Assessing Payments Systems in Latin America

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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

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

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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

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.

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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 quick access to governments and financial institutions have definitive payment, as well as reduced costs and developed a number of tools for overcoming these improved theft and fraud protection. obstacles and steady progress is expected over the Banks have benefited through more efficient next several years. payment processing operations, which have lowered Examples of these tools include leading by example costs and reduced risks. They can also offer new and through their own use of electronic payment products, innovative products to customers, including entry- encouraging or mandating the use of payroll cards, level credit products for previously unbanked lower- creating disincentives for cheque use, offering value- income customers. added tax (VAT) discounts and promoting emerging Governments — both as providers of services and as technologies that support the payments guardians of the public interest — are perhaps the infrastructure. Combined with increasing consumer biggest beneficiaries of the recent payments systems familiarity and comfort with electronic payment modernisations. The large reductions in systemic risk

that have been achieved greatly enhance the ability of electronic payment products increases the velocity of central banks to manage national financial systems, money and reduces friction in the economy, driving and this tends to improve country risk ratings. faster economic growth. One recent study concluded Governments have themselves become major users of that an electronic payments system could potentially electronic payments systems, increasing their own generate a 1% increase in annual real GDP growth. efficiency as well as transparency. Electronic payment products have also helped to draw Governments have also benefited from the people and companies into the formal economy and to macroeconomic impacts of electronic payments capture a larger share of family remittances within the systems. The availability of faster, cheaper and safer banking system.

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Electronic payments systems

he need to exchange value is as old as civilisation universities, government agencies and healthcare itself, and the concept of “money” has evolved facilities are also expanding their use of card-based Tover the millennia. Gold, silver and other payment products. precious objects gave way to paper money backed by The growing use of these payments systems has gold at the beginning in the 17th century. Continued generated numerous benefits, including convenience evolution during the 20th century ushered in the and reduced costs for buyers and sellers, as well as present system where paper currency and bank accelerated economic growth, increased security and account deposits are money because they are backed greater international mobility. In spite of predictions by governments. In the context of this history, “plastic that electronic payments systems would ultimately money” and “electronic money” are very recent lead to a “cashless society”, people around the world innovations. continue to use currency. In fact, plastic cards are Credit cards issued by banks and retailers have been playing a growing role in the cash economy through used around the world since the 1950s. Over the ATMs and cash-back terminals, which enable following decade, global credit card organisations like consumers to carry smaller amounts. Visa and MasterCard broadened merchant acceptance This chapter sets the stage for an assessment of by consolidating brands. This set the stage for the first Latin American electronic payments systems by electronic payments systems in the early 1970s, which describing the types of product in use across the introduced magnetic-strip credit cards and automated region. The next chapter identifies a number of unique approval of credit card transactions. The first characteristics of Latin American countries that shape automatic teller machines (ATMs) and debit cards the way that payment products are used. Subsequent appeared in the 1980s, completing the integration of chapters assess the payments systems in place in the paper and plastic money. Credit and debit cards major Latin American markets. These chapters provide remain the most important non-cash means of a broad overview of the operation of the settlement payment for retail transactions, but other systems in each country, but they exclude a number of technologies such as Internet-based direct debits and technical issues such as central bank liquidity controls credits have appeared over the past few years. and payment product pricing, which are too complex to Electronic payments enable novel new products that be treated here. The final chapter offers brief move beyond simple payment to support ongoing conclusions about the benefits and future development relationships with customers. of electronic payment products in the region. Electronic payments systems have affected nearly every sector of the global economy, gradually Electronic payment products expanding from their origins at the retail point of sale The many different electronic payment products in use to enable payments by phone or Internet, and to such in Latin America can be distinguished both by their diverse applications as pay phones, toll roads and physical format and by the source of the value that public transit. Non-commercial entities such as they convey. Payment cards can acquire value from

credit provided by the card issuer, from access to loaded and reloaded from a bank account over the customer funds on deposit, or from value transferred Internet. For example, Visa’s Buxx Card is a parent- from these sources and stored on the card itself. Non- controlled prepaid debit card for teenagers. Other card electronic payment products such as Internet- special-purpose debit cards include those used for based transfers enhance the usefulness of card payroll and the payment of social security benefits. products by linking them to each other and by providing new interfaces to financial systems. Smart cards The development of smart card technology in the mid- Conventional payment cards 1980s enabled the addition of new applications for Credit and charge cards payment cards, using a microprocessor or memory The most widely used credit cards are those issued by chip embedded in the card. In addition to the banks and other financial institutions under global traditional debit and credit functionality, applications brand names established by card organisations. The include the ability to make transactions over the leading brands are Visa, MasterCard, American Internet using a smart card reader attached to a Express, Discover and Diners Club. Many retailers issue personal computer. The most advanced of these their own credit cards for use in their stores. systems are multi-application Java implementations Cards that require the balance to be paid in full that can also download custom applications. every month are referred to as charge cards, whereas Advantages of these cards compared with magnetic- credit cards extend revolving credit. Either way, cards stripe cards include robust encrypted security and the with high spending limits convey prestige and are ability to store dynamic data such as purchase details given distinctive names and often colours. Credit card for advanced customer loyalty systems. products are also differentiated by annual fees, reward points, promotions and cardholder benefits such as Contactless smart cards insurance. Card organisations also compete on the “Contactless” smart cards are widely used for personal basis of the breadth of merchant acceptance. identification and building access, but their use in There are a variety of special-purpose credit and payment cards is fairly recent. They operate by charge cards, including procurement cards used by exchanging radio-frequency signals with a nearby corporations and government entities, and incentive transponder to transfer information. Contactless cards. Affinity cards are bank-issued credit cards that stored value cards have been rolled out with are co-branded by sports teams, universities and other considerable success in a few markets but usually as a organisations that receive payments based on card single-purpose card, such as those recently introduced usage. in Santiago’s transit system. These cards have particular value for transit systems because they Debit cards increase average vehicle speed and reduce fuel With the advent of ATMs, banks issued “client cards” to consumption and pollution by shortening the time allow customers to access their accounts. In many that vehicles are stopped. They can also increase countries they later formed networks to allow inter- ridership by enabling more flexible pricing schemes. operability. Debit cards expand on the ATM function to General-purpose contactless payment cards have provide a direct means of payment to merchants who undergone market trials, and in March 2005 Visa and are equipped with terminals. There are also prepaid MasterCard announced an agreement to set a common debit cards that access a separate account that can be standard to ensure inter-operability of their products.

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Stored value cards Payments systems infrastructure Stored value cards are smart cards that record an account balance loaded from another payments The payments clearance systems in use in the major system and then deduct purchases from that balance, Latin American markets are described separately for without the need for remote validation. This makes each country in the following chapters. To avoid them particularly useful for micro payments where repetition and to clarify terminology, this section communications costs are high relative to the value of provides an overview of elements that are common to the transaction. Instant validation is another benefit. nearly all systems. These cards are often called e-purses, and they can be either disposable or rechargeable. Disposable cards Clearinghouse systems are typically single-purpose types such as those used Every national financial system has a payment clearing in pay phones. General-purpose stored value cards can system known as an Automated Clearing House (ACH). be recharged from an ATM or similar terminal and Most countries have at least two of these systems. sometimes over the Internet. There are a variety of Large-Value Transfer Systems (LVTS) process special-purpose versions of the stored value card, such electronic funds transfers among financial as gift cards and travel cards. institutions. Participants must maintain clearing accounts with their central bank and must take Internet-based payments overnight loans to settle all transactions by the end of The rapid increase in Internet penetration over the each day. The most modern of these systems is known past ten years has enabled a variety of new electronic as a Real Time Gross Settlement (RTGS) system payments systems. Bank-issued payment cards that because transactions are settled immediately and leveraged existing authorisation/clearing/settlement individually. Some countries continue to use large- systems paved the way for new systems that permit value net settlement systems where net balances are direct credits and debits between bank accounts in settled overnight. This reduces the investment in many markets. When they were first introduced, direct technology, but creates a higher level of systemic risk. debits worked only within individual banks and this Participating institutions communicate, in the main, limited their use to vendors such as utility companies using protocols developed by the Society for that were large enough to maintain accounts at all of Worldwide Interbank Financial Telecommunication the banks used by their customers. For the same (SWIFT), but some have their own proprietary reason, direct credits were used mainly for regular interbank systems. receipts such as payroll deposits. New interbank Smaller-value interbank transactions including electronic networks in many markets now allow ad hoc both paper (cheques, drafts, money orders and customer-initiated direct debits and credits that are travellers cheques) and electronic payments (direct either virtually instantaneous or take two to three debit and credit) are cleared among a larger number of days. Nonetheless, card-based payment products participants though an Automated Clearing continue to dominate this segment in terms of market Settlement System (ACSS). Most of these systems clear share. payment items overnight for next-day settlement. Some clearinghouse systems allow participants to “truncate” paper payment instruments, which means that they make an electronic copy of the cheque (image and/or optical character recognition) or other

document and store it, using the electronic document to establish the connection between the POS terminal, for the clearing process. the acquirer and the card organisation’s network. For Internet transactions and other situations where there Card networks is no POS terminal, the merchant’s relationship with Credit and debit card payments are authorised, cleared the acquirer may be mediated by a fifth-party credit and settled through proprietary networks maintained card gateway. by card organisations or their member financial Transactions are generally authorised by the issuer institutions. These networks vary widely with the size in real time, and are usually settled within 24 hours, of the market and the inter-operability of debit when the acquirer electronically transfers funds to the products among banks. The largest global ATM/debit issuer, which updates the customer’s account. card networks are those affiliated with Visa and Practices differ among national systems, some of MasterCard, which operate in parallel to their credit which have separate credit and debit card systems card systems. whereas others use the same processes for both. These are “open schemes” where cards are issued by multiple competing financial institutions in what is International comparisons known as a “four party” system: The availability and effectiveness of particular electronic payment products varies substantially from ● The cardholder is the person or corporation who country to country. This sometimes reflects the uses the payment card to make purchases. relative efficiency of payments systems, but ● The issuer is the bank or non-bank financial differences in the level of concentration of financial corporation that provides the card and collects sectors and the size and geographical density of the payment from the customer. market are just as important. Consumer preferences ● The merchant is the business that accepts the card and cultural traits also play a role. This is just as true in payment for purchases. among developed markets as it is among developing ● The acquirer is the bank that provides the point of countries. sale (POS) terminal to the merchant and deposits These kinds of differences confound direct country- the funds into the merchant’s account. to-country comparisons of electronic payments systems. This means that there is no overall national The card organisation licenses its brand to the issuer system that can be held up as an example for others to and the acquirer, and co-ordinates the follow. What works in one market is not necessarily approval/clearance/settlement system. Most appropriate for others. For this reason, the settlements ultimately occur through national assessments of the electronic payments systems in the clearinghouses, but the global reach of the card countries covered by this white paper are based on organisation systems means that their products can be their efficiency and efficacy in meeting local needs and used nearly anywhere in the world. The acquirer objectives, and not on comparisons with other contracts the services of specialised network providers countries.

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Electronic payments systems in Latin America

he electronic payments systems in use in Latin GDP America have been shaped by the region’s (Per capita GDP international dollars, 2004) financial environment. There are substantial Argentina T 12,910 variations from country to country and there are also a Chile number of common characteristics. The biggest 11,630 Mexico differences concern demographics, because the 9,680 Brazil penetration of the banking system depends partly on 8,540 the age structure and spending power of the Colombia 7,000 population. For example, Mexico, Colombia and Venezuela Venezuela have younger populations than Brazil, Chile 5,790 Source: WDI Online and Argentina. Per capita income (expressed in Note: International Dollars are US$ PPP equivalent, as defined by the World Bank purchasing power parity—PPP—equivalent international dollars) varies even more sharply across the South-east Asia-Pacific region have ratios higher the Latin American region. In 2004 incomes in the six than 10, and the highest is Papua New Guinea, with countries covered by this white paper ranged from 12.6, according to the World Bank. US$5,790 in Venezuela to US$12,840 in Argentina. These sharp divisions among socioeconomic strata The most common regional characteristics are have major implications for the financial services discussed in the following sections. sector. In particular, only about one-half of Latin Americans have any relationship with the banking Polarised distribution of income system. High illiteracy rates in some countries The region’s most important market characteristic is a compound this problem. Low banking penetration in highly polarised distribution of income. A common turn perpetuates the informal economy, undermining measurement of polarisation is the ratio of the shares government efforts to manage the economy and to of national income received by the top and bottom collect taxes. It has also hindered the development of quintiles of population. In the US, the top quintile electronic payment products that could improve receives 9.2 times the income of the bottom quintile, efficiency and drive economic growth. and this is often used as an international benchmark because the US has the most polarised distribution of Importance of family remittances income of the developed countries. Four of the six Another distinguishing characteristic of the Latin countries covered by this white paper, Argentina, American financial environment is the huge inflow of Mexico, Chile and Venezuela, have polarisation ratios remittances from family members working in other of between 18 and 19, roughly double that of the US. countries, mainly the United States. According to The other two countries, Colombia and Brazil, have estimates by the Inter-American Development Bank even higher ratios of 22.9 and 26.4 respectively. By (IADB), remittances into the region in 2004 exceeded contrast, only three of the ten developing countries in foreign direct investment (FDI) with inflows of more

Income distribution Financial sector restructuring Ratio of highest to lowest quintiles (years vary)

Brazil (2001) Most countries in Latin America, like other emerging 26.4 Colombia (1999) economies, endured severe external and internal 22.9 shocks in the late 1990s in the wake of the Mexican Mexico (2000) 19.3 banking crisis of 1994, the Asian financial crisis and Chile (2000) the Russian economic collapse. Severe macroeconomic 18.7 Argentina (2001) imbalances precipitated the collapse of numerous 18.1 banks throughout the region, followed by a series of Venezuela (1998) 17.9 expensive government bail-outs and takeovers. As the Sources: World Bank, WDI Online region’s banking sectors were gradually reprivatised than US$40bn. Remittances have surged since US and consolidated, foreign banking conglomerates regulators allowed financial institutions to accept moved in, bringing with them modern technology and foreign identification to open bank accounts, drawing business methods. At the same time, governments put undocumented workers in the US into the formal new legislative and bank supervisory frameworks in financial system. place and orchestrated financial sector structural The proportion of remittances handled by banks has reforms. In many cases, reforms were mandated by the been estimated at about 20% for the region as a IMF under the terms of international adjustment whole, about one-half of the share of money transfer assistance initiatives. For these reasons, all of the organisations (MTOs). The market is shifting, however, countries discussed in this white paper have banking as Latin American banks introduce new products at the and payments systems that have been in place for only receiving end. At least in the high-volume markets, five or six years and in many cases reforms are still banks are leveraging their broader business lines, ATM ongoing. networks, and broader debit and prepaid card base to provide lower-cost transfers to more locations than The evolution of payments systems MTOs can offer. Debit and prepaid card products are These common features help to explain the evolution the most common bank-provided remittance solution. of electronic payments systems in the major Latin This shift is beneficial both to the recipient and to the American markets. This evolution is assessed economy since a larger share of the remittance separately for Argentina, Brazil, Chile, Colombia, reaches the beneficiary and a larger share of total Mexico and Venezuela in the following chapters. While remittances is channelled into the formal economy each country has its own unique needs, strengths and and into savings. These products are also more constraints, the regional characteristics described in convenient to the beneficiary since they are this chapter also play a role in shaping these automatically reloaded with each remittance. countries’ payments solutions.

