR20) would not require signature for validation. It is also likely that this technology will take off in the public transportation arena due to the speed factor. At any rate, it is worth highlighting that contactless technology is not the exclusive realm of mobile payments: virtual payment cards are already being made using contactless technology in the US and the UK as part of the PayWave (Visa) and PayPass (MasterCard) initiatives. These could well be compatible with NFC.

56

SPOTLIGHT 9: NFC (NEAR FIELD COMMUNICATION) This technology, shaping up to be the most promising in the contactless mobile payments field, allows wireless data exchange between devices located in close proximity (up to 10cm) to each other. The first contactless payment trial was conducted by Nordea, a financial services provider, Visa and Nokia in Lahti (Finland) in 2003. This experience enabled the continued development of the Radio Frequency Identification (RFID) standard. This shortrange, high-frequency contactless communications technology was later renamed NFC. The first NFC payments pilot took place two years later (2005) in Atlanta (US). Since then, over 200 pilot tests have been conducted worldwide. The first large-scale trial conducted in Spain using mobile phones at points of sale equipped with this technology took place in 2010. The test was orchestrated by Telefónica, ”la Caixa” and Visa Europe, who dubbed it “Mobile Shopping. Sitges 2010”. The pilot test allowed 1,500 users to use their mobile phones to make payments at 500 establishments in the city of Sitges. Seventy per cent of those surveyed rated the experience eight out of ten or higher and 90% claimed they would continue to use their mobile phones as a regular payment tool. One feature of NFC technology is the capability to detect user location and share it with other users, opening up a host of promotional and/or couponing possibilities. This capability, albeit not strictly payment-related, could encourage the use of mobile handsets to pay for goods and services. However, the chips needed to roll out this technology are not yet built into most mobile phones (only a limited number of handsets are equipped with this chip) while very few merchants have POS-enabled terminals, suggesting that take-up for the service will prove slow. Development of the NFC standard has been complex on account of the need to marry the conflicting interests of all the stakeholders in the new mobile payments ecosystem. The traditional issuers and acquirers are being joined by telecommunications operators, mobile handset vendors and, more recently, Google, the sponsor behind Android, the most rapidly-growing smartphone platform in terms of customer base. The delay in striking agreements to ensure the compatibility and interoperability of the various payment issuance and acquisition components in the NFC platform has hindered technological development. The experts seem unable to agree on the number of phones that will come equipped with NFC chips in the future or on the scope for payment volumes using this technology. Some estimates put the number of NFC-enabled smartphones in 2014 at 300 million, which would be one in every five smartphones52, estimating USD50 billion in transactions by value53. Other analysts are predicting over 860 million NFC-enabled handsets and transactions valued at over USD110 billion worldwide (Europe: USD42 billion) by 201554.

The US, which concentrates the bulk of the unfolding technological innovations and where numerous trials have been conducted, is detecting growing interest in m-payments (both remote and close-proximity payments), even though adoption is proving slow. This is evident in the fact that 18% of adult Internet users express interest in mobile payments yet less than 6% have ever used their handheld devices to process payments55.

52 Press release issued by Juniper Research: Press Release: 1 in 5 Smartphones will have NFC by 2014, Spurred by Recent Breakthroughs: New Juniper Research Report. 53 Press release issued by Juniper Research: NFC Mobile Payments to Drive Contactless Transactions to Reach Nearly $50 billion Worldwide by 2014: New Juniper Research Report, June 2011. 54 Press release issued by Frost & Sullivan: Promised Market for NFC Effectively Commences in 2011 with Commercial Roll out within All Verticals, January 2011. 55 Higdon, E.; Wannemacher, P., et all; US Consumers Continue To Show Limited Interest In Mobile Payments, August 2010, Forrester Research.

57



The most common user profile is young and a high earner. It is also interesting that the propensity to use the mobile phone as a payment instrument varies as a function of the kind of phone owned. iPhone owners are more likely to show interest in mpayments. Despite growing interest during the last three years, critical mass adoption of this technology remains a still-distant goal as the overall value proposition of mobile payments (convenience, availability, price) is not yet competitive vis-à-vis alternative payment methods; nor is there a business model that delivers all the needs of the mobile payments ecosystem’s stakeholders56. Nevertheless, industry-wide the number of efforts to generate NFC-enabled solutions is multiplying. Apps such as Google Wallet or its competitor Isis, slated for rollout in early 2012, are attempting to simplify migration from physical cards to virtual wallets that can be managed from an app over which an entire ecosystem of loyalty and marketing programs can be layered. In Europe, although the earliest mobile payments were based on SMS technology, the current high level of mobile Internet penetration makes mobile payments using NFC technology a reality. The improvement in smartphones’ technological capabilities, coupled with entrenched use of banking services, means that remote mobile payments are in reality Internet payments made from a mobile handset, once again underscoring the Internet-mobile convergence phenomenon. To illustrate this point, online payment service provider PayPal has developed an application for smartphones that can be used to perform virtually all the same transactions offered by the counterpart Internet service. In addition, the eBay subsidiary announced during the SIBOS trade fair in 2011 that it sees the future for proximity payments in QR codes (two-dimensional bar codes), which are already compatible with mobile phones equipped with digital cameras, rather than NFC technology. To wrap up, it would be remiss not to take a glance at what is happening in the mobile payments field in Asia, undoubtedly the most advanced region in the world in terms of proximity payments. Without question, the behavior of mobile phone users in Japan is a good proxy for what could happen short and medium term in other industrialized countries in Asia Pacific, the US and the EU. In 2008 Japan had more than 40 million mobile phones enabled to make wireless payments at POS terminals57, a figure bound to have increased since then58. In December 2010, 9.8 million Japanese people (10% of the population with mobile phones) had used their mobile phones as payment devices at least once, with retail or convenience stores being the most popular places for m-shopping (7.6 million payments), followed by vending machines (3.2 million) and public transport (2.7 million), as shown in Chart 17. By way of comparison, 77% of Japanese mobile phone owners used their handsets to read newspapers, 57% for e-mailing capabilities and 63% had taken at least one photo with their mobile devices59. These figures suggest that there is a long way to go before critical mass adoption of mobile payments is a reality. Chart 17: Location of mobile wallet purchases in Japan (millions of transactions) 8

7.6

7 6 5 4

3.2

3

2.7

2.6

2

1.5

1 0 Retail or convenience store

Vending Machine

Public transportation

Grocery store

Restaurant

Source: comScore, MobiLens, (2010).

56 Forrester Research, alluded to by Duryee, T. in Report finds that mobile payments are coming this year, but it will be messy, April 2011. 57 Cheney, J. S., An Examination of Mobile Banking and Mobile Payments: Building Adoption as Experience Goods, Payment Cards Center, Federal Reserve Bank of Philadelphia, Discussion Paper, June 2008. 58 Research and Markets in its report titled “NFC-Enabled Phones and Contactless Smart Cards 2010-2020” dated December 2010, which put the number of NFC-enabled phones in Japan at 47 million. 59 ComScore, 2010 Mobile Year in Review, February 2011.

58

SPOTLIGHT 10: NTT DOCOMO IN JAPAN The success of the mobile payments phenomenon in Japan is largely attributable to a collective willingness to develop the industry, coupled with the existence of a single technology standard, facilitating user adoption and fostering the rollout of enabled readers at points of sale. The success is not therefore the result of superior technology that cannot be exported to other markets. NTT DoCoMo, Japan’s leading mobile network operator by market share with 57 million customers60, equips its handsets with Sony’s FeliCa IC chip. Although both companies are corporate behemoths in Japan, they were keenly aware that neither could develop the market alone because of the need to get merchants to install the card readers. To stimulate the installation of enabled card readers by transport providers such as Japan Railways and Japan Airlines and by small and large merchants, Sony and NTT DoCoMo decided to allow competing operators to use the FeliCa card instead of monopolizing its use (thereby retaining a competitive advantage), which would undoubtedly have fragmented the market. This decision reduced the likelihood of a scenario in which each operator develops its own technology, forcing merchants to install multiple card readers. Today, 80% of new Japanese phones come equipped with the FeliCa smart card, which can be read at 1.5 million points of sale61. As is only logical, the mobile phone operators do all not offer the same services and each provides exclusive online content. For example, fast-food chain McDonald’s joined forces with NTT DoCoMo in 2007 to enable consumers to use their DoCoMo mobile wallets to pay for their purchases at the fast-food restaurant chain by simply holding their mobile devices close to a card reader located at checkout62. These services foster customer loyalty because changing to another phone operator implies losing all the personal information stored in the operator’s systems. This is evident if we compare the churn rate for MNOs in the US of 1% with that of DoCoMo, a mere 0.45%63. Since 2009, NTT DoCoMo has also offered the capability to transfer up to USD260 (monthly ceiling of USD2,600) to other DoCoMo subscribers by simply inputting the recipient’s mobile number. The recipient receives notification of the transfer in his e-mail inbox on his handset at which point he can choose between depositing the money in a bank account and having it credited to his monthly phone bill64. Although it appears as if FeliCa card enabled phones operate using NFC technology, in reality they are based on a different radio frequency identification (RFID) standard. This, however, looks set to change: in February 2011, NTT DoCoMo signed a strategic agreement with one of South Korea’s leading MNOs, KT Corporation, for the development of cross-border mobile payment services, public transport ticket printing, promotional coupons and other applications using NFC technology. These services are slated for rollout in Japan and South Korea towards the end of 201265.

In other industrialized countries – outside of Asia Pacific – widespread adoption of NFC payments beyond the scope of public transportation looks unlikely in the short term. Within the public transportation sector the rollout is expected to be faster in Europe than the US as the necessary infrastructure for enabling proximity payments is already in place. Indeed, the number of transactions processed using contactless technology is running 17.4 times higher in Western Europe than in the US according to several sources66.

60 61 62 63 64 65

DoCoMo, KT partner for international NFC venture, NFC news, February 2011. Balaban, D., DoCoMo Reveals Strategy for Its Move to NFC, NFC Times, March 2011. Special Report, The CEO guide to mobile payments, Companies Lead the Way in Mobile Payments, Bloomberg Business Week, January 2011. Idem 61. Hsu, J., Japan in a Cell Phone League of its Own, Innovation News Daily, July 2010. Partnership Between NTT DoCoMo and KT Corp Will Bring Cross-border NFC Services to Japan and South Korea, Mobile Payment Magazine, February 2011. 66 3Q. 2010 United States Mobile Payment Market Forecast, 2010 – 2014, IE Market Research.

