In addition, some other characteristics of the credit and debit card market in Brazil should also be taken into consideration: there are big fat fees that sellers have to pay for the credit and debit card issuers (the banks) and for the “acquirers”
When one thinks about the traditional payment system in Brazil – mainly based on credit and debit card transactions – usually the picture of a closed market with just few big players and low competition is drawn in their minds.
In addition, some other characteristics of the credit and debit card market in Brazil should also be taken into consideration: there are big fat fees1 that sellers have to pay for the credit and debit card issuers (the banks) and for the “acquirers”2; there were basically two big “acquirers” that owned more than 90% of market share until 2010; it is a vertical and excluding industry – for a long time, only two main credit card companies were able to provide credit and debit services as long as they were somehow in accordance/partnership with Brazilian banks; it is one sector that is expanding its frontiers – the number of cards issued and the amount of business accepting this mean of payment keep growing despite the economic crisis –; among others.
However, it is necessary to understand how the credit and debit card industry evolved in the country before explaining each of those characteristics. Only after that, it will be possible to analyze why there are so many Brazilian FinTechs interested on providing payment solutions, and having success in their attempts. Finally, this chapter will present a brief analysis of the Brazilian payment company PagSeguro that have been using new technologies to develop merchant-tailored services and to change the payment market in Brazil, especially, in the country’s Credit & Debit card industry.
8.1 Credit and debit cards industry in Brazil: a brief analysis
The relationship between the Brazilian population and the credit and debit card industry has more than fifty years of history. The first Credit/Debit card (the American branch Dinners Club) arrived in Brazil in 1954. In 1968, cards started to be issued by Brazilian banks such as Bradesco for the first time. In the same year, Brazil was already considered the 3rd biggest franchising of Dinners Club. In the 1970’s, Citibank launches its own credit/debit card (Citicard) and comes to an agreement with Banco Itaú and Unibanco in order to create their “acquirer” – the Credicard company that would process all the transactions done via Citicard.
By 1971, there were already 180 thousand credit/debit cards emitted in Brazil and more than 15 thousand business and shops receiving payments via credit/debit card. During the next decade, the number of cards’ emission kept growing despite the economic and hyperinflation crisis. As a result, the credit/debit card company Visa decided to enter the Brazilian market by associating with Credicard. A contract granting exclusive rights to Credicard to emit Visa cards in Brazil and to process all Visa’s transactions was signed. In 1987, however, this contract was breached, which lead Credicard to sign another exclusivity contract, now, with MasterCard.
In 1988, Credicard had more than 50 partner banks that could emit cards under the control and supervision of this acquirer company. Moreover, the company had already emitted more than 1 million cards in the country by that time.
During the next decade, Visa returned to Brazil after establishing a new exclusivity contract with Banco do Brasil, Bradesco and Banco Nacional. Visa’s new strategy was to approach to small and medium size banks, especially, the regional and local ones in order to compete with Credicard and its MasterCard. By 1994, there were more than half million business and shops already accepting credit/debit card as a mean of payment.
In the next year, Visa created its own acquirer called Visanet under the supervision, support and investments of Banco do Brasil, Bradesco, Banco Nacional e Banco Real. By that same time, Redecard was created by Citibank in association with Itaú and Unibanco in order to replace the old Credicard and to manage Citicard, MasterCard and Hipercard cards’ transactions.
Only on December 16th, 2009, the Administrative Counsel for Economic Defense (CADE) determined that the contractual exclusivity established between MasterCard-Redecard-Itaú/Unibanco/Citibank and between Visa-VisaNet-Banco do Brasil/Bradesco/Banco Nacional/Banco Real had to end. The counsel argued that the contractual exclusivity was jeopardizing both consumers and merchants as well as creating market reserves and market distortions.
By imposing the interoperability of the credit/debit card machines, the CADE and the Central Bank tried to stimulate more competition and costs’ reductions. Due to this interoperability of card machines (Point of Sales machines – POS) and to the breaching of the contractual exclusivity clause, both Redecard/Rede 3 and Visanet/Cielo’s credit machines would have to start processing transactions made by any branch of credit/debit card.
By applying these measures, the Brazilian authorities expected that other credit/debit cards acquirers would enter the Brazilian market, compete on it and offer better quality-lower costs services. As it can be observed in the figure 8.1.1, the number of business and shops accepting credit card as payment method has grown significantly since 2009. Moreover, the number of new acquirers has increased especially between 2010 and 2013.4
Moreover, the average Merchant Discount Fee charged by the acquirers decreased since the end of the contractual exclusivity clause. The figure 8.1.2 shows how was the evolution of this fee paid by merchants (business and sellers) to the acquirers. Although it has decreased since 2010, this fee is still considered high (around 2.80% for credit cards and 1.60% for debit cards in 2012). By 2016, the Merchant Discount average fee for credit cards was 2.36% per transaction and 1.56% for debit cards – see table 8.1.2.