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Argentina

rgentina has a population of about 39 million. a provision of the Competitiveness Law that restricts Nominal GDP reached US$146bn in 2004. Real the use of cash to pay commercial invoices. Agrowth was 8.8% in 2004, unchanged on the previous year, but still not enough to restore real GDP Banks in local currency to 1998 levels, after four years of The financial crisis of 2001-02 reversed the influx of decline. Per capita income was US$12,910 in PPP foreign banks, which had focused mainly on acquiring equivalent international dollars in 2004. smaller Argentinian banks during the 1990s. When the BCRA committed itself to guaranteeing the solvency of The financial sector private and state domestic banks, they were the A prolonged recession in 1999, combined with an beneficiaries of a reverse flight-to-quality movement overvalued currency, precipitated a severe currency as depositors moved funds to protected banks. Several crisis in late 2001-02 that led to sharply reduced foreign financial groups left the country, while others liquidity, the withdrawal of credit and aggressive scaled back their plans for future Argentinian government intervention. The resulting collapse of operations. incomes has decimated the middle class, which is the By contrast, the largest foreign banks have financial sector’s most promising segment. Demand signalled their continuing commitment to the market. for credit comes mainly from small and medium-sized They include BSCH, BBVA, Bank Boston, Citibank and exporting enterprises that have gained from the HSBC. It is not possible to specify asset market shares peso’s devaluation and have so far grown by taking in the current environment because banks have been advantage of excess capacity and financial expansion given 60 months to phase in the write-downs they through retained earnings. Since the crisis, financial were forced to take during the crisis. The three largest markets have been focused on debt restructuring banks by far are the state-owned Banco de la Nación rather than injecting new capital. de Argentina, the province-owned Banco de la Provincia de Buenos Aires and the private Banco de Governing institutions Galicia. They controlled more than 40% of the assets of The Central Bank of the Republic of Argentina (BCRA) domestic banks as reported by the BCRA in mid-2004. received a new charter in early 2002 to restore its role The penetration of the banking system is estimated at of lender of last resort, and the bank filled this just under 50% of the population, but only 15.8% has function repeatedly throughout the year. It has also a current (or checking in American parlance) account. made numerous changes to the bank supervisory framework as Argentina adapts to the new financial Clearinghouse systems environment. The Superintendency of Financial and Argentina’s system of financial clearinghouses was Exchange Institutions (SEFyC) is partly independent of substantially reformed in 1997, when the BCRA the Central Bank. The government has also acted to established a new framework for private shape the financial sector through other laws, such as clearinghouses to modernise the traditional paper-

Argentina 2001. The number of active cards in force fell by 14% Cards in force in 2003 as a result of the 2001-02 financial crisis, (Number of cards per capita) Debit cards Credit cards which drove up interest rates, reduced foreign travel 2000 0.26 and increased costs for dollar accounts. Credit card 0.24 2001 penetration rose slightly in 2004 from 0.196 per capita 0.34 0.27 to 0.212, and banking officials say that further 2002 0.34 improvements will depend on lower interest rates. 0.23 2003 The banks issue credit cards from Visa, MasterCard, 0.37 0.20 Credencial, Cabal, American Express and Carta Franca. 2004 0.38 American Express and Diners Club also issue their own 0.21 cards, and there are a variety of national and regional Sources: Central Bank of the Argentine Republic, Association of Argentine Banks card brands, some of which are issued by non-banks. Corporate card products such as the Visa Purchasing driven systems. The Bank also implemented a new card are well developed in Argentina, and their use is RTGS system, which private clearinghouses are growing because of the sophisticated reporting and required to use to settle their current accounts at the financial controls that are integrated into some of Central Bank. Two large-value and two low-value these products. clearinghouses were established, and there are also There are also a number of retailer cards in the new systems for clearing and settling ATM and market. No official statistics are available for credit debit/credit card transactions. (Details of this card transactions or spending, but observers say that modernisation program are provided in the appendix.) few cardholders run significant balances because of the high cost of credit. Electronic payment products Some countries in the region have acted to discourage Debit cards the use of cheques, but Argentina’s central bank is Two forces have combined to drive significant growth more concerned with driving cash transactions into in debit card penetration. The first was the gradual the formal economy. The government has promoted implementation of the 1997 BCRA rule that requires electronic payment products, for example by offering a most payrolls to be done by direct deposit rather than value-added tax (VAT) discount for card transactions, cash. This rule is now strictly enforced. The second was but it also regards an increase in processing speed for the imposition of controls on withdrawals from bank cheques as another tool for reducing the use of cash. accounts beginning in December 2001. They created Nonetheless, the popularity of debit cards and an incentive for people to maintain multiple bank instalment payments using credit cards has accounts and to move money between them with debit contributed to reduced cheque usage. The number of cards. Debit card purchases were also exempt from the cheques per capita fell by one-third from about three controls, which had the purpose of preventing people in 2000 to two in 2004, even though the number from withdrawing cash from banks and converting it rebounded somewhat in 2004, with the loosening of into dollars. These controls were gradually relaxed and restrictions on withdrawals. by April 2003 they were no longer in force. There are no official data for payment cards in Argentina, but Credit cards estimates by the Association of Banks of Argentina Credit cards saw widespread use in Argentina prior to (ABA) and independent analysts indicate that the

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VAT rebates provided as refunds to cardholders, which In Argentina, a discount for debit cards has the advantage of ensuring that VAT was launched at the time of the corralito (an reductions are not absorbed by retailers. official restriction on cash withdrawals from Latin American countries often have prob- In Colombia, a new law promulgated at bank accounts) in 2001, and credit cards lems with the collection of value-added the end of 2003 establishes that every were added in 2003. Cardholders receive a taxes (VAT), which are evaded through purchase with VAT rates of 10% and 16% will five-point reduction in the country’s 21% unrecorded cash transactions. This is a sig- receive a two-point discount if they are basic VAT rate for debit card transactions, nificant problem in Latin America because processed with a credit or debit card. and three points for credit card most countries have large informal Reimbursements are deposited into the transactions. There is a separate two-point economies. Some countries also seek to cardholder’s bank account by the end of reduction for purchases of gasoline. promote the use of electronic payment March in the year following the purchase. Reimbursement is monthly, with the amount products to capture their other benefits. Beneficiaries must request the refund, credited to the cardholder’s credit card The governments of Colombia and normally by submitting a form provided by account or bank account. There are no Argentina have tackled this problem by the Credibanco network. But as of the publicly available assessments of the working with the banking industry to inte- beginning of 2005, Visa cardholders can success of this program but industry grate a VAT discount into card-based trans- request automatic calculations to be done observers say that it has played a role in the actions to provide an incentive for their on their behalf. The government expects to large growth in debit card transaction use. In both countries, the discounts are refund Ps100bn in 2005. volumes since 2001. number of debit cards has continued to grow since the they may take more than 24 hours to settle. Users of end of the controls, partly because consumers are now this system send transfer instructions to Interbanking, more familiar with their use. It is expected that debit which in turn sends instructions to the debtor bank card penetration will continue to rise as individuals using the Electronic Payment Methods (MEP) system. and small businesses are drawn into the formal Consumer use of direct debits has also grown economy. rapidly even though they can take up to 72 hours. A Bank-branded debit cards are issued as part of the driving force is that the postal service is not standard package of products associated with current considered reliable enough to trust with money, and accounts and many savings accounts. Co-branded debit the availability of card-based transfers has also cards that can be used internationally are also offered. fostered the development of this mode of transfer. Both debit cards and credit cards can be used for Increasing demand led to the development of recurring payments. specialised consumer direct debit products, such as Visa’s Debit Service, which enables recurring payments Direct credits and debits using Visa cards or Visa Electron cards. Users can set Direct debits have grown in popularity since the up payments by phone and can stop a payment on 24 launch of the new “large-value” clearinghouses, which hours’ notice. Merchants can check available balances enable same-day interbank funds transfers, which in prior to initiating the debit and receive automatic turn has enabled client-to-client transfers. About 90% notification when card numbers change as well as of the transactions cleared through the Interbanking comprehensive reporting. Another service run by settlement system are inter-company electronic funds Banelco, called pagomiscuentas.com, enables anyone transfers where the funds are technically credited to with an ATM card to pay bills on line. RedLink’s Pagos the receiving account on the same day, even though Link offers similar capabilities.

Strengths and opportunities payments systems to increase their transactional functions and to begin to rebuild consumer credit Leadership from the BCRA, coupled with the products. Industry experts believe that commercial willingness of the banks to invest in infrastructure, credit cards are the segment with the strongest short- led to a rapid implementation of Argentina’s term potential, especially as credit is extended to modernised payments system, even in the midst of small business. Remittance products are also regarded the currency and financial crisis. As a result, the as a significant opportunity. country has an electronic payments infrastructure that is as modern as any in Latin America, even Outlook though the use of cash remains at high levels, and Financial sector authorities do not anticipate thousands of companies continue to retain the important changes to the payments systems over the services of cash-management firms. next few years, except for the implementation of a The government has promoted the use of debit and cheque imaging system. A new system, which will credit cards by offering tax incentives and by strongly eliminate the requirement for “over” cheques to be promoting the use of payroll cards, but it has not acted physically transported, is in the testing phases now to discourage the use of cheques. Instead, it has and will be implemented in 2006. This new facility will focused on promoting both electronic payment extend the 48-hour clearing time now seen in the products and cheques as alternatives to cash, in order capital, Buenos Aires, to the rest of the country. This to increase participation in the formal economy. may reduce the use of cash, but it may also impede the It is difficult, in any event, to assess opportunities penetration of electronic payment products. for further improvements in electronic systems when More specifically, the BCRA does not see much room the banking system is in such disarray. Individual for improvement in the electronic funds transfer banks are mostly insolvent and are phasing in over five infrastructure, and it expects usage to increase years the write-downs of losses resulting from the gradually over the medium term. As the economic asymmetric conversion of dollar-denominated debts recovery proceeds, more individuals and companies to pesos. Most observers believe that it will be a few that are operating “off the records” will start using the years before the banking system can restore its banking system – some for the first time. Currently, an traditional intermediation function. Meanwhile, the estimated 30% of billings by Argentinian service banks have started to leverage the modernised providers are paid by direct debit.

16 © The Economist Intelligence Unit 2005 Assessing payments systems in Latin America

Brazil

razil has a population of about 180 million. monetary policy, however. This falls under the purview Nominal GDP reached US$610bn in 2004, and of the National Monetary Council (CMN), which is the Breal growth was a healthy 5.2%, up from 0.5% main policy organ of the Ministry of Finance. the previous year. Per capita income was US$8,540 in PPP international dollars in 2004. Banks In 1993 Brazil launched an aggressive strategy to Brazil’s commercial banks are the most solid in Latin bring hyperinflation under control. Part of this strategy America and have comfortably withstood the effects of included Plan Real, which established the Real as the external shocks. Most of these banks are part of national currency. As a result, consumer price inflation conglomerates that have emerged from intense fell steadily from more than 2,000% in 1994 to 3.2% in consolidation activity since 2000. Privatisation and 1998. Prices increased by 6.6% in 2004. structural change have led to an increase in foreign participation, and 25% of banking assets are now The financial sector owned by foreign entities. Although Brazil is the largest market in South Key reforms since 1998 were the creation of America, the proportion of bankable households is low “multipurpose” banks and the privatisation of state- because the country has one of the most polarised owned banks. The country’s two largest banks remain economies in the world. A key challenge for financial in government hands and no further auctions are sector firms is to reach the lower socioeconomic currently scheduled. The number of banks has fallen strata. With the government committed to fiscal from 242 in 1995 to 160 in 2004. The entry of foreign surpluses, the drop in public-sector borrowing banks has also helped to modernise the industry and requirements will free capital for private investment. to put it on a more solid footing. Five of the top ten The Brazilian capital market is underdeveloped and a private banks were foreign-owned at the end of 2004. lack of liquidity tends to make it cyclical. A culture of Nonetheless, some smaller foreign financial credit has not flourished in large part because of very institutions reduced their Brazilian exposure in 2002- high lending interest rates that averaged 55% in 03, bringing the year-end 2004 foreign share of assets 2004, among the highest in the world. Consumer price down to 24% from 28% at the end of 2002. inflation fell to 6.6% in 2004 and interest rates are The five largest banks hold just over one-half of projected to decline gradually over the next several Brazil’s banking assets. The two largest banks, Banco years. do Brasil and Caixa Econômica Federal, are owned by the federal government and together hold nearly 27% Governing institutions of total banking assets. The other three members of The Central Bank of Brazil (BCB) oversees financial the top five are domestically owned Banco Bradesco, institutions, regulates money markets and plays a Banco Itaú and Unibanco. The largest foreign bank is major role in managing the country’s foreign- Banco Santander Central Hispano with 4.5% of total exchange transactions. It is not responsible for banking assets at the end of 2004. Brazil has the