59



The greatest barrier to mass adoption of close-proximity payments is the lack of enabled POS terminals. By way of illustration, it is estimated that there are currently 150,000 merchants in the US enabled to take payments using contactless technology out of six million merchants accepting traditional card payments67. To overcome this barrier, the installation of new POS terminals is required. However, merchants are likely to be reluctant to make this investment while the number of NFC-enabled mobile phones remains so low. The recent announcement by Verifone that it will equip all its POS terminals with NFC technology is encouraging68. It is likely that businesses where lines for paying tend to be long, such as fast-food chains or convenience stores, will be early adopters. Meanwhile, other initiatives in the field such as Google Wallet, already discussed, and the Starbucks initiative to facilitate NFC payments via smart readers in its coffee shops could well accelerate this trend. In addition to a technology-ready acquisition network, critical mass adoption of mobile payments will also require promotional campaigns to stimulate use and a user-friendly interface. Against this backdrop, it is vital that the banks and MNOs leverage their relationships with existing customers to broadcast the service and encourage merchants to install enabled POS terminals as part of an effort to push market adoption. Turning back to Spain again, it is worth highlighting that the main MNOs, Movistar, Vodafone and Orange, agreed in March 2011 to work together to standardize the NFC technology experience. The goal of the cooperation agreement is to work together to achieve maximum compatibility and uniformity in both the customer experience and the technology used in order to simplify the adoption of NFC services by customers, other companies and technology providers. Unlike other deals such as the Isis joint venture between leading US operators AT&T, Verizon and T-Mobile, the Spanish operators are not planning to work together on a commercial level. Instead, their collaboration will be confined to technical development work designed to grow the overall potential market for NFC services. Specifically, the operators will concentrate on the use of the SIM card as a security element when transacting69.

67 Estimates by Crone Consulting LLC, as published in the article written by Bensinger, G., Sprint Plans Tap-And-Go Payments in 2011, Ahead of Rivals, Bloomberg Businessweek, April 2011. 68 Brown, C., Verifone to include NFC in all new POS terminals, Near Field Communications World, March 2011. 69 Movistar, Vodafone and Orange join forces to boost mobile payments, La Vanguardia, March 2011.

60

6. Use of payment instruments 1. Introduction This chapter attempts to provide the consumer’s perception of the payment usage in Latin America and Spain. To this end, we have performed an on-the-ground quantitative study in seven countries (Brazil, Chile, Colombia, Spain, Mexico, Peru and the Dominican Republic) in order to take the pulse of their user habits and attitudes to the various payment options with a view to providing a snapshot for each country as well as enabling comparisons and providing the foundations for monitoring future trends. Against this backdrop, it is our understanding that the strength of this study lies with the ability to draw comparisons. It is important to point out that the study analyzes user perceptions concerning payment instruments and that these users tend to have limited and/or inaccurate knowledge of the issues, often lacking insight into their own everyday use of these payment methods, so that their views occasionally contradict with those of the experts. As we will see, there are sizeable differences in the universe of payment services on offer and in use in the countries analyzed, which appear to be attributable to a series of factors. Conceptually, therefore, we can correlate the use of payment services to a number of circumstantial drivers. Without pretending to be exhaustive in this respect, we would cite the following factors, which will be fleshed out further on in this section: - The nature of each country’s financial system and the strategies pursued by the various stakeholders (branch network reach, promotion of the various channels, including online platforms, mobile payments and ATMs, pricing structures, etc.) - The socioeconomic backdrop in several senses: • The economic situation in the countries analyzed. • Public policy (promotion of lending activity, subsidies, emigration, remittances). • Local social and demographic factors. - Technology infrastructure (Internet access, mobile connectivity, etc.) and equipment. - The influence of other markets: labor (salary payment methods), real estate, retail (retailer cards, merchant cash withdrawals). Without getting too far ahead of ourselves, we can venture that each country’s idiosyncrasies (in terms of penetration of payment services, usage intensity, attitudes, etc.) point to a range of anticipated market developments. We therefore believe that we will not see a single development model unfold in the payment services industry. At any rate, with a view to making a tentative approach, we have built a Synthetic Indicator to determine the comparative stage of development of electronic payment instruments in each country based on penetration and usage of these instruments, coupled with the role of mobile payments and e-commerce. This analysis provides the basis for making certain generalizations in terms of the status quo and likely trajectories: - The challenge faced in the more mature markets in terms of both electronic payment instrument penetration and usage intensity, namely Spain and Brazil, lies with the gradual rollout of new payment methods (mobile) and the growth of online banking and payments. - Chile and Colombia are well-positioned for growth thanks to the existing diversity of payment methods and their moderate usage, although there are still segments of the population without access to electronic payment methods. - Mexico falls somewhat in between, although the unbanked population remains above 50%, card penetration (encompassing credit and debit cards) stands at 42.3%, in line with penetration in Chile and Colombia. - Lastly, we have the countries that are relatively less developed (Peru and the Dominican Republic) and where penetration and usage are lower, implying further room for growth.

61


6. Use of payment instruments

2. Methodology SPOTLIGHT 11: NOTES ON THE STUDY We conducted two quantitative telephone surveys (CATI): - Calls placed to fixed-line phones (70-75% of the sample in Latin America, 100% in Spain). - Calls placed to mobile phones in Latin America (25-30% of the sample) in order to correct the bias implied by fixed telephony penetration statistics70. Universe: General population, aged between 18 and 65. Scope: Brazil, Chile, Colombia, Spain, Mexico, Peru, Dominican Republic. In all countries, the geographic structure of the survey mirrored the population distribution. Interview length: 10-12 minutes. Sample size or population: 400 interviews per country (2,800 interviews in total). The sample error using p=q=0.5 and a confidence level of 95.5% is +5% for every 400 interviews (i.e. per country). All of the figures are weighted by gender and age (by country) on the basis of the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision[2]71. The field work was conducted in June and July 2011. The research was conducted by The Cocktail Analysis

3. Population categorization Contrasting bank service penetration scenarios: diversity the only constant The use of electronic payment instruments is directly correlated to the extent of financial system formality, as the latter tends to imply due identification of the parties to each transaction. Against this backdrop, although penetration of banking services is not a strict prerequisite for the use of non-cash payment, the two variables are certainly correlated. This is why the first port of call in our research was to analyze the extent to which the population is banked, defined as holding a deposit account at a financial institution (meaning savings accounts/books and/or sight accounts72) and/or credit cards.

70 Although there are no official comparative penetration figures, the International Telecommunications Union provides mobile subscriber numbers per 100 inhabitants (Brazil 104.1; Chile 116.0; Colombia 93.76; Spain 111.75; Mexico 80.55; Peru 107.15; Dominican Republic 89.5). For further information: http://www.itu.int/ITU-D/ICTEYE/Reports.aspx#. 71 For further information: http://esa.un.org/unpd/wpp/index.htm. 72 In Mexico, current accounts include the so-called checking accounts.

62

Under this definition, as shown in Chart 18, Spain (where virtually all of the population falling under the scope of the study is banked) and Brazil (at a considerable distance, 82%) are the most highly banked populations. While it is universally acknowledged that Spain is one of the most banked countries in the world, the Brazilian figures are more surprising when compared to the research performed by the IPEA73, where the level of detail enables correction of deviations on account of territorial diversity. Chile and Colombia fall somewhere in the middle, showing penetration rates in the order of 60%, albeit with sizeable unbanked population segments. Peru, Mexico and the Dominican Republic are the least banked, with the majority of these populations outside of the formal financial system, most notably in Peru. Later on we will see the reported testimony for not being banked, pinpointing the key factors underpinning this situation. Chart 18: Banked vs. unbanked population by country Banked

Unbanked 2.6%

17.6% 36.0%

42.4%

52.4%

59.1%

51.8%

97.4%

82.4% 64.0%

Brazil

Chile

57.6%

Colombia

47.6%

Mexico

40.9%

Peru

48.2%

Dominican Rep.

Spain

n = total per country: 400 (2800).

Source: in-house analysis, on the basis of research.

Chart 19 shows how card penetration also varies by country. In Brazil, 72.3% of the population holds some form of card (debit or credit). The penetration of credit cards stands out (55.8%), confirming other studies alluding to rapid growth in the past decade74. Card penetration falls short of the 50% mark in the rest of the countries in our study. In Chile (48.6%), Colombia (47.5%) and Mexico (42.3%), card holders are concentrated in the middle and higher income population brackets. Card penetration in Peru (32.0%) and the Dominican Republic (27.4%) is lower, even among the middle classes (social segments C1 and C2)75. In Spain, the high level of bank account penetration is accompanied by high card penetration (79.2%), underpinned by debit cards (65.4%), whereas credit card penetration is almost 20 points lower. Albeit with differences, card penetration is significant in all social segments.

73 The Instituto de Pesquisa Econômica Aplicada recently published a study using 2010 data (“Bancos: Exclusão e Serviços” as part of the Sistemas de Indicadores de Percepção Social – SIPS series compiled by the Republican Presidency) using a very precise methodology (inperson interviews and a much larger sample size) showing lower bank account penetration numbers than shown here (according to this institution, 60.5% of the population holds a deposit account). For further information: http://www.ipea.gov.br/portal/images/stories/PDFs/ SIPS/110112_sips_bancos.pdf. 74 According to a study conducted by SPC Brazil, card penetration in 2009 had reached 67% of the population, 45% of which were credit cards. For further information: http://www.bcb.gov.br/pom/spb/seminarios/2010_SemInternCartoesPagamento/Arquivos/CNDL.pdf. 75 To analyze the findings by social segments, we used an internationally recognized scale based on the social and employment position of the interviewee or family head. The scale used is as follows: A – Management, skilled professionals who sit on management boards, B – Department heads and medium-sized business owners, C1 – Manager, administrative staff, self-employed professionals and micro/small business owners, C2 – Skilled manual workers, D – Semi-skilled or unskilled manual workers, E – Pensioner, currently unemployed, receiving state subsidies.

63



Chart 19: Payment card penetration by country Debit card holder Credit card holder (revolving credit and charge cards) Debit and/or credit card holder 79.2%

72.3% 65.4%

58.9% 55.8%

48.6% 37.1%

Brazil

40.3%

47.5%

31.0%

28.6%

Chile

Colombia

34.7%

46.7%

42.3%

23.9%

Mexico

32.0%

23.4% 20.5%

Peru

27.4% 18.3% 18.8%

Dominican Rep.

