Assessing payments systems in Latin America An Economist Intelligence Unit white paper sponsored by Visa International Assessing payments systems in Latin America Preface Assessing payments systems in Latin America is an Economist Intelligence Unit white paper, sponsored by Visa International. ● The Economist Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence Unit’s editorial team gathered the data, conducted the interviews and wrote the report. The author of the report is Ken Waldie. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. ● Our research drew on a wide range of published sources, both government and private sector. In addition, we conducted in-depth interviews with government officials and senior executives at a number of financial services companies in Latin America. Our thanks are due to all the interviewees for their time and insights. May 2005 © The Economist Intelligence Unit 2005 1 Assessing payments systems in Latin America Contents Executive summary 4 Brazil 17 The financial sector 17 Electronic payments systems 7 Governing institutions 17 Electronic payment products 7 Banks 17 Conventional payment cards 8 Clearinghouse systems 18 Smart cards 8 Electronic payment products 18 Stored value cards 9 Credit cards 18 Internet-based Payments 9 Debit cards 18 Payment systems infrastructure 9 Smart cards and pre-paid cards 19 Clearinghouse systems 9 Direct credits and debits 19 Card networks 10 Strengths and opportunities 19 International comparisons 10 Case study: Visa Vale 20 Outlook 21 Electronic payments systems in Latin America 11 Polarized distribution of income 11 Chile 23 Importance of family remittances 11 The financial sector 23 Financial sector restructuring 12 Governing institutions 23 The evolution of payments systems 12 Banks 23 Clearinghouse systems 23 Argentina 13 Electronic payment products 24 The financial sector 13 Credit cards 24 Governing institutions 13 Debit cards 24 Banks 13 Smart cards and pre-paid ards 24 Clearinghouse systems 13 Direct credits and debits 25 Electronic payment products 14 Strengths and opportunities 25 Credit cards 14 Case study: E-commerce 26 Debit cards 14 Outlook 26 Direct credits and debits 15 Case study: VAT rebates 15 Strengths and opportunities 16 Outlook 16 2© The Economist Intelligence Unit 2005 Assessing payments systems in Latin America Colombia 28 Venezuela 38 The Colombian financial sector 28 The Venezuelan financial sector 38 Governing institutions 28 Governance institutions 38 Banks 28 Banks 38 Clearinghouse systems 28 Clearinghouse systems 39 Electronic payment products 29 Electronic payment products 39 Credit cards 30 Case study: Entry-level credit cards 40 Debit cards 30 Credit cards 40 Direct credits and debits 30 Debit cards 40 Strengths and opportunities 30 Smart cards and pre-paid cards 41 Case study: Family remittances 31 Strengths and opportunities 41 Outlook 31 Outlook 42 Mexico 33 Conclusion 43 The financial sector 33 Benefits to stakeholders 43 Governing institutions 33 Macroeconomic benefits 45 Banks 33 Obstacles 45 Clearinghouse systems 33 Opportunities 46 Electronic payment products 34 Credit cards 34 Appendix: Clearinghouse systems 47 Debit cards 35 Argentina 47 Smart cards and pre-paid cards 35 Brazil 48 Direct credits and debits 35 Chile 48 Strengths and opportunities 35 Colombia 49 Case study: Vida Bancomer 36 Mexico 49 Outlook 37 Venezuela 50 © The Economist Intelligence Unit 2005 3 Assessing payments systems in Latin America Executive summary atin American electronic payments systems have based smart cards that have recently been introduced been substantially improved over the past several in some markets. They also include stored value cards, Lyears, as the underlying financial infrastructure such as “electronic purses", as well as Internet-based has been modernised. This has led to greater payments systems such as direct debits and direct penetration of electronic payment products in both credits. Electronic payments systems also include the the consumer and business segments. In particular, clearinghouses and other arrangements used to settle debit cards have helped to increase overall banking payments among financial institutions. penetration, partly because of the growing popularity Clearinghouse systems have undergone significant of payroll cards and card-based products tailored for modernisation throughout Latin America over the past family remittances. Improved risk assessment several years, leading to reduced systemic risk and systems and innovative new credit card products have greater clearing and settlement efficiency. These also facilitated the extension of credit to lower- technological upgrades underlie important income consumers and small businesses. The improvements in retail payment products, particularly modernised infrastructure has also led to increased card-based and Internet-based products. integration of electronic payment products, such as Enhancements to these products over the past few links between card products and direct funds years have resulted in greater convenience and transfers. These improvements have generated reduced costs for buyers and sellers as well as important benefits for all types of stakeholders, increased security, greater international mobility and including consumers, merchants, financial increased economic growth. institutions and governments. This white paper assesses the recent evolution and current state of the electronic payments systems in six Assessing payments systems important financial markets in Latin America. One In addition to recent financial system modernisations, chapter for each country describes the payments Latin American countries share other common systems and products in the market and assesses their characteristics that have shaped their financial strengths as well as opportunities for further sectors, including polarised distributions of income improvements. and large volumes of family remittances. Nonetheless, the availability and effectiveness of particular Strengths and opportunities electronic payment products varies substantially from The modernisation of electronic payments systems has country to country, because of important differences led to improved efficiency, reduced risks and the in the economic, demographic and cultural introduction of new and improved products environment. What works in one country is not throughout Latin America. This modernisation process necessarily appropriate for others. is still in progress. Opportunities for further Electronic payment products currently used in Latin improvements vary from country to country, as the America include credit and debit cards, as well as chip- following examples illustrate. 4© The Economist Intelligence Unit 2005 Assessing payments systems in Latin America In Brazil, the new National Payments System (SPB) products, such initiatives will allow financial services has already been judged a major success, even though providers more fully to exploit the newly modernised it is not yet fully implemented. Brazil also has by far payments infrastructure in order to generate greater the highest debit card penetration in the region. But benefits for a larger number of people. the average value of debit card transactions remains low, and financial authorities have recognised Benefits of electronic payments systems remaining opportunities for improving efficiency, Throughout the region, benefits from modernised including discouraging the use of cheques and payments systems have accrued to every type of increasing the inter-operability of the ATM (automatic stakeholder, whereas economic benefits such as faster teller machine) network. economic growth have accrued to society as a whole. Mexico provides another example. The country’s The improved payments infrastructure is mostly banking sector is now on a solid footing following a transparent to consumers, and the immediate benefits major modernisation of the payments infrastructure are most apparent to financial institutions and and the introduction of new products, including smart governments. From the perspective of buyers and cards. It has also made substantial progress in sellers, the benefits are seen mainly in the form of new promoting the introduction of payroll debit cards. In and innovative payment products and services, addition, the government has recognised that payroll especially card-based products and online banking. cards are used mainly at ATMs, providing cash to fuel For customers, the most important benefits are a the informal economy, and it is now addressing this wider range of payment options, increased problem. convenience, greater personal safety and security, and enhanced financial management capabilities. The Outlook latter feature is particularly important for corporate Financial authorities throughout the region have users. Many lower-income customers have also gained recognised the need for further expansion of access to banking and credit for the first time, as new electronic payments systems, but they face a number products have been introduced. of obstacles in advancing this goal. The hurdles Merchants have benefited from increased sales by include low banking penetration, entrenched offering payment options that feature convenience consumer habits of using cheques and opportunities (debit cards) and liquidity (credit cards). They also to avoid taxes through the use of cash. Fortunately, gain secure transaction processing and