highest banking penetration in Latin America at half the level of 2002. Even so, the number of cheques 72.2% of the population 2002 and nearly two-thirds issued in Brazil was 2.1 billion in 2004, down by only had current accounts. 20% from 2000, and they remain the most expensive payment mechanism. In April 2005 the BCB indicated Clearinghouse systems that it is considering slowing the settlement times for Reforms to Brazil’s financial system implemented cheques under 300 reais to discourage their use. following the 1995 banking crisis were primarily aimed at increasing processing speeds. The focus shifted to Credit cards risk management in 2002 with the introduction of the Credit cards gained widespread popularity in Brazil National Payments System (SPB), which includes a following the success of Plan Real in reducing inflation large-value RTGS settlement system operated by the to sustainable levels. The number of cards in force has Central Bank. The SPB achieves systemic risk reduction grown rapidly, rising by 88% between 2000 and 2004 by monitoring Central Bank reserve accounts to reach 52.5 million. Brazil now has the highest credit throughout the day and by providing a real-time card penetration in the region at 0.293 per capita in Reserves Transfer System (STR). Overdrafts to reserve 2004. This compares with Chile at 0.166 and is notable accounts are no longer allowed, and transaction because the latter has a much higher per capita clearances are delayed if a bank does not have income. sufficient funds. The major credit card brands are Visa, MasterCard, Since 2002, debit card transactions and withdrawals American Express and HiperCard. Nearly all banks from the Banco24Horas ATM network shared by 52 issue both Visa and MasterCard products. The banks banks have been cleared and settled through a system offer a wide range of card products, including a variety operated by Tecnologia Bancária (TecBan). This is a of reward point plans and other cardholder benefits, multilateral net settlement system with final university affinity cards and combination credit-debit settlements through the STR. Data from ATMs and cards. terminals are transmitted through a private Corporate and business cards have gained communication network. A smaller network called Rede momentum over the past two years, although there is Verde-Amerela serves 11 state-owned banks, and is still considerable room for growth as business and operated by the state and regional bank association. government customers become more familiar with Visa and MasterCard transactions were transferred from their benefits. COMPE to VisaNet and RedeCard respectively in 2002. Debit cards Electronic payment products Debit cards are enormously popular in Brazil, with Cheques enjoy special status in Brazil and although penetration of 0.92 per capita in 2003, the most they continue to serve as a credit instrument, their use recent year for which official data are available at the has gradually fallen. Cheques are broadly accepted in time of writing. The number of cards in force, the Brazil because of the strong legal protection they number of transactions and the volume at the point of enjoy, and this makes post-dated cheques an effective sale each grew by roughly 45% in 2003 alone. credit tool. Nonetheless, the number of credit and Visa Electron, Redeshop (from Mastercard) and debit card transactions per capita (13.5) exceeded the Cheque Electrônico (from TecBan) are the most number of cheques issued (11.8) for the first time in common debit cards in Brazil; MasterCard’s Maestro is 2004, while the value of cheques fell to 61% of GDP, also available. The banks have actively promoted debit

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cards as a means of replacing cheques and as a tool for Brazil reaching out to the unbanked population. Banks Cards in force (Number of cards per capita) Debit cards normally provide one of their own debit cards with Credit cards 2000 each current account, but many affluent customers 0.503 0.164 prefer globally branded debit cards because they offer 2001 0.586 better budget control and lower the risk of fraud. A 0.205 2002 variety of special-purpose cards are also available, 0.654 0.238 including several prepaid incentive and employee 2003 0.920 benefit cards. 0.269 2004 1.245* 0.293 Smart cards and prepaid cards Sources: Central Bank of Brazil, Brazilian Federation of Banks, Brazilian Association of Credit Card Companies A number of prepaid cards have been introduced in * estimate Brazil, including Visa Vale (see sidebar), and their use has grown gradually. Market trials of some smart credit cards with upgraded security have been carried Brazil out but these cards have encountered challenges. Card transactions (per capita) Debit cards Observers say that there were problems with retail Credit cards 2000 staff not knowing how to use the cards, and consumers 1.21 5.88 did not generally perceive the need for using a PIN 2001 1.89 (personal identification number) with a credit card. 5.96 2002 Proprietary prepaid cards are used in some telephone 2.58 6.41 and transit systems. 2003 3.74 7.27 2004 Direct credits and debits 4.98* Brazil modernised its system for direct funds transfer 8.47 Sources: Central Bank of Brazil, Brazilian Federation of Banks, Brazilian Association of Credit Card Companies in 2002 with the introduction of the Electronic Express * estimate Transfer (TED), which enables same-day ad hoc customer-initiated direct credits. Banks also offer automatic debit services, but there is currently no Brazil interbank direct debit system, so this is limited mainly Value of card transactions to utility bills and other recurring payments. The banks (% GDP) Debit cards Credit cards 2000 have experimented with money transfer systems for 0.009 Brazilian expatriates in Japan, but they have not yet 0.046 2001 0.013 achieved major inroads into this market. 0.052 2002 0.016 Strengths and opportunities 0.054 2003 The National Payments System (SPB) is regarded as a 0.022 0.056 major success by financial services executives, 2004 0.027* especially considering that it is fairly recent and is not 0.058 yet fully implemented. The adoption of a modern Sources: Central Bank of Brazil, Brazilian Federation of Banks, Brazilian Association of Credit Card Companies * estimate payments and settlement framework has reduced

Visa Vale are considered a fringe benefit and are not Vale cards can be used in restaurants and taxed as long as they are used for food. food stores respectively. From the Other countries in the region have similar government’s perspective, they greatly programs. reduce fraud because they are PIN-based, Several of Brazil’s largest banks partnered There are a number of problems with they bear the employee’s name, and they with Visa to provide a replacement for paper traditional paper-based programs. Vouchers can be cancelled if lost. For the merchant, vouchers for basic goods and services that must be issued every month and, since they there are no more counter-vouchers and employers provide as a fringe benefit. In are equivalent to cash, distribution is check-out is automated using a normal 2002 they established a company called be expensive and subject to losses. The terminal, which means prompt payment and Brazilian Solutions and Services Company merchant must collect vouchers for periodic the elimination of the expense of handling (CBSS) to issue a prepaid card called Visa reimbursement, and if one is used for less paper vouchers. Vale. So far, more than 1.1 million cards than face value, a “counter-voucher” must Employers benefit too. Banco Bradesco, have been issued and CBSS currently be issued for the balance. Paper-based a partner in CBSS, also provides the card to processes 7 million transactions a month. vouchers have become a form of “parallel its own employees. Bradesco executives say Under a government program known as money", and a black market has developed there have been substantial reductions in Workers’ Food Program (PAT), employers to divert this spending power to non- administrative and operational costs, receive income tax deductions if they authorised purposes, resulting in flagrant because each employee’s Visa Vale account provide vouchers that employees and their tax evasion. is re-loaded automatically, and the cards are families can redeem for food. The vouchers Refeição Visa Vale and Alimentação Visa issued only once.

private risks from the interbank system, and has income groups. They have recently bought smaller increased economic efficiency. The banks have already financial companies and established partnership achieved greater payments agility and cost reductions. arrangements with merchants to create new private Customers have benefited from better access to their label portfolios. They are also exploring new products accounts, as well as new card and Internet-based that offer low interest rates because they are payment products, and they are likely to see a guaranteed by a link to a salary or pension plan. Some reduction in fees over the next few years, as cost smaller banks have recently launched Visa products reductions are passed on. aimed at the retired population. Bradesco has Governments have also been major beneficiaries of introduced an instalment-based credit card for the modernisation, not just through the broad individuals who earn as little as the minimum wage. In benefits to the economy but also through their own another development aimed at reaching out to the use of electronic payment products. Commercial banks unbanked, Banco Popular and Banco Postal (owned by play a central role in collecting and disbursing Banco do Brasil and Bradesco/Correios respectively) payments on behalf of all three levels of government, are building banking infrastructure and payment and the new tools implemented since 2002 have given products for more than 4,000 rural municipalities them the ability to monitor their BCB accounts in real throughout the interior of Brazil. time, to shorten tax collection lags, and to make faster The government has taken a series of steps to help payments to beneficiaries at less cost. Card operators small businesses gain better access to credit, and are currently negotiating with the federal government medium-sized businesses are likely to emerge as the for an arrangement to accept credit and debit cards for field of opportunity for banks. For example, the the payment of income taxes, which can be paid by government development bank, BNDES, has joined direct funds transfer but not with cards. forces with Bradesco and Banco do Brasil to offer lines The banks have innovated to reach out to lower- of credit and payment card solutions for small

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businesses that need to buy machinery. 29 ATM networks operating in the country with more In spite of the improvements, however, some than 137,000 ATMs, only 38% of which were linked to inefficiencies remain. The migration from cheques to an “open” network. A shared network would TED reduced the value of transactions processed by substantially reduce costs. For example, at Guarulhos COMPE by roughly two-thirds. But there was only a 5% Airport in São Paulo, there are ten ATMs from six decrease in the number of documents processed, banks, about double the requirement if a shared which include Credit Documents (DOCs) and cheques. network were available. This reflects the fact that the overwhelming majority of transactions are below 5,000 reais, and are not Outlook handled by the SPB. The priority given to larger Income levels that were slashed during the recession payments was appropriate from a risk-reduction of 1999 will recover gradually. Personal disposable perspective but COMPE’s costs are now a much higher income is expected to grow by more than an annual proportion of the value that it processes. average of 5% over the next few years, pushing up The underlying problem is the continuing popularity private consumption and demand for financial of cheques among the public, even for larger services. transactions that could be completed using TED. Central Now that the 2002 reforms have succeeded in Bank officials say they would like to discourage the use reducing systemic risk, the next steps in the evolution of cheques, and the bank is now planning another round of payment and settlement systems will be to increase of reforms, this time directed at low-value payments. It the efficiency of mid-value transactions, mainly by has indicated that new measures may include incentives encouraging the substitution of electronic payment for interbank co-operation, the standardisation of products for cheques. Financial system authorities, communications protocols, truncation of cheques and bank executives and other observers say that the the promotion of electronic instruments. Some industry expected developments described below are mostly experts have also suggested increasing the clearance independent of each other, and will not occur in any time for cheques, as was done in Mexico to increase the particular sequence. use of TEDs and DOCs. In spite of the introduction of the same-day TED for Security has become a bigger issue with debit cards, direct credits, many customers continue to use the as fraudulent use has migrated from credit cards to slower DOC, because they are more familiar with it. It debit cards over the past few years. Theft of cardholder is anticipated that the authorities will gradually lower information at the ATM has been identified as the root the DOC maximum of 5,000 reais to speed up the problem and the banks are now implementing transition. Another modernisation on the horizon is stronger fraud controls. interbank direct debits. Currently, vendors must keep There are also opportunities for improvements in accounts at multiple banks, which limits the system to the efficiency of the ATM network and the terminal large organisations such as public service providers. base. In the case of terminals, many merchants are This is not seen as a major priority and interbank direct forced to maintain two systems in order to get around debits will probably not be implemented until 2007. technological incompatibilities, and there are also Although the number of small-value cheques fell multiple ATM networks. The large banks have significantly in 2003 following the reforms of the traditionally seen private ATM networks as a previous year, there were still more than 1.7 billion competitive tool, whereas smaller banks have been “under” cheques issued, or more than three-quarters more likely to share their networks. In 2003 there were of all cheques. Observers believe that improvements in

the ATM network would encourage more small customers by postal mail. The CIP is in the process of transactions to be done with cash. Lack of inter- designing an electronic boleto to eliminate the paper operability is the most important problem. Links document for many transactions. This is seen as a among the country’s 29 ATM networks will be means of increasing the liquidity of the financial facilitated by improvements to clearing and system as well as a way of reducing the risk of fraud. settlement systems that are planned for mid-2006. The new boletos will be sent by e-mail or downloaded Currently, each interbank transaction is routed from from corporate websites. Payment will be made the ATM to the bank that owns it, then to the electronically, via direct debit or electronic funds Interbank Payments Clearing House (CIP), and then to transfer. Proof of payment, currently a paper the other bank. Confirmation comes back over the document, will also become an electronic file. same route. When the planned improvements are Financial industry observers in Brazil say that the implemented, the information will be sent directly three most important opportunities for further growth from the ATM to the CIP. are in commercial payment products for small and Brazilian financial authorities believe that the medium-sized businesses, government procurement continued widespread use of paper Boletos de cards and innovative products for the low-income Cobrança for bill collection represents considerable segment. The opportunities include increasing the risk for the SPB. The number of transactions using this rate of activation and usage of existing cards in force vehicle continued to increase even after the 2002 as well as expanding the client base. In particular, reforms, and with the introduction of the TED their they believe that, although it will take time for share of the value of transactions handled by COMPE corporate and government customers to understand rose sharply from 18.8% in 2002 to 38.6% in 2003. fully the benefits of procurement cards in terms of While boletos enable electronic payment of bills at expense management and transparency, there is ATMs or over the Internet, they are still sent to substantial room for growth.