Spain



Education and access to computers/Internet are the factors that discriminate most between the banked and unbanked As we will see below, beyond reported attitudes to card payments, there is a series of factors that helps understand why some segments of the population are banked while others are not. Although there are differences across the countries analyzed, a number of variables are common in all cases and these variables divide the banked population from their unbanked counterparts: education levels, access to a computer and frequency of Internet access. Generally speaking, social segment, and in some cases age, is also relevant in explaining banking service penetration, although these are less influential than the first set of factors. This differing variable weighting leads to a noteworthy conclusion: education, technology equipment and Internet access imply access to higher ‘cultural capital’ which, while also correlated to social segment and gender, does not depend exclusively on these factors. This means that being banked or not is a cultural asset, one that is ‘learned’ or acquired as a result of individuals’ cultural environments (social interactions, institutional ties, education, Internet access, etc.). Against this backdrop, we can say that bank service penetration is part of the financial culture of each territory. In the Latin American countries studied, this culture becomes another form of social segmentation, bringing access to funds (financing, savings) that are often beyond the realm for the unbanked. All of this better explains the instances of “no need” reported by the unbanked (as we will see later in our analysis of the reasons given for not holding a credit card): to the extent that bank services are not part of an individual’s cultural surroundings, the less value will be ascribed to these services. In the coming pages, we analyze the trends in these variables across the various countries.

64

Socio-demographics and penetration of banking services Table 11 shows the breakdown of socio-demographic drivers (gender, social segment and age) between the banked and unbanked in each country. With respect to gender, we would point out two diverging trends. In all countries except Peru, most of the men are banked. Brazil is at the forefront in this regard, with 9 out of 10 men participating in the financial system by holding accounts or payment cards. The situation among women varies: in Colombia, Mexico, Peru and the Dominican Republic, the majority of women are unbanked (penetration is below 40% in the latter three countries). In the countries where banking services are more entrenched, namely Brazil and Chile, the situation is more equal among men and women. Analysis of the various social segments meanwhile suggests correlation between the upper classes and penetration of banking services. While most of the people falling under segments A and B are banked, penetration rates fall considerably as we move down the social scale: within segments D and E, only a minority of the population is banked, with the exception of Brazil. In this country, the vast majority of the population is banked, regardless of social segment, with penetration reaching 100% in segments A and B. This would appear to confirm that the country’s economic growth has fostered the penetration of bank services across broad layers of the population. Although penetration levels are lower among the poorer classes in Chile and Colombia, significant percentages of the lower-income segments are nevertheless banked. The same cannot be said of the other countries where only a small percentage (roughly 30%) of the less privileged classes is banked. The age breakdown of the banked and unbanked segments is not homogenous. In Brazil, Chile and, to a lesser extent, Colombia, penetration of banking services would not appear to be affected by age. High percentages of all age brackets are banked. However in the less developed economies (in overall economic terms), meaning Mexico, Peru and the Dominican Republic, more young people tend to be unbanked. Table 11: Key socio-demographics indicators: banked and unbanked population by country Brazil

Dominican Republic

Unbanked

Banked

Unbanked

Banked

Unbanked

Banked

Unbanked

Banked

Unbanked

Peru

Banked

Mexico

Unbanked

Total

Colombia

Banked

Chile

82.4%

17.6%

64.0%

36.0%

57.6%

42.4%

47.6%

52.4%

40.9%

59.1%

48.2%

51.8%

Gender Male

90.0%

10.0%

68.2%

31.8%

66.9%

33.1%

57.2%

42.8%

46.4%

59.1%

59.6%

40.4%

Female

75.1%

24.9%

60.0%

40.0%

48.8%

51.2%

38.3%

61.7%

35.5%

64.5%

36.9%

63.1%

0.0%

73.9%

26.1%

77.0%

23.0%

81.2%

18.8%

58.8%

41.2%

81.7%

18.3%

Social segments A+B

100.0%

C1+C2

85.9%

14.2%

71.3%

28.7%

60.4%

39.6%

53.8%

46.2%

44.9%

55.1%

53.5%

46.5%

D+E

73.5%

26.5%

49.6%

50.4%

46.6%

53.4%

31.3%

68.7%

28.2%

71.8%

31.4%

68.6%

81.7%

18.3%

70.6%

29.4%

52.6%

47.4%

37.0%

63.0%

34.2%

65.8%

41.4%

58.6%

Age 18-29 30-39

89.1%

10.9%

64.4%

35.6%

63.2%

36.8%

53.4%

46.6%

43.4%

56.6%

55.4%

44.6%

40-49

77.4%

22.6%

67.9%

32.1%

58.0%

42.0%

60.8%

39.2%

49.0%

51.0%

58.1%

41.9%

50-59

83.2%

16.8%

49.6%

50.4%

63.5%

36.5%

43.0%

57.0%

35.1%

64.9%

44.2%

55.8%

60-65

78.7%

21.3%

57.7%

42.3%

50.4%

49.6%

57.0%

43.0%

56.9%

43.1%

36.6%

63.4%

Horizontal percentage aggregation. n = total per country: 400 (2800).


65



Education, equipment and Internet access Certain specific variables, such as those itemized in Table 12 (education level, computer equipment and Internet access) are shown to be more likely to determine citizens’ propensity to be banked or otherwise. Table 12: Education, ICT equipment and Internet access among the banked and unbanked populations by country Dominican Republic

Banked

Unbanked

Banked

Unbanked

Banked

Unbanked

Banked

Unbanked

Peru

Unbanked

Mexico

Banked

Colombia

Unbanked

Chile

Banked

Brazil

Total

82.4%

17.6%

64.0%

36.0%

57.6%

42.4%

47.6%

52.4%

40.9%

59.1%

40.9%

59.1%

No schooling/Primary/ Secondary

74.1%

25.9%

49.1%

50.9%

38.5%

61.5%

28.4%

71.6%

24.0%

76.0%

33.9%

66.1%

Prof. training/Diploma/ Degree

94.8%

5.2%

78.2%

21.8%

72.5%

27.5%

67.6%

32.4%

57.1%

42.9%

68.1%

31.9%

PC, desktop or laptop

88.4%

11.6%

78.3%

21.7%

68.9%

31.1%

68.8%

31.2%

58.3%

41.7%

61.8%

38.2%

Mobile phone

85.1%

14.9%

68.9%

31.1%

68.9%

31.1%

59.0%

41.0%

47.3%

52.7%

53.0%

47.0%

Smartphone

93.8%

6.2%

85.5%

14.5%

82.4%

17.6%

81.4%

18.6%

68.3%

31.7%

59.4%

40.6%

Daily

92.8%

7.2%

75.4%

24.6%

72.7%

27.3%

72.9%

27.1%

59.5%

40.5%

64.9%

35.1%

At least once a week

75.4%

24.6%

67.0%

33.0%

48.7%

51.3%

45.6%

54.4%

35.4%

64.6%

60.3%

39.7%

100.0%

-

51.8%

48.2%

35.2%

64.8%

58.1%

41.9%

44.8%

55.2%

48.0%

52.0%

Less frequently

81.7%

18.3%

45.1%

54.9%

56.3%

43.7%

26.2%

73.8%

21.3%

78.7%

39.5%

60.5%

Never or almost never

63.5%

36.5%

38.6%

61.4%

30.4%

69.6%

15.8%

84.2%

22.4%

77.6%

32.6%

67.4%

Internet access

At least once a month

Horizontal percentage aggregation. n = total per country: 400 (2800).


Education levels have a significant impact in this respect. While most of the population with low education levels (defined as schooling until secondary level for the purposes of this report) is not banked in all countries except Brazil, most of the persons with higher education are banked76. There are also noteworthy differences in the ICT equipment owned by the banked and unbanked populations. To illustrate this point, it is sufficient to compare overall penetration of banking services by country with the breakdown of access to ICT devices in both segments (Table 12). This shows that most of the people in possession of these devices are banked, while the unbanked segments have lower access to this technology. Access to personal computers is particularly relevant because this brings access to Internet. In all countries, the percentage of the banked population with access to a PC is higher than their weight in the overall population. This phenomenon is most notable in Mexico, Peru and the Dominican Republic: in these countries, although less than half the population is banked, the vast majority of these citizens have PCs.

76 As an additional note, although the statistics are not included in this report, it is worth highlighting the fact that the schooling level among the unbanked does not surpass secondary level in any of the countries analyzed.

66

The frequency of access to Internet is also heavily skewed between the banked and unbanked segments. Banked citizens tend to access Internet daily (in percentages of around 70%), while unbanked citizens access Internet far less frequently and high percentages of the unbanked have never accessed Internet. 72.9% of people accessing Internet daily are banked, while 84.2% of those who never access Internet are unbanked77. Table 13 depicts the variables having the biggest impact on penetration of banking services in a given country in a more graphic format. In Brazil and, to a lesser extent, Chile and Colombia, the differences between the banked and unbanked are concentrated around the three most significant factors: education, PC access and Internet access. Gender and social segments are less likely to discriminate, especially in Brazil. In Mexico, Peru and the Dominican Republic, the number of determining variables is higher: gender, social segment and even age vary significantly between the banked and unbanked segments. Table 13: Graphic summary of variables that differ by banked and unbanked populations by country

Brazil

Chile

Colombia

Mexico

Peru

Dominican Republic

Education level

PC access

Internet access

Gender

Social segment

Age

Highly differentiating variable between the banked and unbanked. Differentiating variable between the banked and unbanked. Non-differentiating variable between the banked and unbanked.