Indeed, the Merchant Discount fees (MDF) are the main profit source of acquirers. Although these fees have been reduced mostly due to the growth of competition among acquirers, the revenue of these companies keeps increasing substantially – see figure 8.1.3. In other words, it is possible to affirm that this is happening, because the number of costumers and business using credit and debit card as payment method has increased even though the MDF applied to both credit card transactions have decreased a little since 2010 and the MDF applied to debit cards was quite stable.
Despite of the increasing in the competition among acquirers and the short reduction in the average MDF, the so-called “duopoly” of the two main Brazilian acquirers – Rede and Cielo (formerly Visanet) – remains. There is still a predominance of these two companies as the ones that possessed more than 60% of the entire credit and debit card market share in 2016 as it can be observed in figure 8.1.4.
Although the two biggest acquirers still dominates the biggest part of the Credit & Debit Cards market in Brazil, this scenario has started to lightly change during the last three years. Indeed, it is observed that the duopoly has been slowly reduced due to the creation and consolidation of Payment FinTechs – NuBank, Mercado Pago, Büblue, Stone Pagamentos and PagSeguro5 – since 2013. The growth of these companies can be considered the beginning of a disruption in the traditional credit and debit card payment system in Brazil. In fact, not only the payment ecosystem has been impacted by the eruption of those companies, but also the traditional banking system has been forced to change in order to compete in a market with a bigger number of modern, innovative and customer-oriented players.
8.2 PagSeguro
PagSeguro is the Brazilian acquirer and card services’ provider that growths the fastest in the country. Born from/in the main Brazilian Internet and Interne-related content provider, the company started its activities focusing on proving online payment services for the e-commerce ecosystem that was emerging in Brazil during the 2000’s. Rapidly, PagSeguro became one of the safest and most efficient online payment platforms in the country.
After the acquirer-credit/debit card companies contractual exclusivity clause came to an end in 2010, PagSeguro decided to expand its frontiers and invest in the development of low cost and business-tailored payment solutions for not-served or underserved off-line merchants. The previous acquirers’ duopoly created a market distortion by leaving the majority of Micro entrepreneurs and SMEs totally or partially behind the credit and debit card payment solutions and platforms. The high Merchant Discount Fees and the Point of Sale (POS) devices’ rental paid to the acquirers did not allow many micro, small and medium-sized business to benefit from the advantages and conveniences of using credit and debit card as a mean of payment.
These left-behind business and merchants, thus, became the market target of the expanded PagSeguro. Aiming to fit the needs of its target market, PagSeguro expanded its products beyond the digital payment channels it had used until that 2012. In 2013, it started to offer new services such as free digital accounts and prepaid cards to its clients. Additionally, the company also disrupted the credit and debit card market by providing in-person payment solutions via efficient, low-cost and modern Point of Sale (POS) and Mobile Point of Sale (mPOS) devices throughout the entire country. In less than five years, PagSeguro was able to conquer approximately 3% of the Brazilian card-based payments market.6
Indeed, the key of PagSeguro success and expansion relied on the association of POS and mPOS devices’ offer with the provision of digital, business-tailored digital services such as free digital accounts, digital wallets and wealth/profit management tools. Some products and services associated with PagSeguro digital free account can be seen in the figure 8.2.1.
This end-to-end digital payment ecosystem created and provided by the company challenged the traditional Brazilian credit & debit card industry for the first time. Before PagSeguro, a couple of companies tried to challenge the status quo, but failed mainly due to the lack of expertise and the absence of big and powerful investors behind the initiatives – competing with the two main acquirers, for instance, was not an easy task even after the CADE and Central Bank’s interventions procompetition.
The impact of the new technologies and payment solutions provided by PagSeguro was so intense that, in four years, the company had more than 2.5 million of merchants using PagSeguro’s POS and mPOS devices as well as other services offered by the company such as sales reports and inventory control tools (management tools). Moreover, it is estimated that 75%7 of PagSeguro’s merchants – around 1.87 million business – accepted payments neither by credit nor by debit cards before signing the contract with the company. The impact of PagSeguro becomes even bigger when one remembers that there are around 11.3 million of companies in the country – the addition of 1.87 million of businesses into the credit/debit card payment world represents the inclusion of 15.8% of the total number of business/companies in Brazil8. The evolution in the number of merchants using PagSeguro’s products can be seen in the figure 8.2.2.