22 © The Economist Intelligence Unit 2005 Assessing payments systems in Latin America

Chile

hile has a population of about 16 million. The top five banks accounted for 73.2% of deposits in Nominal GDP reached US$91bn in 2004. Real October 2004. Foreign banks own about 43% of total Cgrowth was a robust 6.0%, a substantial gain bank assets. from 3.3% growth the previous year, mainly owing to The two largest banks, Banco Santander Santiago buoyant commodity prices. Per capita income was and Banco de Chile, together account for 41% of US$11,630 in PPP international dollars in 2004. banking assets. The top five banks, which also include Banco de Crédito e Inversiones, Banco Bilbao Vizcaya The financial sector Argentina and Corpbanca, claim a 66.5% share. No Sustained economic growth following the recession of other bank has a share as high as 4%. The penetration 1999 has pushed up personal incomes and expanded of the banking system was estimated at 43.5% of the the middle class, driving demand for financial population in 2002. Current-account usage remains services. Consumer credit and home loans grew in very low, but penetration of the low-income segment 2003, as interest rates fell. Consumer price inflation was improved with the implementation of “sight” was just over 1% in 2004. Liquidity is comparatively accounts (cuenta a la vista) in 1996. These accounts high, and although still a limiting factor, especially for are associated with ATM or debit cards and do not have small business, access to credit in local currency is current account privileges. unusually good for a Latin American market. The banking system is well-capitalised, competitive and Clearinghouse systems prudently managed. Consumer lending is a profitable Chile’s payments infrastructure has been substantially but fierce battleground where retailers play an modernised following a 1997 amendment to the unusually large role. General Banking Law. Implementation was gradual, because of the lingering problem of subordinated Governing institutions debt, which continued to affect financial institutions. The Central Bank of Chile (BCC) is independent and has A major push towards modernisation was initiated by absolute control over monetary policy. Its the BCC in September 2000, including the responsibilities include establishing the rules for development of a new RTGS system, which will be fully bank-issued credit cards but not for private-label cards implemented by September 2005. issued by retailers. These rules are enforced by the Chile has two ATM networks, Redbanc (established Banking Supervisory Agency of Chile (SBIF), which is in 1987) and Globalnet (established in 1992). These an autonomous institution. networks are owned by their participating banks. The two organisations announced an interconnection Banks agreement in 2004. Transbank (established in 1993) In 2004 there were 12 locally owned private operates a network for financial institutions that issue commercial banks operating in Chile, along with 13 Visa, MasterCard, American Express, Diners Club and foreign full-service banks and one state-owned bank. Magna credit cards. It also handles Redcompra,

Electron and Maestro debit cards, as well as domestic allows holders remote use of major credit cards to bank card brands. Transbank also provides a clearing make either recurring or ad hoc payments. Transbank system called Webpay for Internet credit card sales. and the issuing banks have heavily promoted this service, and 10% of card transactions are now made Electronic payment products through PAT. The penetration of electronic payment products has Although the number of bank-issued credit cards in been influenced by the fact that cheques are a firmly force has remained flat over the past five years, there established feature of Chilean society. Cheques are a was a spike in the value of transactions in 2003. Pent- very safe instrument because there are jail terms for up demand for consumer durables was unleashed by a anyone writing cheques with insufficient funds. sharp drop in lending interest rates to 6.2% during the Cheques are also a status symbol because of the year. A 3.7% rise in personal disposable income also rigorous pre-issue requirements, and they can be used contributed to increased demand. as a form of credit, through a scheme known as Tres Private-label credit cards issued by retailers include Cuotas, where customers pay with three cheques post- “open” cards that are honoured at multiple stores, as dated at 30, 60 and 90 days. An estimated 25% of the well as “closed” single-retailer cards. Estimates of the Chilean retail market is funded by instalment number of cards in force vary widely, partly because of payments of some sort. The number of cheques issued differing treatment of inactive cards. One estimate per capita was 19.1 in 2004, by far the highest level of puts the number of active cards at between 7.6 million any of the countries assessed in this white paper. and 8.0 million. Retail cards are originally issued to low-income individuals without access to bank credit, Credit cards and in spite of the much larger number of retail cards Notwithstanding the popularity of cheques among in force, bank-issued credit cards capture about one- affluent consumers, credit card penetration is high half of total credit card payments. relative to other Latin American markets. The penetration of bank-issued credit cards was relatively Debit cards low at 0.166 per capita in 2004, with 2.6 million cards The number of debit cards in force has risen steadily in in force. These data exclude retailer cards, for which Chile, along with the value of transactions. Debit there are no official statistics. cards, usually bank-branded “client cards” or “banking The leading banks issue both Visa and MasterCard cards”, were traditionally associated with current credit cards. Some also issue American Express and accounts and were issued automatically as part of a Diners cards, and there are a few local brands. Most package of services. The first multi-bank debit card, credit cards are associated with bank accounts and are called Checkline (now Red Compra), was introduced in not promoted separately, although some banks offer 1995 and has been extremely successful, now merchandise as incentives to compete with the accounting for about 30% of all card transactions. But common practice of retailers of offering “gifts” or the bulk of the cards in force are Visa Electron and discounts to cardholders. Maestro cards issued by the banks. Transbank offers an instalment payment facility for the global credit card brands, which provides interest- Smart cards and prepaid cards free terms identical to the Tres Cuotas system of post- Smart cards have seen only limited use in Chile until dated cheques. In 2002 Transbank launched a new recently, although initiatives to implement them service called Automatic Card Payment (PAT), which widely are now in progress. In addition to making

24 © The Economist Intelligence Unit 2005 Assessing payments systems in Latin America Chile

credit card transactions more secure, chip-enabled Chile cards facilitate a variety of loyalty programs. Smart Cards in force (Number of cards per capita) Debit cards cards are also in use at several universities, where Credit cards 2000 users can add a debit card function to the multi- 0.12 0.16 function ID card issued to students, faculty and staff. 2001 0.14 The Santiago Metro introduced contactless smart 0.17 2002 cards in early 2005 at all of its 52 subway stations, 0.19 0.17 using the Multivía card system. Public buses will begin 2003 0.24 accepting the cards in mid-2005. The Metropolitan 0.17 2004 Union Association for Passenger Transport is also 0.29 0.17 introducing smart cards on 3,800 privately operated Sources: Central Bank of Chile, National Statistical Institute of Chile, Centre for Latin American Monetary Studies, buses. Superintendency of Banks and Financial Institutions

Direct credits and debits Chile Direct funds transfers were introduced in Chile around Card transactions (per capita) Debit cards 1990, but initially the lack of a comprehensive Credit cards 2000 interbank network limited them to recurring payments 0.13 2.62 with large vendors. In the mid-1990s several banks 2001 0.75 introduced an interbank direct debit system known as 2.73 2002 Automatic Account Payment (PAC). It enables ad hoc 1.31 2.72 payments, and charities and universities are among 2003 2.11 the 500 participating organisations. 2.78 2004 3.07 Strengths and opportunities 3.46 Sources: Central Bank of Chile, National Statistical Institute of Chile, Centre for Latin American Monetary Studies, The modernisation of Chile’s electronic payments Superintendency of Banks and Financial Institutions system has generated important benefits for all of its stakeholders. Payments are processed more quickly and more securely, and consumers have more options Chile as well as greater access to credit. Merchants face a Value of card transactions (% GDP) Debit cards reduced risk of non-payment and lower operating Credit cards 2000 0.00 costs. The Central Bank’s RTGS system has lowered 0.02 systemic risk, cut operating costs and provided 2001 0.00 enhanced information. From the public perspective, 0.02 2002 the banking system is more accessible to low-income 0.01 0.02 individuals, and the government’s own use of 2003 0.01 automated payments systems has increased the 0.04 2004 efficiency of the public service. The reforms will also 0.02 0.03 improve Chile’s country risk ratings. Sources: Central Bank of Chile, National Statistical Institute of Chile, Centre for Latin American Monetary Studies, There are a number of opportunities for further Superintendency of Banks and Financial Institutions improvements in the system. Debit cards could play an increased role in reducing the number of cheques,

mated Latin American e-commerce sales have also played an important role in the E-commerce reached US$3bn. growth of the B2C segment. International Increasing consumer confidence in using online vendors have increasingly targeted Latin America’s e-commerce market is one cards online has been a key force behind the region and claim almost one-third of the of the fastest growing in the world. Large this growth, as initiatives by the global market. About 40% of Latin American e- corporations, especially multinational brands have addressed the security issue. commerce transactions are international, enterprises using specialised software, For example, Verified by Visa leverages the compared with about 15% globally. Latin account for the bulk of this market, but the brand’s global network to enable secure American online retailers are also reaching B2C (business-to-consumer) segment has online transactions. It authenticates Visa international markets with the sale of goods been expanding rapidly. Growth has been cardholders during the virtual checkout and services for expatriates, who buy online in the range of 50% per year for several process at participating merchants using a for delivery directly to family and friends at years in spite of such constraints as under- password provided by the issuing bank. The home or for shipment abroad. A growing developed infrastructure, low Internet merchant can add this function to its number of customers are using card-based penetration and limited online offerings. existing processing system. The system also Internet systems for recurring payments like About 90% of online purchases are paid for provides the cardholder with a personal utility bills. Travel is another area of rapid with credit and debit cards, and the reluc- message certifying that the password growth, as the larger airlines and hotels tance of cardholders to provide their request is legitimate, thus authenticating have introduced online booking and account numbers over the Internet has both the cardholder and the merchant. payment systems, and as web-based travel also held back growth. In 2004 total esti- Improvements in online retail services agencies have gained market share.

which would reduce cost and speed clearing and economy grows. Chilean banks’ good management of settlement. But the number of cheques per capita market and credit risk will ensure that an expansion of remains high, in spite of the fact that only about 20% their credit portfolios does not come at the expense of of the population has a current account. The cultural a deterioration in loan quality. preference for cheques is to some extent reinforced by The country’s payments infrastructure will continue the banks, which are torn between opposing forces. On to improve. The low-value clearing house is preparing the one hand, decreasing cheque use would reduce to introduce a cheque imaging system modelled on the costs. On the other, the Tres Cuotas cheque system US Check 21 system (so named after the Check provides the banks with a tool for competing against Clearing for the 21st Century Act of 2003). Chile has retail credit cards. The banks have not responded passed the legislation to enable this and a three-stage consistently. After a few years of declining cheque implementation is planned. In the first stage, usage, in 2004 some banks once again began expected in the third quarter of 2005, retailers will promoting them, and the number of cheques rose by scan cheques and transmit them electronically to their 5.3% to 304 million. Recently, some banks have moved banks. In the second phase, banks will start in the other direction by introducing fees for cheques. exchanging images rather than cheques. In the third phase, possibly in 2006, customers will be able to Outlook access their cheque images online. Chile’s aggressive pursuit of trade agreements will E-commerce is expected to continue expanding open doors for medium-sized businesses, stimulating rapidly, especially in the B2B (business-to-business) demand for bank credit. Small firms, however, will still sector. International Data Corporation has estimated find it difficult to obtain credit and will continue to that B2B transactions in Chile grew by 150% between rely on renewable short-term loans. They may also 2003 and 2004, to US$10bn, or about 10% of the increase their use of corporate payment cards, as the country’s GDP. A key driver of this growth was the tax

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authority’s implementation in April 2003 of a new of sale. Etisa is also providing the technology for the system of electronic invoices and an associated new prepaid contactless smart cards now being registration scheme for digital signatures. By the end implemented in Santiago’s transit system, and for a of 2006, about 50% of invoices are expected to be proposal to use smart cards to pay tolls on a new electronic, rising to 80% in 2008. Integrating highway to the city’s airport. payments by direct transfer is a fairly simple next step. Competition between bank and retailer credit cards B2B commerce is also expected to expand, especially will escalate, especially if proposed legislative after Visa’s planned introduction of Verified by Visa in amendments to regulate retail credit cards are Chile is completed. approved. Some analysts believe that future growth Smart cards are set to take off in Chile as part of a will come mainly from increases in the size of the concerted effort to improve security and to offer average transaction and the number of transactions enhanced services to cardholders. Several large per card, rather than from a larger number of cards, Chilean banks partnered with Telefónica CTC Chile in because affluent customers tend to use just one card. 2000 to form a company called Empresa de Tarjetas This could change if the banks are successful in Inteligentes (Etisa), which is implementing the achieving greater penetration of the middle class, required infrastructure upgrades. Transbank is also where customers tend to use multiple cards. In implementing smart cards and had upgraded about addition, the banks are expected to continue 5,000 of 35,000 terminals by November 2004. Etisa expanding coverage to the unbanked population. The predicts that the conversion to smart cards will be number of retail card issuers is expected to decline to complete by 2007. This improved infrastructure is also three or four over the next few years, as more retailers expected to increase the use of debit cards at the point join “open” retail card networks.

Colombia

olombia has a population of about 45 million. network, Sistema Electrónico del Banco de la Current GDP reached US$95bn in 2004. Real República (SEBRA). The Banking Superintendency of Ceconomic growth was a healthy 3.6% in 2004, on Colombia is responsible for the supervision of banks the heels of 3.8% growth the previous year, as the and other financial institutions. economy continues to recover from the 1999 recession. Per capita income was about US$7,000 in Banks PPP international dollars in 2004. Since the 1998-99 financial crisis, government policies have promoted the development of universal The financial sector banking (multibanca), leading to banking industry The combination of healthy economic growth and consolidation. The sector consisted of 66 institutions lower interest rates is driving an increase in demand (including banks, finance companies, leasing for financial services, following a financial crisis in companies and other institutions) in 2004, down from 1998-99. Domestic credit is expected to reach 40% of 140 before the crisis. At the end of 2004 there were 24 GDP by 2008, up from 32% of GDP in 2002. Economic private commercial and mortgage banks, of which 15 growth remains tied to the political situation and were private and domestically owned, and nine were management of civil strife. Limits on foreign foreign-owned. By law, banks must maintain assets in ownership in the Colombian financial sector were Colombia and there are no branches of foreign banks. eliminated during the 1990s, and a handful of foreign- Foreign banks held less than 20% of the country’s owned conglomerates now control one-third of banking assets at the end of 2004. financial sector assets. The “universal banks” The five leading banks—Bancolombia, Banco de (multibanca) control 70% of banking assets. Bogota, BBVA Colombia, Banco Davivienda and Banco Consumer price inflation was historically low at 5.9% de Occidente—controlled close to one-half of all in 2004, and further declines are anticipated. banking assets (including the finance companies) at the end of 2004. Of these banks, only BBVA is foreign- Governing institutions owned and no other foreign bank has a larger share The Bank of the Republic (BanRep), the central bank of than Citibank’s 3.6%. The proportion of the Colombia, is an independent institution under the population using the banking system was estimated at country’s constitution. It is responsible for the usual 40.3% in 2002. Current account penetration was central bank functions including the issuing of exceptionally low at 9.2%. currency, monetary policy, foreign exchange and the provision of clearinghouse services to the banks, as Clearinghouse systems well as management of reserve requirements. The The Central Values Deposit (DCV) was established by bank either operates, or provides the infrastructure BanRep in 1992. This is an electronic high-value net for, the country’s main payments clearinghouses system, with settlements occurring at the end of each through its national online real-time interbank day. At that time there was also a real-time system for