77 In all countries, however, the unbanked use the Internet only scantly.

67



4. Penetration of payment and bank accounts The penetration of the various payment instruments and bank accounts (expressed as user percentages) in the various countries analyzed varies widely by country (Table 14). Brazil emerges a country where a broad range of products boast meaningful penetration rates. Indeed, 63.3% of the population has a current account, 58.9% has a debit card, 54.5% holds revolving credit cards78, a figure that stands out within the universe of analysis, and 30.5% has a checkbook. In Chile, penetration of debit cards (37.1%), store cards79 (36.4%) and credit cards (22.3%) is significant, while a noteworthy 17.9% holds checkbooks. The high penetration of store cards is unique to Chile. As we have seen elsewhere in this report, the number of retailer cards in circulation outnumbers mainstream bank cards by a factor of three, implying a high number of private cards per card holder. Indeed, each store card holder typically holds more than two cards of this kind. In Colombia, the debit card is the most widespread form of electronic payment (40.3%), with the other instruments lagging significantly behind. In relatively underbanked countries, the penetration rates of the various products tend to be low. The penetration of non-cash payment methods in the Dominican Republic is low (e.g., debit cards: 18.3%), while in Peru, over 55% of the population does not hold any non-cash payment instrument; the most popular instrument, the debit card, is only held by one in five Peruvians. In Mexico, where the pattern is broadly similar, the main difference is the relatively high penetration of debit cards, with at least one in three holding one, a rate of penetration that mirrors the presence of current accounts. Among the countries analyzed, Spain boasts the highest presence of debit cards, charge cards and retailer cards80. Although penetration of revolving (deferred payment) credit cards is currently relatively high in comparison to the traditional use of this form of payment in Spain (16.0%), we would note that growth in this instrument in the past two years would appear to be being fostered by the ongoing crisis; indeed many financial institutions are offering the choice of sporadic payment deferrals on certain charge cards81. By product, debit cards are the most popular payment method in nearly all the countries analyzed. The use of savings and current accounts varies by country: whereas savings accounts are more popular in some countries (Dominican Republic, Peru and Colombia), current accounts are more widespread in others (Spain, Brazil and Mexico). While the penetration of current accounts would appear to be somewhat correlated to bank service penetration levels, savings accounts/books would not.

78 Credit cards settled monthly, referred to as charge cards in this section, were classified separately from cards paid off in instalments or automatically rolled over. 79 Retailer cards refer to both open systems (usually associated with some form of processing brand) and closed systems (exclusive to a given retail chain). 80 In the case of retailer cards in Spain it is important to note the tremendous influence of the El Corte Inglés department store chain which reports to have 11.18 million store card holders: http://sgfm.elcorteingles.es/SGFM/ECI/recursos/doc/Datos_Economicos/Memorias/2010/2083090945_2382011161836.pdf. 81 In 2010, Mastercard published the results of a survey conducted by Inmark that found that 22.1% of credit cards in Spain were set up to be paid off in instalments with year-on-year growth in this format in 2011 estimated at 35%. For further information on this topic: http://bit.ly/ r9dAmy y http://bit.ly/oBkbLW.

68

Table 14: Penetration of payment instruments and bank accounts by country

Brazil

Chile

Colombia

Mexico

Peru

Dominican Republic

Spain

Debit card

58.9%

37.1%

40.3%

34.7%

23.4%

18.3%

65.4%

Savings account / savings book

49.7%

40.2%

44.4%

20.9%

23.5%

40.2%

57.8%

Current account

63.3%

30.5%

18.2%

31.0%

20.3%

20.6%

84.4%

Store / retailer card

35.6%

36.4%

23.2%

15.9%

17.1%

6.0%

43.8%

Revolving credit card (paid off in installments)

54.5%

11.5%

15.1%

11.6%

10.1%

4.3%

16.0%

Charge cards (paid off monthly)

14.5%

22.3%

19.6%

17.0%

15.8%

16.7%

30.7%

Check / checkbook

30.5%

17.9%

8.9%

6.2%

2.1%

4.3%

8.2%

2.6%

-

2.3%

3.7%

5.5%

5.9%

2.1%

14.4%

29.2%

38.9%

49.3%

55.9%

49.7%

2.2%

Prepaid card None (other than cash)



The average number of payment instruments per capita also varies by country: as shown in Chart 20, the average in Spain and Brazil (for the products used in the survey) is close to two; in Chile this number falls to close to 1.25 per person and to 1.09 in Colombia. In Mexico, Peru and the Dominican Republic, the average per person is less than one. This means that beyond the penetration of banking services or bank accounts, these countries’ financial systems are less diversified in terms of payment methods. Chart 20: Average number of (non-cash) payment instruments per individual by country

1.97 1.25

Brazil

Chile

1.66

1.09

0.89

0.74

0.55

Colombia

Mexico

Peru

Dominican Rep.

Spain



69



5. Use of payment instruments The frequency with which the various payment instruments are used varies substantially as a function of product/service range and also purchasing power. This factor is significant in terms of the entire country’s economic development and the social segment to which the individuals belong82. Table 15 shows the incidence of monthly use of the various electronic payment instruments among product holders83. In Brazil, the use of credit cards stands out in both the charge card (92.4%) and revolving credit card categories (90.9%), demonstrating the country’s heavy use of consumer credit. Debit cards are also used extensively every month (85.7%, with 34.8% using them daily), while retailer cards and checks (almost 54% usage and significant penetration) are used monthly by more than half of their holders84. Chileans display a preference for using their debit cards (87.6%) and retailer cards (60.3%, with higher penetration of this instrument than in the other Latin American countries analyzed). Among the less commonplace instruments, card holders use their credit cards relatively frequently. Colombia and Mexico share common traits: the use of debit cards dominates in both countries (> 80%), followed by credit cards (revolving credit and charge cards alike). Peru and the Dominican Republic use electronic payment methods with less frequency: it is less common to possess these instruments in these countries, and the only instrument used monthly by more than 70% of holders is the charge card. In Spain, the debit card is the most widely used electronic payment instrument on a monthly basis (85.7%); notably, debit cards are also the instrument held most extensively (with the highest penetration rate in our universe of analysis), clearly delineating Spaniard’s payment preferences. The use of charge cards and credit cards (just over 70% and 72.5%, respectively) lags considerably, although penetration of revolving credit cards is significantly lower. Table 15: Electronic payment instrument usage frequency (daily + weekly + monthly) Brazil

Chile

Colombia

Mexico

Peru

Dominican Republic

Spain

Debit card payments

84.4% (n=236)

87.6% (n=148)

84.3% (n=161)

81.3% (n=139)

69.3% (n=94)

64.5% (n=73)

85.7% (n=262)

Revolving credit card payments

90.9% (n=218)

70.4% (n=46)

70.4% (n=61)

72.9% (n=46)

61.5% (n=40)

-

72.5% (n=64)

92.4% (n=58)

74.0% (n=89)

68.5% (n=78)

79.3% (n=68)

71.7% (n=63)

78.6% (n=67)

68.7% (n=107)

Check writing

53.8% (n=122)

63.6% (n=72)

58.7% (n=36)

-

-

-

26.6% (n=33)

Retailer card payments

56.1% (n=142)

62.5% (n=146)

60.3% (n=93)

60.8% (n=64)

70.7% (n=68)

-

54.2% (n=175)

Charge card payments**

n = the number of holders of the banking product in question. * = low base - = n < 30 The presence of prepaid cards in the sample was not sufficient to yield statistically significant findings in any country. ** While the number of users who claim that they make frequent payments with charge cards is based on penetration of this instrument, as set forth in Table 14, some of the figures may surprise those who are familiar with the market reality in countries such as Brazil and Colombia where it is very rare to pay down charges in full at the end of the month. It is possible that respondents misunderstood the question somewhat, which would explain these unusually high figures.

Source: in-house analysis, on the basis of research. 82 While we lack sufficient data to analyze specific trends by social segment and country, what we can say is that in every country, the higher the social segment, the more the various payment instruments are used. 83 By way of example, and to facilitate reader comprehension of the table, 84.4% of debit card holders in Brazil use this payment instrument at least once a month. 84 Several experts consulted by Jornal Globo underscore the importance of checks despite their decline in the past decade. Brazilian central bank statistics put the percentage of all transactions still paid for by check at 15.1%. For further information: http://g1.globo.com/economia-enegocios/noticia/2010/10/uso-de-cheques-despenca-em-uma-decada-mas-continua-representativo.html.

70

6. Reasons given for not holding credit cards As already discussed, credit card penetration varies significantly across the countries analyzed. Given the fact that credit cards are used extensively for payment in many other countries, we thought it was relevant to investigate the reasons why people (banked and unbanked) had decided not to hold them, with a view to better understanding the hurdles to be overcome. Although some of the reasons given are common to the banked and unbanked, already being a banking services user does shift attitudes towards and appraisals of cards.

The perception that cards are not necessary or of value hinders penetration of cards among the unbanked In general terms, the unbanked85 were found to be far removed from the realm of credit cards in the sense that these citizens had very little knowledge of how they work or the value they bring. As shown in Table 16, one of the main reasons cited by the unbanked for not holding a credit card is the perception that they do not need one since they don’t have enough money to justify one (except in Brazil). Mexico stands out in this respect, with the vast majority of the unbanked sharing this perception. Other significant barriers include fees and commissions, security concerns and fear of indebtedness as a result of uncontrolled spending. Table 16: Reasons given for not holding credit cards by the unbanked

Brazil (n=70)

Chile (n=144)

Colombia (n=169)

Mexico (n=210)

Peru (n=236)

Dominican Republic (n=207)

17.6%

55.5%

53.9%

74.1%

66.6%

62.0%

I don’t want to pay card fees

4.9%

25.5%

16.0%

15.7%

16.6%

15.0%

Security concerns - thefts, fraud, etc.

1.4%

13.9%

8.4%

6.2%

8.9%

10.7%

I don’t want to become indebted

13.8%

7.8%

9.2%

6.0%

4.1%

9.5%

I don’t handle money, I am very young, I don’t have a job

3.1%

5.7%

8.4%

2.6%

7.9%

15.0%

52.3%

9.6%

0.6%

4.3%

2.4%

5.6%

I prefer to pay cash

5.8%

3.1%

2.3%

4.5%

4.3%

4.5%

I applied for one but was rejected as I had a poor (or no) credit history

6.9%

4.8%

5.1%

2.4%

2.5%

5.0%

I don’t trust the banks

1.1%

1.1%

1.7%

0.6%

2.2%

0.9%

Other reasons

5.9%

4.2%

5.8%

2.8%

6.1%

4.5%

I don’t have much money, so I don’t need one

I don’t want people to know what I do with my money

n = the number of unbanked in each country.


85 In this analysis and in other polls focused on the attitudes of the unbanked, Spain has been excluded as the sample is too small to be significant (with just 10 instances).

71



What sets Brazil apart in this respect is the fact that by far the main reason given for not holding a credit card was the unwillingness to have others know what they are doing with their money (52.3%). The fear of the control associated with financial formality is a significant obstacle among non-card holders in Brazil, this being the biggest barrier to growth in this instrument and by far the highest in the region. In the Dominican Republic, on the other hand, the lack of work and/or funds (15.0%) is the second most cited factor. Against this backdrop, the development of service penetration strategies in the various countries would seem to require work on campaigns and messages that highlight the benefits of financial system formality, coupled with products that overcome fear of control and lack of security, that make it easy to control spending and with low or no fees and commissions.