The company’s total revenue and income also grew significantly between 2013 and 2017, even during one of the most severe and deepest economic crisis the country ever faced. In September 2017, the revenue was estimated in R$ 1.69 bi just during the first nine months of that year. The year before, the total revenue was R$ 1.13 billion while the numbers of 2015 and 2014 were R$ 0.67 bi and R$ 0.32 bi respectively.9
According to reports released by the company, the main source of its profit relies on POS and mPOS devices sales and on the attractive merchant discount fees. The main difference between PagSeguro and other acquirers in Brazil relies on the following: instead of renting the POS or mPOS to the merchants, PagSeguro sells them with a really competitive price. In fact, the price paid for each POS or mPOS device corresponds to 3 to 6 months of rental paid for using other acquirers’ POS. Moreover, this price can be paid in up to 12 monthly installments which allows the new and micro merchants to get access to the companies services in a smoother and more feasible way that fits better each merchants own economic needs.10
Indeed, PagSeguro has invested in offering not only cheap POS devices options, but also in developing different models of those devices – each one of them designed to fulfill specific needs of micro entrepreneurs and SMEs. For instance, there are the Minizinha (entry-level mPOS device, the cheapest one), the ModerninhaPro, the Moderninha Wifi, the Minizinha Chip (the mPOS device Minizinha connected to the Internet either via SimCard or wifi), PlugPag (the POS device Moderninha or the mPOS device Minizinha connected with a business automation/payment system), and the PagSeguro TEF (POS device used by big shops such as supermarkets, drugstore chains, etc). These Point of Sales devices and their respective prices can be found in Appendix C.
In addition to the POS and mPOS devices’ lower prices and different models, PagSeguro also offers Merchant Discount Fees cheaper then its competitors. If the payment is made via debit card, the merchant will pay only 2.39% as MDF in each transaction. If a credit card is used instead, the MDF will be 3.19% (no installments) or around 3.79% if the merchant’s customer requires installments and if the merchant receives the payment’s money 30 after the purchase (the most common case in Brazil). In case the merchant needs to receive the money paid by its customer in on business-day11 after the purchase, then, the MDF raises up to 4.99% (no installments) or 5.59% (if installments are required by the customer).12
As it can be observed in the comparisons found in table 8.2.1, all the fees – MDFs, adhesion – applied by PagSeguro are lower than its biggest competitors. According to a formal report released by the company before its IPO in the New York Stock Exchange in the beginning of 2018, the company has achieved its main goal of providing low cost, (not-served or underserved) merchant-tailored payment solutions. So far, the company has spread its network throughout all the 26 Brazilian states and the Federal District.
Many merchants using PagSeguro have shown contentment with the services provided by the company – especially those that were underserved by the other big Brazilian acquirers. In addition, some big drugstores, supermarket chains, and department stores have also shown interest in migrating from their current acquirer to PagSeguro.
In order to compete with PagSeguro, Rede and Cielo are trying to reshape their products and services offers. Indeed, Cielo and Rede started to offer different kinds of merchant retention/ merchant loyalty plans – plans that do not request the payment of MDFs up to a pre-established limit of transactions as long as the merchant agrees to pay a higher monthly rental/plan. These new offers of plans with reduced MDFs, however, do not seem to democratize the access of not previously served or underserved merchants to credit and debit card payment ecosystem. The number of not previously served merchant signing contracts with Cielo and Rede, for instance, has not increased expressively so far differently from what has happened with PagSeguro (around 1.8 million not previously served merchants started to accept card payments after signing a contract with the company).
Despite this growth, some could argue that increasing the number of merchants accepting credit and debit cards payments, per se, is not enough to increase the inclusiveness of a country’s economy as a whole. Indeed, the number of people connected to payment systems and, consequently, to the formal economy is not enough to assure the democratization of financial services mostly provided by banks, financial institutions or acquirers for instance. However, PagSeguro has not only democratized the access to both online and credit-debit card payment platforms, but also offered this kind of service to a historically excluded and forgot portion of Brazilian merchants. In addition to this inclusion, the company has also created a way of enabling merchants to use these payment platforms without requiring that they possess a bank account. By creating a system where the merchants can receive the money paid by their costumers via PagSeguro prepaid card, the company allows the sellers to get into the financial world – paying bills and suppliers, buying products, making financial transactions – without necessarily linking them to the traditional banking system that historically has never paid enough attention to the needs of micro entrepreneurs and SMEs for example. As consequence, more merchants got into the formal economic process because they now both produce (sell goods and services) and have access to different payment channels and services in the formal economic system.
It is possible to claim that PagSeguro has contributed with Inclusive Economic Growth in Brazil as it allowed previously excluded/underserved economic actors such as micro entrepreneurs and SMEs’ merchants to get into the formal economic process. Moreover, the company also lowered the fees charged for each credit/debit card transaction, allowing the merchants save more income/profit generated in each sell and permitting them to invest more capital (savings) in their own business or in other investment options – the money used to pay high MDFs, for instance, could be better applied/invested by the merchants that now would be able to save more money as the fees were reduced. In addition, PagSeguro also applied different technologies and digital products – management tools and digital free accounts – to its merchants business. In other words, it offered different resources and services to help each merchant to understand his/her own business better – there are tools analyzing the merchant’s income composition and evolution, the shop’s sells and profit – and, in this way, to increase his/her productivity and potential profit.
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