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institutions that did not maintain an account with Colombia BanRep, and in 1998 this was expanded into a full Cards in force (Number of cards per capita) Debit cards RTGS system, in the midst of the financial crisis. Credit cards 2000 BanRep also administers an automated low-value 0.19 0.05 multilateral net clearinghouse called the Electronic 2001 0.19 Cheque Compensation System (CEDEC). The 0.05 2002 government has promoted the use of electronic 0.19 0.05 payment products, and BanRep also administers the 2003 0.21 National Interbank Electronic Compensation System 0.06 2004 (ACH-CENIT). 0.23 0.06 There are six ATM/POS networks including Sources: Bank of the Republic, National Automated Interbank Electronic Clearing House, ACH Colombia, Credibanco, A Toda Hora (ATH), Servibanca and Banking Superintendency of Colombia Redeban Multicolor, in addition to several proprietary networks operated by banks. Banks issuing Visa, Colombia MasterCard and American Express, the principal credit Card transactions (per capita) Debit cards card organisations operating in Colombia, use clearing Credit cards 2000 services provided by Credibanco and Redeban 1.36 0.71 Multicolor respectively. Diners cards are processed by 2001 1.53 a commercial bank where merchants who accept the 0.69 2002 card maintain accounts. 1.87 0.77 2003 2.22 Electronic payment products 1.14 2004 Electronic payment products have increasingly 2.21 displaced cheques as a means of payment. The number 1.14 Sources: Bank of the Republic, National Automated Interbank Electronic Clearing House, ACH Colombia, of cheques processed has fallen every year since they Banking Superintendency of Colombia peaked at 212 million in 1996. Between 2000 and 2004, the number of cheques per capita fell from 2.4 to 1.4. Colombia The number of credit card and debit card transactions Value of card transactions grew by 72% and 74% respectively over the same (% GDP) Debit cards Credit cards period. Some of the decrease in cheque usage reflects a 2000 0.12 shift to cash following the imposition of a tax on 0.03 2001 0.14 financial transactions in 1998. Cheques are used mainly 0.03 for low-value transactions; large-value transactions by 2002 0.14 business are generally handled electronically. The 0.03 2003 number of transactions processed electronically 0.15 0.04 through RanRep’s single deposit accounts (CUD) 2004 0.14 increased by 265% between 2000 and 2004. 0.04 Sources: Bank of the Republic, National Automated Interbank Electronic Clearing House, ACH Colombia, While the proportion of the population using Banking Superintendency of Colombia current accounts is quite low, savings account penetration is relatively high, estimated at between 35% and 55% in 2004 by various authorities. This

reflects the growing use of electronic payroll systems, grown sharply, rising from less than 100,000 in 2000 since unlike some other countries Colombia allows to 673,000 in 2004. payment products to be associated with savings accounts. Strengths and opportunities Colombia’s electronic payments system is modern and Credit cards efficient, and has gradually implemented emerging Credit card penetration is relatively low in Colombia, at technologies. The high-value system provides 0.062 per capita in 2004, but this was a substantial financial stability, whereas the low-value system increase from 0.046 in 2000 as the number of cards in fosters competition, leading to increased efficiency. force increased from 1.9 million to 2.8 million. There Observers believe that the continuing modernisation were more than 50 million credit card transactions in of the low-value system will lower costs for financial 2004, only about 1.1 per capita. All of the larger banks institutions. These will be passed on to consumers as offer both Visa and Mastercard, and American Express lower fees, which in turn could increase the and Diners cards are also available. Bank-issued co- penetration of the main electronic payment products. branded card products dominate the market, although Enhanced financial control systems are also expected a few retailer and fidelity credit cards are also to lead to a crack-down on money-laundering and an available. improvement in the country’s international reputation. The government and financial institutions Debit cards will also gain from increased transparency and more ATM/debit cards are available to all holders of current accurate monitoring of the financial system. or savings accounts, but both Visa and MasterCard The use of payment cards has expanded as branded debit cards issued by commercial banks are merchant acceptance has spread to smaller stores, widely used, with more than 10 million in circulation. pharmacies and fast-food outlets, which has increased All ATMs and terminals in the country are inter- total volume while reducing the average transaction operable. Debit cards have gained popularity over the size. The credit card market has also been further past few years, with cards in force rising by nearly 20% segmented as existing cardholders have migrated to between 2000 and 2004, and the value of transactions upscale products. These developments have given exceeding 15% of GDP in 2003. However, there is still increased convenience to cardholders, while also room for growth as banking penetration increases. contributing to the government’s objective of increasing VAT collections. Direct credits and debits There are a number of opportunities for further Most banks offer Internet portals and Colombia has a improvements. Banking industry players say that the well-developed system for interbank direct debits and intra-day liquidity of the large-value clearinghouse credits through both ACH Colombia and ACH-CENIT. needs to be improved. Closing times for transactions These services have seen increasing use in recent are scheduled in such a way that there is a surge of years, as companies and individuals have become settlements in the late afternoon, and up to one- comfortable with them. Direct credits are widely used quarter of operations take place after 6 pm. Some for payroll deposits, and the number of transactions improvement was achieved by implementing a new fee grew nearly seven-fold to reach 14 million between system, and there are now plans for further 2000 and 2004. Direct debits were slower to gain improvements through the creation of a hybrid system consumer acceptance but have nevertheless also that will simulate the net settlement obligations of

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allows them to start saving and investing to products ranging from debit cards to Family remittances play an active role in the economy. The international joint accounts and electronic savings-to-remittances ratio is estimated to transfers. Over the last two years, the banks Latin American migration to the developed be as high as 10% in Mexico and a 2001 have begun to offer card-based products to countries has increased substantially over World Bank study found it to be 4% in the beneficiaries, creating value added the past decades. When these immigrants Guatemala. services and drawing these customers to the earn money, they often send some of it The challenge for governments is to financial system. For example, Visa Giro is home to help their families. These remit- ensure that a larger proportion of an innovative payment card specifically tances increased by 20% in each of the past remittances travels through legal channels. designed to facilitate the transfer of money two years to reach US$45bn in 2004. They That way, it is injected into the formal to Latin America. These forms of transfers are now a greater source of liquidity than economy where it can create legitimate are cheap, efficient and flexible. These foreign direct investment (FDI) and official employment and business opportunities. factors, plus the convenience they offer to foreign aid combined. Unlike foreign aid, Better reporting is clearly a key part of this recipients, have already enabled the banks they reach families directly through exist- effort. to gain a 15% market share from traditional ing channels and, unlike FDI, they are One way to achieve better reporting is to money transfer organisations like Western counter-cyclical, usually peaking during route transfers through banks, which are Union and MoneyGram. Increased economic downturns. subject to central bank oversight and competition has already forced down The surge in remittances translates into a reporting requirements. On the sending transaction fees, from about 20% to 7%, significant rise in disposable income. It lifts side, the banking industry has responded to and this translates both into larger transfers households above subsistence level and this opportunity by offering innovative new and to a greater share reaching recipients. each participant before gross payments are processed. Outlook Observers say that obtaining the co-operation of large financial institutions, especially non-bank entities Impressive advances in public security helped to keep such as stock traders, presents BanRep with its GDP growth strong at 3.6% in 2004. Forecasts see principal challenge in implementing these growth stabilising at around an average annual rate of improvements. 3.5% in the years ahead, but there are risks to these Financial industry observers point to important forecasts. Victories in the internal civil conflict are opportunities for continued expansion of Colombia’s bringing diminishing returns and concerns over public upscale credit card segment, as well as greater use of solvency leave Colombia vulnerable to swings in card-based recurring payments systems and further investor sentiment. expansion of the commercial card market. There are Real lending rates will remain low by historical also opportunities for banks to increase their share of standards, stimulating demand for credit and financial incoming remittances, leading to greater participation services already bolstered by improved stability and in the formal economy. Observers also note that steady increases in disposable income and private increased co-operation between card organisations, consumption. A surge in remittances and the return of banks and the government could drive a further expatriate Colombians and their money are reviving expansion of payment cards. Further penetration of small to medium-sized ventures, especially in the low-income market is seen as a continuing domestic sectors such as construction, and this will challenge. have a cascade effect on credit in the rest of the economy.

As a result of lower inflation and lending rates, the Colombia’s low personal computer (PC) penetration, proportion of households with formal access to credit, which was only 7.9% of the population in mid-2004. which now stands at less than one in ten, is expected By contrast, virtual banking has risen rapidly from to increase by 25% over the next four years. Banking about 840,000 users in 2002 to nearly 1.3 million in assets will grow by an annual rate of 6%. Colombia’s 2004. Over the same period, the number of monthly low level of banking penetration is an obstacle to transactions per user also rose from 5.5 to 10.6, increasing debit and credit card usage. Nonetheless, according to data published by Asobancaria, the there has been a significant increase in debit card bankers’ association. usage, which partly explains the diminishing use of While the penetration of virtual banking is still low cheques. Although the value of debit card transactions compared to other forms of payment, this segment is still very low, the volume of transactions is appears set for further expansion, especially as rapidly significant and will continue to grow, partly because of falling computer prices drive increases in Internet an expanding acceptance base. penetration. To some extent, low levels of PC One payment product currently receiving attention penetration can be offset through the provision of is “virtual banking”. Internet banking portals already public terminals. There are a number of pilot programs in operation will be expanded to permit funds under development in Colombia that involve the use of transfers, bill payments and other types of payment, kiosks and interactive displays in public places where further reducing transaction costs. The expansion of bank customers can access their bank accounts in a Internet-based payments systems is limited by manner similar to Internet access.

32 © The Economist Intelligence Unit 2005 Assessing payments systems in Latin America

Mexico

exico has a population of about 105 million. industry was in fragile shape when the peso suddenly Nominal GDP reached US$677bn in 2004, and collapsed in the last days of 1994, leading to a full- Mreal growth was 4.4%, up from 1.4% the blown financial and economic crisis in 1995. The previous year. Per capita income was US$9,680 in PPP government was forced to mobilise the Savings international dollars in 2004. Protection Banking Trust (Fobaproa), to prevent the failure of key financial institutions. The cost of this The financial sector massive bail-out has been estimated at 20% of GDP. Shifting spending patterns, driven by continuing The banking system was thoroughly overhauled in the increases in average wages, will shape growth in demand years following the crisis. for financial services. Credit is expected to increase by The crisis weakened the banking industry to the point 5% annually over the next few years, outpacing GDP and where it was not able to fully service the growing market domestic demand. Interest rates will rise, but will remain during the economic boom of the late 1990s. Foreign relatively low by historical standards, and will not banking conglomerates moved in to fill the void. significantly cut demand for loans. Consumer price Between 2000 and 2002, banks from Spain, the US, the inflation was 4.7% in 2004. Mexican economic growth UK and Canada carried out a series of acquisitions. By remains highly dependent on the performance of the US mid-2004, 22 of the 32 commercial banks operating economy. The banking sector has been strengthened by before the crisis had been restructured or shut down. full liberalisation, consolidation and the entry of foreign Only one major bank, Banco Mercantil del Norte capital. Portfolios have been overhauled and the (Banorte), remains in Mexican hands. proportion of past-due loans is low. About 75% of In December 2004 there were 30 “multiple banks” banking assets are foreign-owned. operating in Mexico. The largest five banks, BBVA Bancomer, Banamex, HSBC, Santander Serfin and Governing institutions Banco Mercantil del Norte, control 75% of total bank The Bank of Mexico is the central bank. It is an assets. Bancomer and Banamex together control autonomous institution responsible, among other nearly one-half of the country’s banking assets and things, for ensuring the functioning of the payments only eight banks hold more than a 1.5% share. The systems. The National Banking and Securities penetration of the banking system was estimated at Commission (CNBV) is a semi-autonomous unit of the 43.8% of the population in 2002, with only 15.2% Secretariat of Finance (SHCP) and is responsible for holding current accounts. Banking penetration is the direct supervision of financial institutions. gradually rising as employers implement payroll systems based on debit cards. Banks When Mexico’s banks were reprivatised in 1991-92 Clearinghouse systems there was no solid supervisory structure in place, after Mexico began a substantial modernisation of its a decade of government ownership. As a result, the payments settlement systems in 1994. At that time,

Mexico Cards in force (Number of cards per capita) Debit cards Credit cards 2000 accomplished in stages beginning with the launch of n/a n/a the high-value Extended Electronic Payments System 2001 0.29 (SPEUA), and culminating with the launch of the 0.06 2002 Interbank Electronic Payments System (SPEI) in March 0.32 0.08 2005. Cecoban, Mexico’s cheque clearinghouse, was 2003 0.31 privatised in 1997, and an extensive modernisation 0.09 2004 program has since been carried out. 0.33 0.11 Mexico originally had three interconnected ATM Sources: Bank of Mexico, Mexican Bankers’ Association, Centre for Latin American Monetary Studies and POS terminal networks, with Banamex and Bancomer running their own systems and Prosa Mexico covering all of the other banks. Banamex and Card transactions Bancomer have now combined their operations. Final (per capita) Debit cards Credit cards settlements are made by a commercial bank using 2000 n/a n/a electronic funds transfers through SPEUA. 2001 8.79 1.76 Electronic payment products 2002 10.36 As electronic payment products have gained market 2.08 2003 traction, the number of cheques processed has fallen 11.01 2.21 slowly from 6.0 per capita in 2001 to 5.7 in 2004. The 2004 11.82 value of cheque transactions fell from 170% of GDP to 2.37 Sources: Bank of Mexico, Mexican Bankers’ Association, Centre for Latin American Monetary Studies 120% over the same period. In 2004 6.2 million fewer cheques were processed than in the previous year. The