Users of banking services that do not hold credit cards exhibit mistrust of the product On the other hand, users of banking services that do not hold credit cards (Table 17) cite fees, the feeling that they are spending without control and, to a lesser extent, a perceived lack of necessity as the main reasons for not holding them. In general, there is a sense of suspicion regarding the potential use of the cards. Table 17: Reasons given for not holding credit cards by bank account holders

Brazil (n=105)

Chile (n=119)

Colombia (n=114)

Mexico (n=95)

Peru (n=76)

Dominican Republic (n=114)

Spain (n=203)

I don’t want to pay card fees

23.0%

38.1%

33.6%

35.4%

33.3%

27.9%

12.1%

I don’t want to become indebted

30.9%

14.3%

24.0%

12.7%

17.2%

20.3%

37.2%

I don’t have much money, so I don’t need one

13.1%

28.4%

26.4%

33.7%

35.7%

38.1%

13.9%

I prefer to pay cash

20.4%

4.2%

13.1%

8.9%

10.8%

11.8%

22.3%

Security concerns - thefts, fraud, etc.

6.4%

20.9%

8.6%

11.2%

20.4%

19.6%

7.3%

I applied for one but was rejected as I had a poor (or no) credit history

9.6%

4.5%

16.2%

6.6%

5.9%

10.9%

2.4%

I don’t handle money, I am very young, I don’t have a job

3.7%

5.1%

3.5%

7.5%

5.7%

11.5%

5.2%

I don’t want people to know what I do with my money

3.5%

8.8%

0.9%

5.7%

5.7%

9.5%

1.3%

Other reasons

3.0%

5.6%

5.9%

2.2%

4.0%

0.5%

5.9%

n = number of bank account holders without credit cards per country.


Nevertheless, there are significant differences among the various countries: in Spain, for example, the fear of uncontrolled spending and the preference for cash stand out (fees are not a big issue). In fact, as discussed earlier in the report, these are two of the reasons why card numbers have been falling throughout the crisis. In the Dominican Republic on the other hand the perceived lack of necessity looms large. In Mexico and Colombia, concerns regarding card fees stand out, while in Chile security concerns emerge as the biggest issue (20.9%). In Colombia, in contrast, having card applications turned down is a relevant factor (16.2%), so that it is the financial institutions' approval processes that are hindering rollout. Getting more bank account holders to use credit cards requires strategies designed to foster proximity and security in terms of every day use by positioning the product as ‘safe’ for the user in the broad sense, namely by offering low fees and mechanisms for controlling spending.

72

7. The mobile phone as a payment mechanism Mobile payments: incipient yet promising To date, mobile phones, be they smartphones or so-called feature phones, are scantly used as a payment instrument in the countries analyzed. Chart 21 illustrates the restricted use of mobile payments. Nevertheless, it is worth pointing out that these percentages imply millions of customers in the cases of Brazil (2.0%) and Mexico (5.7%). Penetration is lowest in Spain86, in all likelihood because of the entrenched position of payment alternatives. Although the sample is too small to analyze the variety of payment systems used, it is big enough to conclude that SMS and USSD based systems are the most widely used (especially in Chile and Mexico), being the technology that is easiest to use and with which more users are familiar. Chart 21: Persons to have paid businesses (purchases, bills, etc.) using their mobile phones at least once

2.0% Brazil (n=354)

5.0%

Chile (n=343)

3.0%

Colombia (n=355)

5.7%

4.2%

2.9%

Mexico (n=268)

Peru (n=305)

Dominican Rep. (n=294)

1.1% Spain (n=382)

n = number of mobile phone owners in the country in question.


Interest in and appraisal of mobile payment services: incipient demand with scope for development Although trialing of the commercial mobile payment platforms available in Latin America is still scant, those polled who do not yet use these services did show interest in the platforms, whether SMS or application based (Chart 22). Although majority interest was not detected in all countries, we can confirm the existence of nascent demand. Colombians were particularly inclined to use this service (41.2% expressed keen interest). Inclination is lower in the other countries, albeit still significant, ranging between 20% and 30% of the population, permitting talk of established demand and implying a niche for these kinds of services. Notably, in all countries, young people (under 30) expressed significantly higher interest. Chart 22: Inclination towards using mobile payment services by country High (7 to 10)

Colombia (n=344)

Medium (5 to 6)

41.2%

Low (1 to 4)

14.4%

44.3%

Brazil (n=345)

28.2%

17.6%

54.2%

Mexico (n=253)

27.6%

17.3%

55.0%

Peru (n=276)

27.0%


23.6%

Chile (n=324) Spain (n=378)

19.0% 16.7%

15.6% 15.5% 17.6%

12.0%

57.4% 60.8% 63.3% 71.3%

n = number of mobile phone users who do not make mobile payments.


86 Nevertheless, Spain was a pioneer in adopting mobile payments when the Mobipay system was introduced in 2001, even though it was subsequently abandoned in 2009 on account of its lack of commercial success.

73



It is worth noting that Spain is the country exhibiting lowest reported interest (16.7% expressed keen interest). This is probably attributable to several factors. Firstly, the Spanish sample population is relatively older (although this figure is not shown, young Spaniards do express keen interest 35.4% of the time, in line with youth interest in other countries). Secondly, a lack of familiarity with the value proposition compared to other payment alternatives, which are manifold in Spain due to the high level of financial formality and the existence of an extensive network of bank branches and ATMs. It would also appear that the existence of mobile payment services that have been heard of increases interest and inclination. Focusing on citizens expressing keen interest in mobile payments (Table 18), ease of payment and time savings emerge as the main perceived benefits in all countries. In some cases, despite having previously expressed interest, those polled queried service security, especially in Brazil. In contrast, in other countries, such as Chile, Colombia, Spain and Peru, the perception is that security is a benefit of mobile payments in so far as they eliminate the need to carry cash, while devices are easier to control as they are always hand-held. Notably, those most inclined to use their mobile phones to make payments are also those who see security as one of the biggest advantages. In contrast, as we will see further on, those most reluctant to use mobile payments primarily cite system security concerns, suggesting that campaigns to raise awareness and knowledge of the security reality could boost demand. Table 18: How mobile payments are perceived among those expressing high interest (a score of 7 to 10)

Dominican Republic (67)

Brazil (99)

Chile (62)

Colombia (142)

Mexico (70)

Peru (75)

Easier payments and time savings

67.2%

74.2%

62.9%

84.6%

77.6%

84.7%

77.7%

I don’t think they are safe

26.8%

6.0%

12.3%

11.2%

5.4%

1.8%

13.2%

Mobile payments are safer (physical control over handset, no need to carry cash)

6.2%

10.3%

15.9%

7.3%

16.5%

4.5%

13.2%

Just another payment alternative (coexists with other methods)

-

10.0%

6.1%

-

5.2%

1.8%

4.2%

I prefer other payment instruments

3.2%

1.3%

3.4%

1.4%

4.2%

1.8%

7.2%

Other

8.2%

12.0%

5.9%

4.5%

8.4%

5.5%

1.2%

Spain (63)

n = number of people expressing keen interest in mobile payments by country.


Although those expressing medium interest (5-6), as illustrated in Table 19, acknowledged the user-friendliness and time savings implied by mobile payments, security concerns came across more intensely, curbing interest in the service.

74

Table 19: How mobile payments are perceived among those expressing medium interest (a score of 5 to 6) Brazil (61)

Chile (57)

Colombia (50*)

Mexico (44*)

Peru (43*)

Dominican Republic (44*)

Spain (46*)


45.9%

39.8%

41.5%

33.7%

21.3%

35.6%

17.1%

Easier payments and time savings

32.7%

21.4%

4.0%

15.3%

31.2%

21.0%

21.4%


9.4%

9.6%

17.0%

22.2%

22.3%

19.4%

14.8%

I don’t understand how they work

5.5%

5.9%

-

5.4%

13.1%

12.5%

13.6%

I don’t see how they are of use, I don’t need them

4.9%

6.8%

4.9%

9.8%

5.6%

4.2%

13.4%

Just another payment alternative (coexists with other methods)

1.7%

10.4%

10.7%

4.7%

2.4%

2.7%

17.2%

I don’t use my mobile / I don’t know how to use it

-

2.9%

13.7%

7.5%

5.2%

-

3.8%

I don’t think my handset is compatible

2.1%

2.7%

2.1%

2.3%

4.6%

4.2%

5.2%

Other

3.4%

6.9%

6.1%

11.9%

2.4%

5.7%

10.2%

* = Small sample size. n = number of people expressing medium interest in mobile payments by country.


Table 20 shows how, among those expressing scant interest (1-4), common factors curtail interest in all countries: security above all, but also preferences for other payment instruments (cash and cards), the difficulty in using mobile phones and the lack of perceived advantages. All these negative perceptions suggest that mobile payments are unlikely to be adopted by large swaths of the population in the near term. Table: 20 How mobile payments are perceived among those expressing scant interest (a score of 1 to 4) Brazil (188)

Chile (205)

Colombia (153)

Mexico (44*)

Peru (159)

Dominican Republic (172)

Spain (270)


55.3%

55.3%

48.9%

47.4%

41.3%

30.8%

31.0%


21.0%

17.2%

21.9%

23.3%

30.3%

25.9%

40.0%

I don’t use my mobile / I don’t know how to use it

4.6%

9.4%

23.0%

5.2%

10.4%

5.1%

14.3%

I don’t see how they are of use, I don’t need them

14.0%

7.4%

1.7%

7.7%

8.1%

11.6%

14.1%

I don’t understand how they work

3.0%

5.1%

0.6%

6.1%

10.7%

9.9%

11.7%

I don’t have money/ work/a bank account/I don’t handle the money

2.1%

3.6%

5.1%

8.2%

5.6%

18.0%

0.8%

I don’t think my handset is compatible

1.0%

1.9%

2.9%

3.8%

3.1%

1.4%

5.2%

Other

4.9%

6.3%

6.3%

5.1%

2.6%

5.7%

7.0%

n = number of people expressing low interest in mobile payments by country.


75



8. Internet payments Internet access is fairly widespread in the countries analyzed (Chart 23), with most of the population accessing Internet at least monthly (the weekly figures are only slightly lower, confirming access stability/recurrence). The Dominican Republic is the only country exhibiting significantly lower access. Chart 23: Internet access by country

65.6% 66.5%

75.2% 70.6%

70.6%

79.4%

78.0% 59.1%

63.9%

61.6%

82.5%

67.7% 46.5%

53.6% At least once a week At least once a month

Brazil

Chile

Colombia

Mexico

Peru

Dominican Rep.

