|
Card payment systems in Latin America are on the verge of maturity, says analyst
(InfoAmericas (Pan Regional) Via Thomson Dialog NewsEdge)Interchange fees were once a minor issue in the background of the payment card market. Recently, however, they have made headlines in Latin America as they have attracted the attention of policy makers, concerned about their effects on countries' economic development and growth. Merchant associations say that interchange fees unduly burden vendors, and undermine their competitiveness, while generating unwarranted profits for banks and payment processors. Proponents of change now have the ear of left-leaning governments throughout the region, and regulation of interchange fees is under consideration in some countries. For their part, banks and other system operators argue that government intervention would upset the balance of the market and impede development of electronic payment systems, which stimulate economic growth. The dynamics of electronic payment systems will be profoundly affected by the outcome of this debate. The Purpose of Interchange Fees Interchange fees are designed to balance costs and benefits between the issuing and acquiring sides of the electronic payments system. When it pays a merchant for a credit card transaction, the acquiring bank deducts a discount. A portion of this discount, the interchange fee, goes to the cardholder's issuing bank or financial institution. Ideally, interchange fees should establish equilibrium between the number of cards in force and the number of POS terminals, because they allow issuers to offer reward programs and other incentives to attract new cardholders.
Electronic payment instruments were introduced throughout the region in the 1990s in an unregulated environment and banks and card associations were able to set high transaction fees. Since then, regulators have begun to address this issue and in some countries interchange fees are now seen as a matter of national policy. Central banks and antitrust authorities are concerned mainly about the fact that interchange fees are generally passed on to consumers, raising prices and potentially hindering growth.
The Case for Regulation In Mexico, the central bank has acted to influence interchange fees without actually imposing regulations. These fees are set by the Interchange Rates Committee of the Mexican Banker's Association (ABM), created in 2005. The Central Bank has observer status on this committee, and exerts influence by suasion rather than by regulation. The central bank's goal is to extend the electronic payment network, and it sees greater transparency and reduced barriers to entry as key strategies. This approach has been successful, with interchange fees falling steadily, both through competitive reductions by the banks and through negotiations with merchant associations. While Mexico's approach is seen as a model for other parts of the region, historically, large and medium-sized merchants have benefited most from reductions in transactions fees, because they have the negotiating clout to demand concessions from the banks. Smaller merchants tend to pay higher rates, and one objective of regulation is to level the playing field somewhat. In Australia, for example, while the actual allocation of transaction fees among different types of merchant was left to the market, regulations mandated a decrease of more than 40%, and included measures to ensure that reductions reached merchants of all sizes. The Case for a Free Market Opponents of regulation point out that although bargaining power plays a role in negotiating discount rates, economies of scale affect operating costs, which is why merchants with lower volumes of card sales volume should pay more. While it is true that small merchant discount rates in Mexico and Argentina are among the highest in the world, card purchases currently account for less than 6% of sales. Moreover, while small merchants do face difficulty absorbing transaction fees, the fact that card transactions represent such a small proportion of their sales mitigates the negative effect.
While high transaction fees represent a barrier to the growth of electronic payments by smaller merchants, credit card penetration has been growing at nearly 20% annually in some Latin American countries over the past five years, and has now reached 40% in Brazil and Argentina. Brazil, in particular, has seen steady growth in the number of merchant card terminals, reaching one half-million affiliated merchants in 2004.
In Mexico, the ABM has addressed the problem of expanding the electronic payments system to smaller merchants with its "Terminalization Fund", which aims to extend the POS network by 300,000 units placed in small and medium-sized businesses. This is a voluntary initiative, and is taking longer to implement than originally conceived. Delays are attributed to fears that future regulation could jeopardize these investments, by compromising acquirers' ability to recover their investments in electronic payment technologies.
Building payment card infrastructure is an expensive endeavor. In Brazil's state of Sao Paulo alone, more than $55 million was spent on POS terminal, ATM and network technologies between 2004 and 2006. Further investment is required to keep the momentum going, and as in Mexico, potential regulations are seen as an obstacle to the payment system reaching maturity.
Finding a Balance In countries such as Australia, where payment systems are much more developed, a certain level of regulation is argued to be beneficial. There is little evidence to support this, however, and regulation has failed on a number of fronts. For example, transaction fee reductions were imposed on bank cards, leaving a loophole whereby private label cards and non-bank cards such as American Express were not affected. Furthermore, the level of fees established by the government was based on what the government and merchant associations felt was viable. This did not provide for the maintenance, much less the expansion, of the electronic payment infrastructure. Issuers and acquirers will be forced to compensate by charging fees to merchants and end users through other means, such as higher card fees and interest rates.
South Korea is an example in the other extreme. The government not only left transaction fees to the market, it also made the use of credit cards mandatory for transactions over $300. This created economies of scale that allowed the payment system to expand rapidly, adding as much as one percentage point of annual GDP growth between 2000 and 2003. One motivation for governments to promote the use of electronic payments systems is to divert activity from the informal economy into the mainstream financial system. The informal economy in South Korea is estimated to have shrunk by 15% since 2001, mainly as a result of the expansion of the electronic payments system. Initial results in Argentina point in the same direction, albeit with a more modest reduction of 4%.
Conclusion
Card payment systems in Latin America are on the verge of maturity and will soon achieve the economies of scale needed for sustained growth. This situation is partly the result of ambitious efforts by issuers to extend card penetration to the middle and lower classes, which has been difficult in an environment where credit rating systems are poorly developed. Acquirers have also played their part by extending POS terminal penetration to an ever-growing number of merchants. In this setting, merchant discount rates and the interchange fees they support are necessary to ensure adequate return on investment and to support maintenance of the growing payments infrastructure. Banks, card organizations and merchant acquirers are therefore the best judges of appropriate levels for transaction fees. Market forces are already pushing these rates down in Colombia, Brazil and Mexico by proportions expected to reach 15-to-20% by the end of 2006.
Merchant associations are concerned that the benefits of these reductions will be reaped mostly by larger merchants such as supermarkets and department stores, because they enjoy the negotiating power that comes from a high volume of credit card transactions. Nonetheless, as the market has matured, smaller merchants have gained negotiating power in many sectors. For example, although travel agents are generally small establishments, they are relatively intensive users of credit cards, and are good candidates to participate in rate reductions. As card payments become the preferred payment method in other merchant categories, economies of scale will support similar drops in transaction fees. The market can be expected to accomplish such reductions, because the objective of card issuers is to expand the number of cards in force and the volume of card transactions, not to earn revenue from fees imposed on merchants. By balancing costs and benefits between the issuing and acquiring sides of the market, interchange fees help to drive expansion of the electronic payments system. This growth is in the public interest because it increases GDP growth and helps to curtail the operation of the informal economy. Government regulation of interchange fees can only interfere with capturing these benefits. 2006 NoticiasFinancieras - InfoAmericas - All rights reserved
[ Back To TMCnet.com's Homepage ]
|
Find Solutions for Enterprises, SMBs & Service Providers at the INTERNET TELEPHONY Conference and EXPO West, September 16-18, 2008. Los Angeles, California.