Mexico use of large-value cheques has declined sharply since Value of card transactions the Bank of Mexico implemented a one-day delay in the (% GDP) Debit cards Credit cards clearance of interbank cheques, to promote the use of 2000 n/a SPEUA. Cheques continue to be used for big-ticket n/a 2001 consumer purchases, such as cars and houses, and 0.09 0.01 financial authorities say that they would like to continue 2002 0.14 to encourage people to use electronic products. 0.02 2003 0.13 0.02 Credit cards 2004 0.14 Although credit cards have been issued in Mexico for 0.02 many years, they have been available only to a Sources: Bank of Mexico, Mexican Bankers’ Association, Centre for Latin American Monetary Studies relatively small proportion of the population. There were 14 million active credit cards in force in 1994, but the Bank of Mexico operated both an electronic this fell by roughly one-half after the crisis as interest interbank settlement system and a manual cheque rates rose and new restrictions were imposed. There clearinghouse. A principal objective of the reforms was was significant growth as the economy recovered, and to replace large-value cheques with electronic as the banks were consolidated, and by 2004 there transfers through the Bank’s existing RTGS system, the were 11.6 million active cards in force. Account Holders Service System (SIAC). This was The banks issue Visa and MasterCard products while

American Express issues its own cards. The five top password-based security and increased functionality banks dominate the card business, both for issuing through advanced loyalty programs (see sidebar p36). and acquiring. Many retail chains issue privately Prepaid cards for telephones are used extensively. branded cards. There is a very wide variety of products in the Direct credits and debits market, including air miles cards as well college, The larger Mexican banks began to offer direct credits charity and sports team affinity cards. In addition, in 1995, and about 25 banks now participate in the there are commercial cards designed for both Electronic Funds Transfer (TEF) system. These corporations and smaller businesses. transactions do not occur in real time and are Customers can arrange for recurring payments such processed through the Bank of Mexico’s Clearinghouse as utility bills to be automatically charged to their credit System (SICAM). (TEF and SICAM are described in cards. This is popular with some consumers who are greater detail in the Appendix.) uncomfortable about direct debits from their accounts. Direct debits have been used by large utilities for several years, but interbank debits were not available Debit cards until after an amendment to the Banking Law in 2001. Originally, banks issued cash cards associated with The new system, known as DOMI, has been in current or savings accounts for use in ATMs, but in the operation for about two years through about 20 banks. mid-1990s they started issuing debit cards that could As a result, direct funds transfers have become be used in POS terminals. The majority of these cards increasingly popular. are Electron or Maestro branded. These cards have The consumer direct transfer market will continue become increasingly popular, with growth driven by to grow but only slowly because Internet penetration the expansion of the ATM network and terminal base remains low. The Mexican Bankers’ Association (ABM) beginning around 2001, as well as a trend towards anticipates that only about 5 million Mexican bank payroll payment through direct deposits linked to account holders will have access to online banking debit cards. Another positive factor has been the services this year. Corporations and governments, expansion of cash-back functionality by merchants. however, are rapidly implementing electronic There were 20,400 ATMs in the country in 2004. The payments. number of debit cards in force grew by 18.7% between 2001 and 2004 to reach 34 million. These cards were Strengths and opportunities also used more intensively, with the number of The Bank of Mexico enjoys a strong reputation after transactions rising by 39.2% over the same period. The having recovered from the damage stemming from the leading banks offer a wide variety of different debit 1994-95 peso crisis. The bank became autonomous cards, including affinity cards, youth/teenager cards under a 1994 constitutional amendment, and and cards designed to facilitate the receipt of improved disclosure practices have made it one of the remittances from abroad. most transparent central banks in the world. The banking system is also on a much more solid footing, Smart cards and prepaid cards as the sector has consolidated, increased efficiency Credit cards based on smart card technology have and introduced new products. New electronic recently been offered on a larger scale in the Mexico payments settlement systems have been put in place market. So far, there have been two principal that have substantially reduced transaction costs, applications: fraud reduction through enhanced while simultaneously reducing systemic risk by

Vida Bancomer this technology allows for instant bank officials are confident of reaching their processing of rewards at the point of sale. objective of 10,000 by year-end. Rewards can be allocated to certain Participating merchants can also work with In March 2005, BBVA Bancomer became the establishments, products, customers or Bancomer to design their own customised first bank in Mexico to launch an enhanced days, or a combination of factors. The programs, sharing the costs of the rewards, loyalty program based on Visa’s Smart Gen- system provides customers with instantly while Bancomer provides and manages the eration concepts that leverage smart card awarded reward points, coupons and instant rewards platform. technology to provide added value to cus- discounts, without having to produce a Bancomer’s special projects team worked tomers. The loyalty program itself, called separate loyalty card or paper coupons. with the platform vendor over a period of 18 Vida Bancomer, and its supporting software Moreover, the system incorporates a months to develop the program. Cards were developed and implemented by Ban- customer-recognition system that can be issued following the March launch carry the comer. Smart card experts from Visa worked used to build customer relationships, Vida Bancomer logo, and the bank has been with Bancomer throughout the evaluation, triggering surprise gifts or reserved sending them to preferred customers. planning and implementation phases of the promotions for valued customers or those Eventually all of the bank’s Visa credit cards project. using the card at a store for the first time. and some of its debit cards will be replaced Because the program identifier and the More than 2,000 merchants have already with smart cards that include the loyalty rewards are stored on the smart card itself, enrolled in the Vida Bancomer program and program.

enabling real-time settlements. The number of circumstances, giving many of them improved access interbank electronic transactions has more than to credit, based on a better understanding of their doubled since 2000, drawing more activity into the financial position. It also provides better rewards for formal economy. The central bank no longer faces the good credit behaviour over time. risks of granting uncollateralised loans. Financial The banks have recognised that expanding credit sector officials agree that these benefits accrue to the for the lower-income groups represents an important entire economy. opportunity, because credit card penetration is still Industry observers point to Mexico’s credit bureau relatively low in Mexico. The number of credit cards per as an important asset to the country’s financial capita was only about 0.11 in 2004, whereas the system. It combines personal credit histories from penetration of the economically active population is Trans Union de Mexico with corporate information estimated at less than 28%. There is also room for from Dun and Bradstreet, and is considered one of the expansion of debit card usage, through wider most developed credit information systems in the merchant point of sale acceptance. Currently, the bulk region. The banks are making increasing use of credit of debit card usage is through ATMs and merchant bureau information to manage the risks of issuing acceptance is limited. Industry observers also point to credit cards to lower-income groups. As the use of this commercial card products as another area of system expands, the accuracy of lending decisions will opportunity, since penetration is still low. be improved, generating benefits for both lenders and Both the government and the banking industry borrowers, and contributing to economic growth recognise the need for further improvements to through the expansion of credit. Lenders will be in a Mexico’s electronic payments systems. The next better position to measure and price the underlying challenge is the low level of banking penetration in risk of a given account, and to increase segment the country. The penetration rate stood at only 43.8% specialisation. Consumers will benefit from pricing of the population in 2002, although the ABM has that more accurately reflects their individual estimated that three-quarters of the economically

active population has a debit card. Payroll programs also contribute to an increasing demand for credit and have led to an increase in the number of cards, but this financial services. approach is not effective in industries with a large Inflation reached 4.7% in 2004, but the central bank proportion of itinerant workers, such as agriculture will remain in control and guide price increases towards and construction. Another problem is that people with a standard target rate of 3%. Lending interest rates will payroll debit cards use them mainly at ATMs rather increase, possibly to double-digit levels, but will than at merchant terminals, which may undermine the remain at historically low levels. In a stable and friendly objective of reducing the scale of the informal environment, credit will thrive and expand by some 5% economy. With these challenges in mind, the ABM, the per year, outpacing both GDP and domestic demand. SHCP and local banks launched the Electronic The new payments settlement systems now in place Payments System Support Program in 2003 to both will enable new products, especially new types of extend the electronic payments infrastructure and to online transfers that will take advantage of the convince consumers to use it. The government’s removal of the minimum transaction value in the SPEI. objective includes the promotion of chip cards because The central bank is expecting that money transfers will in the future they could enable systems that would occur in less than 20 minutes in the near future. Users contribute to more efficient tax collection. will also have access to more information, such as A key element of the effort to increase participation verification of receipt of a transfer. First, however, the in the formal economy is the Boletazo campaign, banks will have to upgrade their own systems to which has a goal of tripling the use of debit cards over exploit modernised clearinghouse capabilities more three years. This is a joint effort by the SHCP and ABM, fully. The new system will also provide the Bank of with the support of Visa and MasterCard. Purchases are Mexico with more reliable information to support automatically registered in the Boletazo system. There oversight of the payments systems. are daily raffles for substantial prizes, including big- Instalment purchases on credit cards are another ticket items such as cars, as well as smaller items such relatively new innovation launched by the largest as washing machines, blenders and concert tickets. banks, and this is expected to make an important There is an associated TV game show where contribution to further expansion of credit for lower- participants are selected from Boletazo vouchers that income groups. The banks are also increasing their they send in. The ABM has supported this campaign efforts to provide expanded credit to small business. with a series of TV advertisements. Over the next three years, the banks will make major efforts to extend the terminal base to reach Outlook small businesses. The ABM’s Terminalisation Fund has The Mexican economy is highly dependent on the a target of 3.2 billion pesos (about US$280m) to pay performance of the US market. GDP growth was 4.4% for the installation of 250,000 POS chip-enabled in 2004 and is forecast to remain stable at an annual terminals free of charge in small businesses. At the rate of around 3% for the foreseeable future. Personal end of 2004, there were 65,000 chip-enabled disposable income, up by 4% in 2005 and rising by 3% terminals in place. The program will also put another annually in the next few years, will support reasonably 50,000 terminals in gas stations, movie theatres and strong private consumption growth. Changing fast-food establishments. Tenders for the terminals spending patterns by an emerging middle class will are expected to go out in mid-2005.

Venezuela

enezuela has a population of about 26 million. institutions. Its main function is to monitor the Current GDP reached US$109bn in 2004. Rising behaviour of institutions within its preview and to Voil prices led to real economic growth of 17.3% notify the BCV of any instances of risks that could lead during the year, but this was not sufficient to offset to insolvency. real declines over the previous two years. Per capita income was US$5,790 in PPP international dollars in Banks 2004, 3.2% lower than in 2001. Venezuela’s legislative framework distinguishes between several types of bank, including universal The financial sector banks, commercial banks, investment banks, The financial sector in Venezuela would offer mortgage banks and representative offices of foreign considerable scope for development in a stable banks, as well as several categories of non-banks such economy. But a young population and low consumer as leasing companies and savings and loans entities. spending power restrain market size. Captive liquidity The most recent SUDEBAN report for the third quarter has emerged as a result of exchange controls, but the of 2004 indicates that there are 43 institutions under increase in deposits is only barely positive after its supervision, including 17 private universal banks accounting for inflation, and has been directed mainly and 15 commercial banks (one commercial bank is to instant-access accounts. The country’s wealthy also government-owned). continue a tradition of investing their assets abroad. Four large universal banks hold about 61% of all Consumer price inflation fell to 22% in 2004 from 31% public deposits. Banco Mercantil, Banco de Venezuela, the previous year. Banco Provincial and Banesco each claim a market share of between 14.5% and 15.9%. Four medium- Governance institutions sized banks collectively claim another 15% of the The Central Bank of Venezuela (BCV) is an independent market. institution responsible for managing the country’s The number of foreign banks operating in monetary policy and for promoting price stability. It is Venezuela has declined in recent years, reversing the also the country’s principal source of foreign previous trend. Banco do Brasil, Bank of America, ING exchange, under an arrangement where the state Bank and JP Morgan Chase all closed their Venezuelan petroleum company, Petróleos de Venezuela S.A. operations in 2001 and 2002, citing cost-cutting as (PDVSA), is required to sell its foreign-currency the reason. Four small foreign banks were sold to local receipts to the BCV. The Bank operates Venezuela’s investors in 2003, in response to growing political and National Payments System (SNP), including the economic risk. There are now eight banks with cheque clearinghouse and a variety of other payments majority foreign ownership, holding approximately services. 35% of Venezuela’s bank assets. The penetration of The Superintendency of Banks and Other Financial the banking system was estimated at a relatively high Institutions (SUDEBAN) supervises all of the financial 55.4% of the population in 2002 and the proportion of

the population with current accounts was 33.9%, Venezuela above the Latin American average. Cards in force (Number of cards per capita) Debit cards Credit cards 2000 n/a Clearinghouse systems 0.10 Venezuela’s payments systems are currently in the 2001 n/a process of an extensive modernisation following 0.10 2002 consultations with the banking sector in 1998. The 0.27 0.10 Central Bank operates two payments clearinghouses, 2003 0.25 one for cheques and one for large-value transactions. 0.10 2004 At the core of both systems are current accounts that 0.29 0.11 each bank or financial institution holds at the BCV, Sources: Central Bank of Venezuela, Superintendency of Banks, Venezuelan Banking Association, known as a single account, which is used both for National Banking Council, Centre for Latin American Monetary Studies, Interbank Payment System interbank settlements and for compliance with reserve requirements. Financial institutions also use their BCV Venezuela accounts to carry out bilateral large-value settlements Card transactions (per capita) Debit cards—data not available such as those for credit card transactions. Following Credit cards 2000 the 1998 consultations, the BCV implemented a 1.60 proprietary SWIFT closed users group, which 2001 1.57 institutions could use to initiate same-day interbank 2002 transactions. This system does not operate in real 1.43 time, and the BCV manually processes each transfer. 2003 To compensate for this weakness, seven large banks 1.24 2004 have set up a private network to communicate 1.57 payment information. Sources: Central Bank of Venezuela, Superintendency of Banks, Venezuelan Banking Association, National Banking Council, Centre for Latin American Monetary Studies, Interbank Payment System Electronic payment products Cheques remain the most important method of Venezuela payment in Venezuela, although the use of cash has Value of card transactions increased since 2000, when the banks imposed a (% GDP) Debit cards—data not available Credit cards minimum amount per cheque to discourage low-value 2000 0.01 transactions. The shift to cash was also encouraged by 2001 a tax on bank transactions implemented in 2001. 0.02 Cheques are broadly accepted in the country partly 2002 0.03 because of a relatively advanced system of telephone 2003 funds verification, which operates around the clock. 0.03 This system recently stopped providing confirmation 2004 0.03 services for cheques of less than 20,000 bolivares, Sources: Central Bank of Venezuela, Superintendency of Banks, Venezuelan Banking Association, which caused increased popularity of ATM cards. As a National Banking Council, Centre for Latin American Monetary Studies, Interbank Payment System result of these developments, the number of cheques fell from 4.4 per capita in 2000 to 2.9 in 2004. There are no consistent official statistics available for

prime customers. Their usual approach has tomers consider banks to be overly bureau- Entry-level credit cards been to integrate instalment payments for cratic. Latin American banks have been act- individual purchases into conventional ing in both areas. In Brazil, for example, a credit card products. There are three leading bank has simplified the application principal types of scheme: process for credit cards, in some cases In most Latin American countries, access to ● Issuer bears risk: The customer negoti- requiring only proof of identity and credit has traditionally been a privilege ates with the issuer to negotiate instal- address, and an income as low as one mini- enjoyed mainly by the relatively affluent ment terms for a particular purchase, and mum wage. In Peru, banks have reached out section of the population. Without access to the merchant receives full payment. to new customers with special outlets in credit, many people chose not to have a ● Acquirer bears risk: The merchant offers shopping malls in low-income areas. banking relationship at all, so entry-level fixed instalments and receives monthly Banks have also been making better use credit can play a role in drawing them into instalments, with the full amount guar- of credit bureau information by focusing on the banking system. anteed by the acquiring bank. the absence of negative reports, since few Where the low-income segment has ● Merchant bears risk: The merchant new applicants have a credit history. New gained access to credit, it has usually been offers instalment options. The merchant products have also been developed that from retailers, which often collect gets monthly instalments when the cus- stabilise cash flow. For example, a leading instalments at the customer’s door. The tomer pays. bank in Mexico offers a credit card with success of instalment credit in the retail Research has shown that in the sub-prime instalment payments based on a fixed sector provided one model for banks segment, monthly cash flow is the most percentage of the credit limit rather than throughout the region to reach out to sub- important consideration, and that cus- the outstanding balance.