Spain



Chart 24 shows how e-commerce (meaning the purchase of any product or service) among Internet users is a reality in the various countries analyzed, albeit presenting significant deviations from one country to the next. -e-commerce is most entrenched in Spain and Brazil (62.6% of Internet users claim to have made online purchases at one time or another in both countries), indicating a significant use of electronic payment methods in this field. Penetration of e-commerce is also meaningful in Chile (39.1%) and Colombia (close to 30%). Penetration is substantially lower in Mexico, Peru and the Dominican Republic, at roughly 20%. The correlation between financial formality and e-commerce is noteworthy: the higher the penetration of bank services in a given country, the higher the incidence of online shopping. Chart 24: Sample population to have made an online purchase at some point vs. population that has never done so, by country

37.4%

37.4% 60.9%

72.0%

77.6%

82.2%

81.5%

Has shopped online Has not shopped online 62.6%

62.6% 39.1%

Brazil (n=266)

Chile (n=301)

28.0%

Colombia (n=312)

22.4%

17.8%

18.5%

Mexico (n=256)

Peru (n=271)


Spain (n=330)

n = No. of people using Internet at least once a month in each country.


There is also considerable diversity in the payment methods used to make online purchases (Table 21), although cards, especially

76

credit cards, play a pivotal role in all countries. Spain leans somewhat towards the debit card, which also plays a meaningful role in Chile. At present, the use of PayPal is uneven across the various countries: its use is prominent in Chile, Spain and Peru, but only secondary in Brazil, Colombia, Mexico and the Dominican Republic. Brazil stands out for its strong preference for credit cards (65.3% of online shoppers having used this instrument) and for the penetration and use of the bloqueto de cobrança (this country’s exclusive online payment option), which is the second most widely used service (used by almost 30% of online shoppers). The findings are less conclusive in Peru and the Dominican Republic, due to the low incidence of online shopping; however, these shoppers appear to lean towards cards, debit or credit. Table 21: Payment methods used to make online purchases, by country

Brazil (167)

Chile (118)

Colombia (87)

Mexico (57)

Peru (48*)

Dominican Republic (40*)

Spain (207)

Credit card

65.3%

38.2%

40.4%

58.9%

27.0%

40.3%

33.6%

Debit card

14.6%

35.9%

22.5%

22.9%

23.5%

8.1%

39.4%

2.4%

18.6%

6.6%

9.2%

23.8%

10.9%

19.8%

-

2.8%

10.2%

5.4%

21.9%

7.8%

17.1%

Bloqueto de cobrança (BRAZIL only)

28.9%

-

-

-

-

-

-

Bank transfers

11.1%

2.1%

5.5%

5.7%

4.3%

-

5.1%

Third-party credit card

2.4%

6.4%

4.5%

3.5%

6.2%

17.8%

-

Bank deposit

0.5%

4.4%

8.9%

12.4%

6.5%

-

1.4%

Third-party debit card

-

0.7%

8.5%

-

-

4.7%

-

Retailer card

-

7.5%

-

-

-

-

-

Prepaid card

0.6%

0.9%

-

-

-

10.0%

0.8%

-

4.5%

1.1%

2.2%

-

11.1%

1.5%

Paypal Cash (on delivery or direct payment)

Other

n = number of people making online purchases at some point in each country. * = Small sample size.


77



9. Payment instrument scenario by country A different payments snapshot emerged for each of the countries analyzed. This picture is not only painted by the differing rates of penetration of electronic payment instruments but is fleshed out by differing uses, channels and categories across the sample as well as diverging levels of online shopping and mobile banking and mobile payments usage. The provision of a snapshot for each country, albeit synthetic, provides the grounds for concluding that there is no single model for financial services penetration but rather a series of possible developments or paths that the various countries may take from here. As we have seen, the contrast between the situation in Spain relative to the panorama in the Latin American countries is particularly significant.

Brazil: preference for revolving credit cards and ATMs Brazil (Table 22) rises to the top of the league table in Latin America in terms of penetration of banking services (82.4%) and the uses made of the customary payment instruments. As we have already noted, credit cards, particularly those configured for revolving payments, play a very significant role in terms of penetration (54.5% of the sample holds a credit card of this kind) and usage thereof. Credit cards constitute the non-cash instrument most widely used to pay for clothes and domestic appliances and for booking travel arrangements, while use of the debit card is more frequent in food shopping and leisure payments. Brazil also has the highest incidence of checks (30.5%), although their use is more irregular. As for payment channels, the Brazilians show a preference for using ATMs for cash withdrawals, deposits, transfers and account tracking. However, Brazilians use the retail channel extensively (almost half our sample used merchants as their most common payment channel to pay for their utilities and other recurring payments). In fact, as we saw in chapter 4, the Brazilian central bank has expressed its displeasure at the relatively low number of transactions performed at ATMs. As far as mobile banking is concerned, use of these services remains very restricted in Brazil, whether it is mobile payments, mobile banking applications, mobile browsing or account tracking/transacting. Brazilians’ preference for the ATM and retail channels could be curtailing, at least for the time being, development of mobile banking. It is also true, however, that supply is slim and critical mass has yet to be reached. Turning to online shopping, however, Brazil emerges as a pioneer in Latin America, with 62.5% of Internet users (66.5% of the population) having purchased online at some point in time. In these instances, credit cards are the most popular payment instrument (65.3% paid using this option); however a national product, the bloqueto de cobrança is also prominent, being used by 28.9% of Brazilians87 shopping online.

87 See chapter 4, spotlight 3, for more details on this payment instrument.

78

Table 22: Payments snapshot in Brazil

Penetration of banking services1

Penetration of payment methods1

Banked

82.4%

Unbanked

17.6%

Debit card

58.9%

Charge card

14.5%

Credit card

54.5%

Check / checkbook

30.5%

Store card

35.6%

Prepaid card

Payment instrument usage frequency (daily + weekly)2

Most widely used payment channel1

Cash

63.0% (n=400)

Debit card

57.6% (n=236)

Charge card

30.9% (n=218)

Credit card

16.8% (n=122)

Store card

2.6% (n=142)

Prepaid card

6.8% (n=11)

Cash withdrawals, ATMs

49.9%

Money lodging / deposits, ATMs

39.4%

Utilities and other recurring payments, in-store

49.4%

Account tracking, ATMs

Collection of state payments/subsidies, bank branches Use of mobile Internet Use of banking website or app Account tracking

Use of Internet

Most popular online purchase payment options

48.3% (n=58)

Check / checkbook

Intra- and interbank transfers, ATMs

Mobile banking usage frequency (daily+ weekly+ monthly)4

2.6%

Percentage of Internet users

40.3% (n=328)3 21.9% 9.5% 19.8% (n=354)4 12.9% (n=79)5 3.5% (n=306)6 66.5%1

Percentage of online shoppers

62.6 % (n=266)7

Credit card

65.3% (n=167)8

Bloqueto de cobrança

28.9% (n=167)8

1 Total base = 400. 2 Base = Population holding this payment instrument (indicated below each percentage). 3 Base = Banked population. 4 Base = Population with mobile phones. 5 Base = Population with mobile phones that access Internet from their handsets and hold an account and/or card. 6 Base = Population with mobile phones and an account and/or card. 7 Base = Population of Internet users (accessing Internet at least once a month). 8 Base = Population that has made an online purchase at some stage.


79



Chile: diversity in terms of payment instruments and channel usage Table 23 illustrates how Chileans, who are highly banked (more than six out every 10 citizens), make meaningful use of electronic payments. Plastic cards constitute the most entrenched non-cash payment option. The most popular instrument is the debit card (37.1%), followed very closely by the store card (36.4%). It is noteworthy that Chile ranks second in terms of check penetration (17.9% of Chileans claims to use this payment method), second only to Brazil and followed at some distance by the rest of the countries analyzed. The debit card is the form of electronic payment used most extensively (63% of debit card holders use them at least weekly). The debit card is the most commonly used instrument in nearly all product categories polled, although store cards are more popular for clothing, electronics and home appliance purchases (less frequent purchases). Chile emerges as the country making most use of checks / checkbooks, which are used monthly by 63.0% of holders. Chileans know where they want to perform each transaction: they prefer to withdraw cash from ATMs (47.6%), make deposits at bank branches (45.7%), pay for their utilities and other recurring payments in-store (43.1%) and use the banks’ websites to track their accounts (almost 50% of the total survey population) and transfer money (19.7%). The use of mobile banking is among the highest among the countries analyzed: 40.8% of mobile Internet users visit the banks’ website or mobile application at least once a month, while 20.0% of mobile phone owners track their accounts at least that often. Almost four out of every 10 Chilean Internet users have made online purchases at some point. Chileans use credit and debit cards most extensively to pay for these purchases.

80

Table 23: Payments snapshot in Chile


Penetration of payment methods

1


Banked

64.0%

Unbanked

36.0%

Debit card

37.1%

Charge card

22.3%

Credit card

11.5%

Check / checkbook

17.9%

Store card

36.4%

Debit card

63.0% (n=148)

Charge card

26.8% (n=89)

Credit card

27.9% (n=46)

Check / checkbook

23.6% (n=72)

Store card



47.6%


45.7%


43.1%

Account tracking, bank websites

19.7%

Collection of state payments/subsidies, bank branches

13.7%

Use of banking website or app Account tracking

Use of Internet


49.7% (n=243)3

Intra- and interbank transfers, bank websites

Use of mobile Internet

Mobile banking usage frequency (daily+ weekly+ monthly)

16.8% (n=146)


26.4% (n=343)4 40.8% (n=87)5 20.0% (n=249)6 75.2%1


39.1 % (n=301)7

Credit card

38.2% (n=118)8

Debit card

35.9% (n=118)8



81



Colombia: uneven penetration by payment option, reliance on traditional payment channels Although the majority of the Colombian population is banked (57.6%), the penetration of the various payment methods is uneven (Table 24). Whereas 40.3% of Colombians hold debit cards (in turn the most widely used electronic payment instrument), only 19.6% hold charge cards and just 15.1% hold credit cards. Albeit lagging far behind cash, debit cards are the most popular electronic payment method for food, household goods, clothing and leisure purchases, while credit cards are used for booking trips and buying household and electronic appliances. Colombians prefer to lodge money, pay for their utilities and other recurring payments and transfer money at banks, while they use ATMs to withdraw cash, depicting a still-traditional banking profile. However, Colombians have adopted the banks’ websites for account tracking with conviction, indicating scope for a shift towards more regular use of online banking platforms for other capabilities medium to longer term. So far, mobile phones are used only scantly for payment purposes (with only 3% of phone holders ever having made a mobile payment). However, one in every four Colombians use mobile Internet (29% of those owning mobile phones) and they use it to consult their banks’ websites or use their mobile applications (monthly). 28% of Colombian Internet users shop online. These shoppers use credit cards (40.4%) and debit cards (22.5%) most often to pay for these purchases.

82

Table 24: Payments snapshot in Colombia



Banked

57.6%

Unbanked

42.4%

Debit card

40.3%

Charge card

19.6%

Credit card

15.1%

Check / checkbook Store card Prepaid card



Debit card

42.0% (n=161)

Charge card

15.2% (n=78)

Credit card

13.4% (n=61)

Check / checkbook

24.9% (n=36)

Store card

14.2% (n=93)

Prepaid card

32.2% (n=9)


46.6%


55.4%


39.9%


44.6% (n=229)3

Intra- and interbank transfers, bank branches

20.3%


11.8%

Use of banking website or app



2.3% 83.7% (n=400)

Account tracking

Use of Internet

23.2%

Cash



8.9%


25.8% (n=355)4 25.5% (n=69)5 29.0% (n=220)6 78.0%1 28.0 % (n=312)7

Credit card

40.4% (n=87)8

Debit card

22.5% (n=87)8



83



Mexico: low penetration and low usage of payment instruments What stands out from the Mexican statistics (Table 25) is the low incidence of financial formality (47.6%), which is correlated with the low penetration of the various payment instruments: the most popular instrument is the debit card, which is nevertheless held by just 34.7% of the population. Penetration of the other payment options, including credit cards, is below 20%, despite the efforts of the authorities and financial sector to develop payment services through the FIMPE. Electronic payment methods are used with limited frequency. Only credit cards are used weekly by more than half of users. Weekly usage of all other instruments is below 30%. As a result, Mexicans said they mostly paid cash for nearly all product categories, with credit card payment sporadic at best. Use of payment channels in Mexico reflects this low penetration, as formal banking channels are little-used in general. There are nevertheless some links between payment channel and the task performed: ATMs for cash withdrawals, bank branches for deposits, bank websites for account tracking, albeit all at relatively low usage levels. With respect to mobile banking, Mexicans with mobile Internet access are not yet visiting the banks’ websites or using their mobile banking applications extensively (18.9%). Use of mobile phones follows a similar pattern: only 11.3% of mobile phone users track their accounts from their handsets. Meanwhile, one in every five Mexican Internet users has made an online purchase at some stage (generally speaking, using credit cards). As with the other Latin American countries, the credit card is the preferred payment option among online shoppers, followed by the debit card and, at a certain distance, bank deposits (12.1%) and PayPal (9.2%).

84

Table 25: Payments snapshot in Mexico



Banked

47.6%

Unbanked

52.2%

Debit card

34.7%

Charge card

17.0%

Credit card

11.6%

Check / checkbook Store card Prepaid card Debit card



54.9% (n=139)

Credit card

25.2% (n=46)

Check / checkbook

32.2% (n=25)

Store card

16.5% (n=64)

Prepaid card

7.4% (n=15)


30.8%


40.2%


51.0%


Use of mobile Internet Use of banking website or app Account tracking Percentage of Internet users Percentage of online shoppers


3.7%

30.9% (n=68)


Use of Internet

15.9%

Charge card

Intra- and interbank transfers, bank websites


6.2%

32.3% (n=169)3 9.8% 8.4% 26.5% (n=268)4 18.9% (n=57)5 11.3% (n=165)6 66.4%1 22.4 % (n=256)7

Credit card

58.9% (n=57)8

Debit card

22.9% (n=57)8



85



Peru: the challenge of bringing more people into the banking fold Banking service penetration defined in the broadest sense is lowest in Peru (Table 26) among all the countries analyzed, at just 40.9% of the population, with inevitable implications for penetration of the various products, which is very low. In fact, penetration of electronic payment options is below 25% in all instances. Debit cards are the most widely-held instrument, at just 23.4% of all Peruvians, with only 40% of card holders using them weekly. Cash is the standard form of payment for the various product classes; with electronic payment methods used only very sporadically (8% use credit cards to buy electronics and home appliances, while 6.5% use them to buy clothes). As we saw in Mexico, usage of the various payment channels mirrors the lack of financial formality, with all formal channels used scantly in general. Channels are used for specific purposes, again as in Mexico. The use of mobile banking among mobile Internet users is low (22.9% visit the banks’ websites or use their applications monthly), while under 17% of smartphone holders use their phones to track their accounts. E-commerce is also limited: less than 18% of Internet users have ever purchased anything online. When they do shop online, Peruvians prefer to use their credit cards, debit cards and PayPal.

86

Table 26: Payments snapshot in Peru



Banked

40.9%

Unbanked

59.1%

Debit card

23.4%

Charge card

15.8%

Credit card

10.1%




Charge card

26.9% (n=63)

Credit card

14.3% (n=40)

Check / checkbook

28.4% (n=8)

Store card

20.7% (n=68)

Prepaid card

42.3% (n=22)


30.8%

Money lodging / deposits, bank branches

46.1%


41.2%

Account tracking, bank branches

32.3% (n=158)3

Intra- and interbank transfers, bank branches

23.9%


15.2%


Percentage of Internet users Percentage of online shoppers


5.5% 40.5% (n=94)

Account tracking

Use of Internet

17.1%

Debit card



2.1%

17.9% (n=305)4 22.9% (n=42)5 16.9% (n=147)6 67.7%1 17.8% (n=271)7

Credit card

27.0% (n=48)8

PayPal

23.8% (n=48)8



87



Dominican Republic: average penetration of banking services; very reduced use of payment instruments Penetration of banking services in the Dominican Republic is average, at 48.2% of the population, thanks to the incidence of savings accounts, which are held by 40.2% of the population, as illustrated in Table 27. However, penetration of payment instruments is significantly lower, at under 20% for the various card classes. Their usage is similarly low (weekly usage is under 33.5% for debit card holders and 44.7% for credit card holders). These results imply that there is significant scope for development of electronic payment instruments. Cash continues to dominate the payments scene. Due to this usage pattern and the relatively high incidence of savings accounts, bank branches play a more prominent role than in other countries, constituting the main channel for lodging money, withdrawing cash, making transfers and tracking account movements. Only utilities and other recurring payments are paid for more commonly in stores. Access to mobile Internet services is very limited (underpinned by lower penetration of mobile phones relative to other countries), resulting in only testimonial use of the banks’ mobile banking websites and applications. However, the use of mobile handsets to track account movements is the highest of any country (26.1% do so monthly) thanks again to the relatively high incidence of savings accounts. Some 23.6% of Internet users claim to have shopped online at some point even though the percentage of Internet users is the lowest among the universe of countries analyzed (53.6%). Notably, beyond the fact that 40.3% of online shoppers use their own credit cards to pay, another 17.3% use other people’s cards.

88

Table 27: Payments snapshot in the Dominican Republic





Banked

48.7%

Unbanked

51.8%

Debit card

18.3%

Charge card

16.7%

Credit card

4.3%

Check / checkbook

4.3%

Store card

6.0%

Prepaid card

5.9%

Debit card

33.5% (n=73)

Charge card

44.7% (n=67)

Credit card

30.4% (n=17)

Check / checkbook

11.9% (n=17)

Store card

24.3% (n=24)

Prepaid card

25.5% (n=23)

Cash withdrawals, bank branches

29.2%

Money lodging / deposits, bank branches

45.3%


56.5%

Account tracking, bank branches Intra- and interbank transfers, bank branches Collection of state payments/subsidies, bank branches Use of mobile Internet


Use of banking website or app Account tracking

Use of Internet

Percentage of Internet users Percentage of online shoppers


42.1% (n=189)3 8.2% 4.4% 17.9% (n=294)4 28.8% (n=39)5 26.1% (n=162)6 53.6%1 18.5% (n=214)7

Personal credit cards

40.3% (n=40)8

Third-party credit cards

17.8% (n=40)8

1 Total base = 400. 2 Base = Population holding this payment instrument (indicated below each percentage). 3 Base = Banked population. 4 Base = Population with mobile phones. 5 Base = Population with mobile phones that access Internet from their handsets and hold an account and/or card. 6 Base = Population with mobile phones and an account and/or card (< 30 cases, insufficient base). 7 Base = Population of Internet users (accessing Internet at least once a month). 8 Base = Population that has made an online purchase at some stage.


89



Spain: intensive use of payment instruments and higher penetration of online banking Spain’s profile (Table 28) is unique:not only is virtually the entire population banked but penetration of the various products and instruments is higher than in Latin America in nearly all cases. Penetration of credit cards (configured for installments/revolving credit) is lower than in other countries88, confirming Spaniards’ preference for the so-called ‘full payment’ options (immediate or monthly charge card formats). Nevertheless, the use of credit cards is currently above the trend line in Spain, probably due to the search for greater payment flexibility in times of crisis. Debit cards are used most extensively to pay for food and household items, while credit cards are used most frequently to buy clothes and electronics goods and to book travel arrangements. The use of electronic payment options has spiked since the crisis, thanks to the ability to control spending with these instruments. Of all the countries analyzed, Spain is unquestionably the most developed market. Consumers have pared back their use of bank branches for depositing money and paying for utilities and other regular payments thanks to the widespread use of standing orders and they use the banks’ user-friendly websites to transfer money and track their accounts, saving time in the process. The use of mobile handsets to visit the banks websites or use their mobile banking applications is relatively high: 36% of mobile Internet users avail of these services at least once a month. Coupled with Brazil, Spain presents the highest percentage of Internet users to have shopped online (62.6%). Online shoppers mostly use debit cards (39.4%) and credit cards (33.6%) to pay for their purchases, followed at a fair distance by PayPal (19.8%).

88 As noted earlier, the fact that payment can be deferred occasionally with certain charge cards in Spain means that some users may not be sure of the differences between the two categories.