payments systems in Venezuela for the 2000-04 period Corpbanca and Banco Exterior, both universal banks, covered by this white paper. The statistics cited here are the other large issuers, with almost 250,000 cards come from a variety of sources, including a SUDEBAN each. No non-universal bank had as many as 50,000 report for 2003. cards in force, according to BCV statistics. All of the large universal banks issue both Visa and Credit cards MasterCard products. Some banks also issue American Credit cards have seen increased use in Venezuela Express or Diners Club cards. There are also numerous since the government imposed foreign-exchange affinity cards. controls in 2001, making credit cards the only means Rewards points cards are not as common as in some of access to foreign currency for most people. Credit other countries, but some banks issue such cards cards can also be used for cash withdrawals, using a under private brands. Two savings and loans debit function known as Domiciliación de Pagos. This institutions, Casa Propia and Mi Casa, also issue a function can be used to initiate pre-arranged or ad hoc small number of credit cards. direct debits or credits to accounts at the same bank or within the private network maintained by seven large Debit cards banks. This service is available only to corporate and The banks issue ATM cards that can be used on two individual accounts with relatively high volume. principal networks: Suiche 7B and Conexus. These Venezuela’s 17 universal banks issued nearly 95% systems have been inter-operable since 2000, and at of the total of 2.6 million credit cards in force at the the end of 2002 there were 4,302 ATMs in the end of 2003. The four large universal banks alone combined network. Banks promote the use of ATM and control more than 60% of the market, which is debit cards because the cost of processing is lower proportionate to their share of public deposits. than for cheques. In 2004 there were more than 7.5

million cards in force. These cards have limited use disruption by providing time for training staff at all within the country since Venezuela does not yet have a levels in the new procedures. Industry observers also fully operational system for the electronic clearance of credit some larger banks, most notably Banesco and retail payment instruments. BBVA Provincial, with helping smaller institutions through the transition by providing consultation Smart cards and prepaid cards services. No smart cards are currently issued in Venezuela. When it is fully implemented, the new CCE Prepaid cards are a fairly recent offering and are not yet electronic system will generate considerable benefits broadly popular. Some banks offer prepaid e-cards that for the economy and for the system’s users. Cheques can be used to make purchases on the Internet, and will be cleared in 24 hours rather than the present 48 some have also begun to offer electronic “vales” hours, which translates into reduced costs for financial (vouchers). These replace the paper coupons and institutions and the BCV. This, however, is likely to stamps used by some companies to provide fringe reduce incentives for using electronic payment benefits to employees. These are used as money, but products. Electronic processing will also reduce risk, they are accepted only for the purchase of certain since it reduces the size of the float, and it lessens the goods, such as basic goods or gasoline. These cards are risk of human error. Another benefit is more effective not linked to a bank account, so can be used by anyone. control systems both for the BCV, which will have It is expected that this type of product will introduce access to disaggregated data, and for financial new users to the concept of plastic money, which will in institutions. turn increase trust in electronic payments systems and Lower processing costs should lead to lower fees increase banking penetration. Single-purpose prepaid charged to customers, which could translate into cards are also in wide use for mobile phones. higher banking penetration, although the banks have not shown much interest in targeting the lower- Direct credits and debits income population, according to industry observers. Direct credits and debits are widely used in Venezuela, Banks will also benefit from a unified payments especially for large-value payments. The system is system that allows them to perform inter-bank limited by the fact that there is no national interbank operations in a quick and cost-effective manner, in settlement system. Seven large banks have created a turn enabling them to offer customers a wider array of private network, which allows direct transfers among products. For its part, the government will benefit their account holders, but transfers outside of this from reduced costs for public transactions, such as the system take 48 hours. collection of taxes and payment of social security benefits. Strengths and opportunities Improvements in interbank communications are Banking sector officials give credit to the BCV, and its still in the implementation process and it is too soon effective consultations with the industry, for the rapid to assess the outcome. Nonetheless, observers implementation of a new electronic clearinghouse throughout Venezuela’s financial sector say that the (CCE). The large banks were quick to make the unprecedented process of consultation and planning necessary investments in new technology, and that began in 1998 has created the momentum needed substantial infrastructure upgrades were implemented to continue the modernisation of the country’s in just over one year. The use of parallel operations payments systems. during the transition to the CCE has minimised risks of The main obstacle to the expansion of credit card

usage is a tax deduction of 4% of the transaction that penetration and banking industry officials say that goes to the government to cover merchant taxes. If this will be addressed through reforms to the the merchant is entitled to a refund at the end of the Domiciliación system, which will be integrated into the year, this is paid as a credit against the following CCE, along with other forms of electronic payment. The year’s taxes rather than as a cash refund. This first step will be electronic payroll transfers, which are deduction applies only to credit cards. expected to be available by the end of 2005. This The biggest obstacle to the efficient operation of reform could lead to substantial increases in banking the financial sector is the lack of an RTGS system. The penetration and the velocity of payments. current SWIFT private network is a product of the BCV’s Debit and credit cards are expected gradually to tradition of ad hoc solutions, and it imposes both gain wider acceptance as banks pass on cost savings to delays and risks on its participants. The creation of a customers and are able to offer more services. In real-time system, combined with a clear distinction addition, it is expected that banks will focus on between large and small-value payments, will greatly launching campaigns that emphasise the safety of benefit all financial institutions in the country. using plastic products. The banks are also exploring the possibility of launching meal voucher cards. Outlook The banks also plan eventually to implement The Venezuelan banking industry plans to take cheque imaging based on the US Check 21 system. This advantage of the new CCE electronic clearinghouse to will require changes to banking rules to give the introduce new and expanded services in the near cheque image the same legal status as the original, as future. The most important will be an expansion of the has already been done in some other Latin American existing system of direct debits, which is currently countries. In addition to speeding up processing, this available only to large-volume customers and only innovation would provide greater security through through certain banks. This has inhibited debit card faster detection of fraudulent actions.

Conclusion

he electronic payments systems in place in the banking. larger Latin American markets have seen major Treforms since the late 1990s, and in most cases Benefits to customers their performance is close to those found in ● A wide range of payment options combined with developing countries. RTGS systems have been immediate access to deposits and lines of credit, as implemented in all of the payments systems assessed well as a period of interest-free credit. in this white paper (with the exception of ● Enhanced financial management tools, including Venezuela’s), thereby substantially lowering systemic online account access, automatic proof of payment risk. Paper-based cheque clearinghouses have given and the ability to transfer funds between accounts way to electronic systems, and new image-based electronically. electronic systems are now being developed to enable ● Enhanced personal safety and security through cheque truncation, in some cases at the merchant reduced cash holdings. level. New high-value clearinghouses, combined with ● Convenience for travellers who use payment cards modern communications protocols, have enabled with global acceptance, and who manage their rapid low-risk transactions between larger businesses, accounts online while away from home. speeding the pace of commerce and driving economic ● Sophisticated cost-control systems for corporate growth. In addition, revamped low-value card users. clearinghouses have adapted to accommodate ● In many cases, benefits from rewards and discounts emerging payment products such as direct credits and from loyalty programs as well as VAT discounts. debits, and increased financial system efficiency has ● Access to the banking system, and an opportunity helped banks to introduce new debit and credit card to build a credit history for low-income individuals products. who use payroll cards, entry-level credit cards and other electronic payment products for the first Benefits to stakeholders time. Benefits from modernised payments systems have ● Convenient, safe and inexpensive access to accrued to every stakeholder, and they also accrue to remittances abroad. society as a whole by creating economic benefits such ● Lower prices in the medium term, as the reduced as faster growth. The improved payments costs of retail operations are passed on by infrastructure is mostly transparent to customers, merchants who can capture the economies of scale since their immediate benefits are most apparent to of new technologies. financial institutions and governments. From the perspective of consumers and merchants, the benefits Merchants of financial system improvements are seen mainly in ● Increased sales from offering a range of payment the form of new and innovative products and services, options featuring both convenience (debit cards) especially card-based payment products and online and liquidity (credit cards).

● Fast and secure transaction processing, with quick their clients along with more robust security. access to definitive payment. ● Lower costs that ultimately allow lower fees to ● Reduced costs from automated transaction customers, driving increased penetration of the processing and record keeping, including post- banking system. purchase transactions such as refunds and exchanges. Governments ● Improved theft and fraud prevention from smaller Governments — both as providers of services and as cash holdings and sophisticated reporting systems. guardians of the public interest — are perhaps the ● Reduced risk from elimination of store-provided biggest beneficiaries of the recent reforms. The large credit. reductions in systemic risk that have been achieved ● Larger merchants benefit from the ability to greatly enhance the ability of central banks to manage develop customised loyalty programs and build national financial systems, and this tends to improve ongoing relationships with customers. They also country risk ratings. Governments have themselves benefit from promotional campaigns sponsored by become major users of electronic payments systems, issuing banks. and they also have benefited from increased economic ● Merchants who accept payment cards from the growth. global brands are guaranteed payment by the card A detailed discussion of the use of electronic organisation, even in the event of default of the payments systems by governments is beyond the issuer. scope of this white paper, but advanced e-government ● Merchants in the travel and tourism industry systems are increasingly incorporating both the increase sales by accepting globally branded collection of taxes and fees and the distribution of payment cards from international visitors. In benefits. For example, the government of Colombia is particular, hotels, airlines and other service now routing some payments directly to recipients providers can hold deposits, accept bookings and through electronic systems. The Brazilian government payments online. launched a new Visa branded payment card in 2001 called the CPGF (Cartão de Pagamento do Governo Banks Federal), which will replace roughly 27,000 individual ● Long-term costs savings through more efficient vendor accounts. And several Mexican states are now operations of both central clearinghouses and accepting payment of taxes using debit and credit internal bank systems. cards. ● Reduced risks from new RTGS systems, and The use of electronic payment products by enhanced internal financial control systems. governments has multiple benefits. It increases ● Reduced payment-processing costs and fraud risks transparency and reduces fraud by implementing from displacement of cheques by debit cards. automated reporting systems and cutting back the use ● Lower-risk extension of credit to lower-income of cash and paper receipts. It speeds the flow of both groups through entry-level credit card products tax revenue and payments to beneficiaries. It also that can be automatically upgraded as a credit demonstrates the benefits of electronic payment history is created. products to users, and draws more people into the ● Emerging payment technologies such as smart cards formal economy. Lastly, it greatly reduces the cost of that allow banks to offer a wider range of services to government financial transactions.