90

Table 28: Payments snapshot in Spain



Banked Unbanked

2.6%

Debit card

65.4%

Charge card

30.7%

Credit card

16.0%



46.4% (n=123)

Credit card

61.1% (n=64)

Check / checkbook

6.4% (n=33) 21.9% (n=175)

Prepaid card

26.5% (n=8)


71.7%


59.1%


80.8%

Account tracking, ATMs

42.3% (n=390)3

Intra- and interbank transfers, ATMs

24.0%


21.5%




2.1%

Charge card

Account tracking

Use of Internet

43.8%

67.8% (n=262)



8.2%

Debit card

Store card


97.4%

23.1% (n=382)4 36.0% (n=97)5 8.5% (n=376)6 84.6%1


62.6 % (n=330)7

Debit card

39.4% (n=207)8

Credit card

33.6% (n=207)8



91



10. Tecnocom Indicators and Matrices Tecnocom Indicator of demand for electronic payment methods

SPOTLIGHT 12: UTILITY AND METHODOLOGY With a view to creating a metric that enables users to directly compare the level of development of electronic payment methods in the various countries, we have designed a synthetic indicator that encompasses what we deem to be the key variables. The indicator covers a scale from 0 to 100 in which all the variables used would sum to 100 in the event of obtaining the highest score on each. Each variable was assigned a different weighting as a function of its relevance to sector development. The indicator was built from the average score obtained by those surveyed in each country. More specifically, the total score per person polled is the outcome of the sum of the following variables and weighting factors: 1) Penetration of electronic payment methods Those polled with any of the following payment instruments: debit card, charge card, credit card, store card, prepaid card: 65 points 2) Monthly use of electronic payment methods Those polled who use any of the above payment instruments at least once a month: 25 points 3) Mobile payments Those polled who have made a mobile payment at some stage: 5 points 4) Online shopping Those polled who have shopped online at some stage: 5 points The weighting factors were allocated in order to assign greater importance to the fact of holding payment instruments (as this factor determines their usage) and secondary importance to usage intensity. Mobile payments and online shopping were considered complementary variables of potential value in the future as their usage becomes more widespread.

Results of the Tecnocom Indicator of demand for electronic payment instruments As shown in Chart 25, Spain and Brazil, both with over 70 points, are the highest-scoring countries, standing out on payment option penetration and usage and on the incidence of online shopping. Based on our analysis we can conclude that these countries are advanced in terms of use of payment services, albeit presenting further scope for development (particularly in terms of online and mobile banking, use of mobile payments and frequency of card usage). Chile and Colombia scored significantly (52.33 and 47.34 points, respectively), driven particularly to the broad range of payment methods (recall the notable incidence of store cards in Chile) and high monthly usage of debit cards. In short, the situation in these countries is positive but there is scope for increasing penetration of electronic payment instruments across sizeable segments of the population. Mexico scores above the 40-mark, mainly supported by the debit card. Peru and the Dominican Republic, where penetration of payment methods is lower, obtain the lowest scores.

92

Chart 25: Tecnocom Indicator of demand for electronic payment methods

75.45

71.24 52.33

Brazil

Chile

47.34

Colombia

40.32

Mexico

33.02

Peru

28.01

Dominican Rep.

Spain



Matrix comparing immediate payment vs. deferred settlement

SPOTLIGHT 13: UTILITY AND METHODOLOGY This matrix maps the use of cards that imply immediate settlement (debit and prepaid) against cards that imply payment on credit (monthly charge cards, revolving credit cards, store cards). Specifically, for each payment category we divide the number of individuals using one or more of the products included in this segment with a daily, weekly or monthly frequency by the total population size. In short, it represents the percentage of individuals in a country to have used at least one of the products considered at least once a month for each payment category. As a result, it provides a reasonable proxy of each country’s behavior and preference for each of the respective payment modules. Note however, that this analysis does not tell us anything with respect to transaction frequency or volumes.

Results of the comparative payment matrix The results of this analysis confirm the existence of a diversity of attitudes towards the two payment categories (Chart 26). Brazil uses both payment modules extensively, but stands out for its use of credit, for which the reading is even higher than the marked Spanish preference for immediate settlement, demonstrating the Brazilians’ patent preference for credit. Chile and Colombia are once again paired in this analysis, displaying very similar and balanced usage percentages for both formats, the only difference being a slight inclination towards payment on credit in Chile versus immediate settlement in Colombia. In Mexico, where usage of both modules is somewhat lower, the analysis reveals a slight preference for immediate settlement, although one in every five Mexicans pays on credit. Peru and the Dominican Republic, where card penetration is lower than in the other countries, inevitably present lower usage patterns. Nevertheless, Peru shows balanced use of immediate settlement versus credit options, while in the Dominican Republic the analysis indicates a preference for payment on credit.

93



Spain, in keeping with other findings, tops the ranking in terms of use of immediate settlement cards. The results show a clear cultural tradition and preference for this form of payment, which is complemented by proportionately low use of deferred and revolving credit payments. Next to Brazil, Spain’s credit payment statistics are nevertheless very significant so that we can conclude that this form of payment is not excluded of Spaniards’ payment habits. Chart 26: Matrix comparing immediate payment vs. deferred settlement 70

Deferred settlement

60

Brazil

50 40

Spain Chile

30 Colombia

20 Dominican Rep.

10

Per

Mexico

0 0

10

20

30 Immediate settlement



94

40

50

60

11. Conclusions regarding demand for electronic payment methods Differing payment instrument scenarios, different growth paths The countries analyzed reveal significantly different percentages of financial formality and penetration and use of banking products. Moreover, each market is structured differently in terms of the role of the various payment channels (presence, functionality), the various payment instruments available, Internet usage, the use of online banking platforms, the existence of mobile payment services, socio-demographic factors, etc. Therefore, we cannot talk of any single usage pattern but rather different scenarios in which the players, payment instruments and payment habits all vary. This diversity suggests that each country will pursue its own path in the future:

• Brazil: The current situation in Brazil is shaped by the high level of financial formality (well above the rest of the Latin American countries), a marked preference for the use of revolving credit and notable dominance of ATMs for performance of the main banking activities. Brazil also stands out in terms of development of e-commerce, with the large majority of Internet users have already made an online purchase. Also noteworthy is the significant use of the bloqueto de cobrança, which is unique to Brazil and for which the take-up among the Brazilians has been very strong. All these features point to consumer habits in search of user-friendliness in terms of payments and banking activities, boding for a continued natural shift towards these instruments and more widespread adoption of mobile payments and online shopping in the medium term.

• Chile and Colombia: Both countries show relatively high penetration of banking services and both exhibit a preference for debit cards, coupled with certain entrenched products such as store cards and checks. Usage of payment channels is correlated with specific activities, although Colombia exhibits a stronger preference for traditional channels (branches and ATMs). Chileans and Colombians are using online banking platforms to track their account balances and movements, while Chileans use these platforms for transacting more frequently. A significant number of Internet users purchases online, particularly in Chile, and debit and credit cards are used most frequently to pay for these purchases. The likely outlook is for continued development of a market shaped by multiple competing and growing payment options.

• Mexico: Although penetration of banking services is relatively low in Mexico, use of the various payment options can be categorized as intermediate. This is underpinned by the relatively high incidence of debit cards, which are held by more than one-third of the population. However, credit card penetration is low. Mexicans use multiple channels to perform their banking activities, with branches standing out for depositing, ATMs for cash withdrawals and online banking platforms for account tracking. E-commerce is still only incipient despite the fact that most of the population has Internet access. Mexico’s challenge is to deliver growth in the various payment options, particularly credit instruments, in terms of both penetration and usage.

95



• Dominican Republic and Peru: The penetration of formal banking services is average (in the Dominican Republic, thanks to the high penetration of savings accounts) to low (Peru). It is not surprising therefore that usage of electronic payment methods is low, albeit varying significantly by instrument. In Peru, penetration of store credit cards is relatively higher. Bank branches and merchants (specifically for payments) are the most widely used banking channels. The challenge faced in these markets is to exploit the opportunity implicit in the significant scope for building electronic payment methods into citizen’s everyday purchasing habits.

• Spain: Virtually the entire population is banked and use of the various payment instruments, particularly charge cards, is extensive. Online banking platforms are used prominently for account tracking and transfers. Most Internet users are online shoppers and penetration of mobile banking (via online browsing or smart phone applications) is meaningful. The lack of a mobile payments platform offering a well-defined value proposition, the abundance of alternative payment methods and, possibly, the relatively older population, mean that citizen interest in mobile payment options remains limited to date. However, the introduction of a platform perceived to overcome the hurdles identified (security above all) that makes a compelling case for its advantages could prompt more users to adopt the model considering the extensive take-up for electronic payment methods in Spain.

How to boost penetration of banking services: cultural capital and perceived value of payment services The factors that best explain the penetration of banking services relate to education levels (populations with low education levels tend to be less banked), access to computers and Internet, gender and social segment. Higher education standards, coupled with increased access to computing equipment and the Internet play a role long term in boosting penetration of banking services and, as a natural extension thereof, more intense use of electronic payment methods. The perceived lack of a need for cards due to low income levels on the part of the unbanked constitutes the main reason reported for not holding cards, while commissions and fear of uncontrolled spending are the main reasons given by bank account holders without cards. Development of far-reaching campaigns targeted at these segments of the population, spearheaded by the various governments and leading industry players and designed to disseminate the importance and advantages of the various banking products, is key to significantly boosting penetration in the countries studied. Moreover, companies, in so far as they pay salaries, have a meaningful role to play in boosting financial formality. There is also room for public policy to play a prominent part by passing legislation requiring salaries to be paid into bank accounts. As seen in chapter 4, a good example of the scope for public policy involvement is the Income Payment Banking Act in Peru passed in 2010, which allows workers to choose freely which bank they wish to have their salaries paid into.

96

The opportunity: mobile payments and online shopping Beyond the varying penetration levels by country, what we have seen is that mobile payment services are more highly valued in countries that already have mobile payment platforms, i.e., the greater familiarity with the service, the more open-minded a country’s citizens. These platforms are perceived as being user-friendly but there are concerns over safety and doubts regarding the platform’s utility. Growth of these platforms is likely to accelerate to the extent that potential users’ concerns are allayed, as is the case in Spain. Online shopping is widespread among the banked (segments of the population that also have greater access to computers and Internet), although the percentage of Internet users to have purchased goods or services online is still below 50% in all countries except for Spain and Brazil. Against this backdrop, it is important to offer a variety of payment methods that cater to the differing user habits in each country. Beyond the entry barriers erected by limited access to payment channels, the unbanked need tailored payment solutions (such as cash payment on delivery) in order to stimulate greater interest in this shopping solution. At any rate, growth in access to Internet will in itself drive growth in the number of online shoppers in all countries.

97

Madrid Josefa Valcárcel, 26, 28027 Madrid Tlf: (+34) 914 368 100 / 901 900 900 Att. Comercial. 902 135 555 Fax: (+34) 914 368 151 [email protected] www.tecnocom.es