Macroeconomic benefits electronic payment products to address some of the unique problems of the region’s economies. Some of the most important benefits flowing from the ● Credit and debit cards directly draw people and widespread use of electronic payment products accrue companies into the formal economy by giving them to society as a whole in the form of a more efficient an attractive alternative to cash, especially in economy and faster economic growth. countries that offer VAT discounts. The availability of faster, cheaper and safer ● Payroll cards increase the penetration of the electronic payment products increases the velocity of banking system, further bolstering the formal money and reduces friction in the economy. While economy. these benefits can intuitively be expected to increase ● Payment cards increase the efficiency of tax economic growth, analysts have only recently begun collection by engaging both merchants and to quantify them. An important study by the AEI- consumers in automated reporting processes. Brookings Joint Centre for Regulatory Studies, ● Debit cards and other bank products for family published in September 2004, has shed light on this remittances lower transactions costs and increase issue. It concluded that an electronic payments system the share that reaches the recipient, while ensuring costs nations one-half to one-third as much as a that the remittance enters the formal economy. paper-based cash system, and that a shift away from a fully-paper payments system to a fully-electronic one, Obstacles could potentially generate a 1% increase in annual Latin American countries face a number of obstacles real GDP growth. While no country could make such a that stand in the way of capturing the full benefits of big change over the short or medium term, even half electronic payments systems. The most important of that benefit would be considered very substantial. these is low banking penetration. A study in 2002 Moreover, the mere existence of a net social benefit in found that the average banking penetration of 16 addition to private benefits accruing to the parties Latin American countries was 55.6% of the involved creates a compelling case for government population, and the six countries covered by this white promotion of electronic payment products. paper ranged from 40.3% in Colombia to 72.2% in Interestingly, the Brookings study points out that Brazil. The proportion of the economically active the costs of processing cash transactions are often population that is banked is higher, but there are no under-reported by retailers, since they fail to account recent consistent measures of this factor across for the full cost of making deposits that should include nations. Low banking penetration tends to perpetuate the probability of theft, as well as the time required to consumer habits of paying with cash, which in turn count money, to prepare deposits and to visit a bank fuels the informal economy, and this is a major branch. The large fixed costs of infrastructure and obstacle to more effective use of electronic payments. training related to electronic forms of payment cannot Another important obstacle is the entrenched use of be fully recaptured without reasonable economies of cheques, especially by affluent customers. This scale. This provides an additional rationale for phenomenon is most pronounced in Chile, Colombia and initiatives by governments to ensure that sizeable Brazil, where there is a firmly entrenched practice of investments that have already been made benefit the using post-dated cheques as a form of payment. Aside largest possible number of people. from the fact that credit is often easier to obtain with In Latin America, there are additional cheques than with credit cards, cheque usage in some macroeconomic benefits stemming from the ability of countries is seen as a status symbol because it

demonstrates the ability to qualify for a current account. these arrangements represent employees’ first contact Low Internet penetration also hinders a transition with the banking system, and they help to increase to online payments. This is, in turn, a function of low their level of comfort with electronic payment PC penetration. Of the six countries studied, Chile has products. the highest penetration with 238 Internet users per Governments can create disincentives for cheque 1,000 people, followed by Argentina with 112. use by introducing programmed delays into cheque Penetration is lowest in Venezuela with 51 users per clearance systems. The VAT discounts for card 1,000 people. transactions that have been implemented in some countries also create positive incentives for using Opportunities electronic payment products, although their purpose Notwithstanding these obstacles, there are many is mainly to enforce tax collection by merchants. opportunities for governments and financial Financial institutions and governments can also institutions to take action to drive the transition to continue to promote the introduction of emerging electronic payment products. Methods that work in technologies that enable sophisticated payments one country are not necessarily appropriate in others, systems. Smart cards, for example, reduce fraud and and the examples that follow are not prescriptions. allow for other benefits of multiple applications. They are intended to illustrate general approaches Financial institutions can also work to promote that can be customised for the unique needs of each expanded terminal networks to ensure widespread use market. and acceptance of payment products. Governments can lead by example. Increased Finally, governments can promote increases in government use of electronic payment products for Internet penetration indirectly by subsidising procurement, the payment of benefits and the infrastructure costs, or directly by providing public collection of taxes and fees provides a practical Internet terminals or by subsidising individual demonstration of the benefits of these products. purchases of computers. Moreover, exposure to these payment products, to All of the countries discussed in this white paper receive social security benefits for instance, helps have made rapid progress over the past decade in people to become comfortable using them. implementing modern payments systems, especially in Employers and governments can advance the entry developing modern infrastructure. But there is still of employees into the banking system by requiring more that can be done to exploit this new payrolls to be deposited into bank accounts, or by infrastructure to generate greater benefits for a wider otherwise promoting such systems. In many cases, number of people.

Appendix Clearinghouse systems

The six countries included in this white paper have all (COELSA), which mainly serves banks in the Buenos implemented major reforms to their payments systems Aires area, and ACH S.A., which serves the provincial over the past several years. They have all modernised banks. Both of these systems operate in a similar their cheque clearinghouses, and all except Venezuela manner, clearing cheques, interbank direct debits, have implemented real-time systems for large-value transfers and other payment instruments. Transfers transactions. include those made using the Internet and ATMs as well as credit and debit cards. All cheques are cleared Argentina within 48 hours. The ACH and COELSA systems are Argentina’s system of financial settlements was interconnected, use similar technological systems and substantially reformed in 1997, when the Central Bank appear to banking customers as a single national of the Republic of Argentina (BCRA) established a new clearinghouse. framework for private clearinghouses to modernise the All cheque information is electronically captured, traditional paper-driven systems. The BCRA also and clearance is also handled electronically for cheques implemented a new Real Time Gross Settlement (RTGS) below the low-value threshold, below which cheques do system, which private clearinghouses are required to not travel. This amount is currently set at 700 pesos, use to settle their BCRA current accounts. Two large- which covers about three-quarters of all cheques issued value and two low-value clearinghouses were in the country. Cheques below this amount are always established. cleared within 48 hours. Higher-value cheques are The Central Bank’s RTGS system is called Electronic physically exchanged among the banks. Even though Payment Methods (MEP). It handles all interbank electronic records are used for control purposes, they transfers, including those made on behalf of clients, do not clear until the actual cheque has been presented through current accounts maintained by participants and the signature has been checked. Cheques are at the Central Bank; overdrafts are not allowed. The cleared within 48 hours within about 60 km of Buenos system is based on a single account for both executing Aires, but elsewhere it can take three to five days. The settlements and for complying with the BCRA’s Buenos Aires region accounts for about one-half of minimum liquidity requirements. These accounts can Argentina’s cheque volume. be accessed online in real time to make direct transfers Two high-value clearinghouses were created including those for settlement of intra-day net following the 1997 reforms. Interbanking (CCI), balances from the clearinghouses. The BCRA’s system created in 1998, provides services to all of Argentina’s is unusual in that it designates clearinghouses as private banks. Provincanje, created in 1999, serves the high-value if they settle transactions within 24 hours, provincial banks. Both provide same-day multilateral and low-value if settlements take longer, regardless of net settlement services. They are interconnected and their value. they operate in parallel fashion under BCRA co- Two low-value clearinghouses have been ordination. Participants must maintain sufficient authorised by the BCRA:Compensadora Electrónica collateral with the Central Bank to make transactions.

Brazil COMPE is a national multilateral net clearinghouse system for cheques, DOCs and bloquetos. Cheques may Reforms to Brazil’s financial system implemented be truncated under bilateral agreements, while other following the 1995 banking crisis were primarily aimed documents are always truncated. There are two at increasing processing speeds. The focus shifted to sessions each operating day for cheques over and risk management in 2002 with the introduction of the under a threshold value, currently 300 reais. “Over” National Payments System (SPB), which includes a cheques are cleared on the same day and “under” large-value RTGS settlement system operated by the cheques are cleared overnight. Net balances are Central Bank of Brazil (BCB). The SPB achieves settled at the end of each session via the STR and all systemic risk reduction by monitoring Central Bank payments are irrevocable at that point. reserve accounts throughout the day and by providing a real-time Reserves Transfer System (STR). Overdrafts Chile to reserve accounts are no longer allowed, and Chile’s payment infrastructure has been substantially transaction clearances are delayed if a bank does not modernised following a 1997 amendment to the have sufficient funds. General Banking Law. Implementation was gradual In addition to the STR, four other new payment because of the lingering problem of subordinated clearing systems were implemented as part of the debt, which continued to affect financial institutions. 2002 reforms. They include an interbank net A major push towards modernisation was initiated by settlement system, an ATM network, and two debit and the Central Bank of Chile (BCC) in September 2000. credit card networks. The traditional cheque The Central Bank is in the process of implementing clearinghouse called COMPE continues to operate. a new RTGS system. When it is fully operational in In addition to cheques, there are three types of September 2005, the system will work in conjunction interbank payment instruments in Brazil. The Credit with a privately owned large-value clearinghouse Document (DOC) is an overnight interbank transfer up (CCPAV), managed by Compensadora Bancaria to a limit of 5,000 reais that supports ATM and (Combanc). It uses interbank cheques for overnight Internet transactions. The Electronic Express Transfer net settlements. To smooth implementation, the (TED) was introduced in 2002 as part of the Association of Banks and Financial Institutions (ABIF) modernisation process and it enables same-day has set up a temporary parallel large-value net settlements. Boletos de Cobrança are bar-coded paper clearinghouse called Cámara de Cobranza, which gives invoices that allow consumers to pay bills at an ATM, the banks a way of connecting to the RTGS. through Internet banking or at a bank. The physical Since 1985, ABIF has operated a small-value document may be truncated by the collecting bank, in multilateral net clearinghouse called the National which case the transaction is cleared and settled Financial Communication System (SINACOFI). This electronically. system has been gradually modernised, but it is still The Interbank Payments Clearing House (CIP) is only partially automated. Paper cheques are sent to an designed for settlements of DOCs, TEDs and electronic outsourced processor, which issues a report showing boletos. This is a hybrid system, with net settlements at the total transactions of each bank. This goes to the end of the day based on credit orders that occur SINACOFI, which analyses it overnight for settlement throughout the day. Balances are settled through the following morning in most of the country’s separate COMPE “linked” accounts at the BCB, and regions. The Central Bank is expected shortly to issue participants use the STR to maintain a positive balance. new rules to enable total automation, and SINACOFI

has already installed an Internet-based system to CENIT handles far fewer transactions, but accounts for facilitate communications throughout the country. nearly one-half of the value of payments since it handles relatively high-value government payments. Colombia ACH Colombia recently launched a new interbank The Central Values Deposit (DCV) was established by network for Internet-based transactions called the Bank of the Republic (BanRep), Colombia’s central Electronic Services Payment (PSE). The PSE serves as a bank, in 1992. This is an electronic high-value net mediator between online merchants and acquiring system, with settlements occurring at the end of each banks, and customers can pay for purchases either day. At that time there was also a real-time system for from their bank accounts or with a credit card. institutions that did not maintain an account with BanRep, and in 1998 this was expanded into a full Mexico RTGS system, in the midst of the financial crisis. While Mexico began a substantial modernisation of its the implementation took a mere 15 days, the payments settlement systems in 1994. At that time, transition period was difficult because the system was the Bank of Mexico, the central bank, operated both not ready for the shocks imposed by the crisis. The an electronic interbank settlement system and a relationships between the banks and BanRep are manual cheque clearinghouse. A principal objective of maintained through single deposit accounts (CUDs) the reforms was to replace large-value cheques with used for both clearance and reserve purposes. electronic transfers through the Bank of Mexico’s BanRep also administers an automated low-value existing RTGS system, the Account Holders Service multilateral net clearinghouse called the Electronic System (SIAC). The SIAC had been launched three Cheque Compensation System (CEDEC). The banks years earlier, but it lacks the ability to include send their cheques to outsourced processing payment instructions for third-party transactions. companies that convert 90% of these cheques to The Bank of Mexico filled this gap in 1995 with the electronic form for transmittal to CEDEC, which settles launch of the high-value Extended Electronic Payment the resulting net payments through BanRep accounts. System (SPEUA). This system is now being replaced Payments are settled by noon on the day following with an upgraded system, including a new presentation of the payment instruments to CEDEC. technological platform that went online on March 1st The government has promoted the use of electronic 2005. The Interbank Electronic Payment System payment products, and BanRep also administers the (SPEI), also launched in March, enables digital National Interbank Electronic Compensation System signatures, integrates a sophisticated messaging (ACH-CENIT). This system was created in the wake of protocol, and increases capacity from 5,000 to 20,000 the 1998-99 crisis to encourage the development of payments per day. Participants can settle transactions electronic payment products, especially direct debits in real time through SIAC, or they can extend lines of and credits. It is primarily focused on public-sector credit to each other and settle at the end of the day. payments. It is in the process of modernisation and all The Ps50,000 minimum transaction value has also settlements will be intra-day by the end of 2005. been removed. ACH Colombia, operated by a group of private Cecoban, Mexico’s cheque clearinghouse, was financial institutions, provides a second clearinghouse privatised in 1997, and a multi-phase modernisation for electronic payments. It is focused mainly on retail program was launched. The upgrades included an operations and high-value interbank transactions. electronic settlement system known as Pago Volume totalled 17 million transactions in 2004. ACH- Interbancario, which provides electronic processing

for nearly all transactions. Net balances are cleared each bank’s BCV account to settle the net balances though the Bank of Mexico’s Clearinghouse System between 3 pm and 3.30 pm on the second day. (SICAM), which is operated by Cecoban. This is a net Financial institutions also use their BCV accounts to settlement system for electronic transactions, with carry out bilateral large-value settlements such as balances cleared through the SIAC on the day those for credit card transactions. Following the 1998 following the transaction. In 2002, Pago consultations, the BCV implemented a proprietary Interbancario was transformed into TEF. At the same SWIFT closed users group, which institutions could use time, direct debits (DOMI) were introduced. to initiate same-day interbank transactions. This Also in 2002, the first phase of a new cheque system does not operate in real time, and the Central truncation and imaging system was launched, starting Bank manually processes each transfer. To with the design of the cheque image and the compensate for this weakness, seven large banks have introduction of a standardised 18-digit banking code. set up a private network to communicate payment The second phase of the truncation system began in information. 2003, with preparations for image exchange Large-value payments account for an estimated operations. At least one Mexican bank has already 90% of all payments in Venezuela, but there is no clear begun truncating cheques at the merchant level. distinction between high- and low-value payments in the BCV’s clearinghouse system. The Central Bank has Venezuela announced plans to establish a definition for high- Venezuela’s payments systems are currently in the value payments and to process them through a process of an extensive modernisation following separate channel. This will be a preliminary step consultations with the banking sector in 1998. The towards the establishment of an RTGS system for Central Bank of Venezuela (BCV) operates two large-value payments, which will eventually replace payments clearinghouses, one for cheques and one for the present SWIFT technology and private bank- large-value transactions. At the core of both systems operated networks. This would eliminate the high-risk are current accounts that each bank or financial float that currently exists in both the cheque and institution holds at the BCV, known as a single SWIFT systems. account, which is used both for interbank settlements Implementation of a new BCV-operated electronic and for compliance with reserve requirements. clearinghouse for cheques began early in 2004 when The low-value cheque clearinghouse uses a semi- the banks started replacing cheque numbers with 20- automated multilateral net settlement arrangement. digit client numbers using magnetic ink. Known as the Cheques are presented to the BCV physically and on a Electronic Clearing House for Cheques and Other computer diskette with aggregate information for Means of Payment (CCE), the new system also each day’s operations compiled at 6 pm. The BCV modernises the means by which financial institutions processes this information electronically and returns and the BCV exchange information, facilitating all cheques that could not be processed by the next types of interbank arrangements. The BCV began a morning at 6 am. Where possible, the banks resolve trial of the new system in early 2005, running both the irregularities and re-submit cheques to the BCV by systems in parallel to work out the bugs before full 2 pm. The BCV then processes debits and credits to implementation, which is anticipated in mid-2005.

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