options in the war between banks and machines

A complex challenge is being faced by a working group made up of the Central Bank, the Ministry of Finance and entities representing the banking, payment machine and retail sectors: finding solutions for the high interest rates charged on revolving credit – used by those who pay the full card bill – and, at the same time, decide whether interest-free installments on credit card purchases should continue to be allowed.

Still in August, the president of the BC, Roberto Campos Neto, spoke about the possibility of ending the rotary system. The decision must be made by November. This is one of the most expensive lines of credit that exist: the average interest was 445.7% per year in July, which makes the debt grow more than five times in 12 months.

The fear of those involved in the discussion is that, due to pressure from the banks, the end of the revolving system will also lead to the extinction or restrictions on interest-free installments of purchases offered by businesses.

Almost 90% of store owners in the country use interest-free installments on cards as a sales strategy, according to a recent survey by the National Confederation of Commerce in Goods, Services and Tourism (CNC).

Denis Forte, professor at the Center for Applied Social Sciences at Universidade Presbiteriana Mackenzie, assesses that there are two alternatives to this issue: a more liberal approach, allowing the market to act and encourage competition; and another that is more interventionist, limiting the field of action of machine companies that are independent of banks, such as Stone and Pagbank (new name of PagSeguro).

To date, a more liberal stance on the part of the Central Bank has prevailed. In other words, without intervention, stimulating competition. In recent years, this has contributed to the emergence of new competitors in the machine segment, independent of banks, and the reduction of costs for merchants and service providers.

Why the end of the revolving system could affect interest-free installments on the card

This complex scenario involves several interests.

One idea considered by the working group is that, with the end of the revolving system, consumers who do not pay their bill in full will automatically fall into the installment plan, whose rates are lower, but still high: 198.4% per year, in average.

The issue is that, with the possibility of the end of the revolving system and its replacement by card credit in installments, the interest-free installments offered by most retailers in the country are at risk of being extinguished or limited.

CNC research shows that 47% of retail establishments have up to half of their sales billed on interest-free credit cards. For 29% of retailers, interest-free installment sales represent between 50% and 80% of revenue. And for another 13%, the share of this modality in total sales is more than 80%.

Banks claim that, while retailers and machine companies earn more by enabling business through interest-free installments, they – the banks – are the ones who bear the risk of default in these transactions.

The argument is that the modality encourages purchases that many consumers will not be able to afford. The level of default in the revolving loan is astronomical: the most recent data indicates that 49.5% – almost half – of these loans are more than 90 days late in payment, according to the BC. The high risk of default is one of the banks’ main justifications for why revolving loans are so expensive.

This criticism of banks targets independent acquirers, such as Pagbank and Stone, since the banks themselves control part of the sector. Cielo (formerly Visanet) is controlled by Bradesco and BB; Rede, through Itaú; GetNet, through Santander. Safra also operates in the sector.

Any limitations – such as the prohibition of interest-free installments, for example – could mean a restriction on the activities of independent acquirers, who do not have a bank behind them. This would open up space for bank machines (such as Cielo, Rede and Getnet) to regain hegemony in the sector.

Retailers maintain that the ban on interest-free installments could make part of sales unfeasible. In this dispute, independent machine companies are on the side of traders. Meanwhile, consumers who pay on time have a lot to lose if they can no longer pay in interest-free installments for their purchases.

The Brazilian Federation of Banks (Febraban) says, in a note, that it participates in multidisciplinary groups that analyze the causes of the interest charged and alternatives for a redesign of the revolving system, on the one hand, and, on the other, the improvement of the purchase installment mechanism .

“Therefore, neither of the two models under discussion presupposes a disruption of the product and how it is financed”, highlights the entity.

The pieces of this puzzle also include acquirers, companies responsible for payment machines, and merchants who split sales through these machines.

They usually anticipate receiving the amounts paid by customers, in a credit operation that has an average cost of 1.45% per month. Banks also offer this option, but with less competitive interest rates, ranging between 8% and 10% per month.

Cristiane Schmidt, former deputy secretary of Economic Monitoring of the federal government and consultant at the Millenium Institute, points out that, in the current scenario, store owners face two types of costs:

1. the cost of paying in installments for interest-free purchases – the sum of how much the merchant no longer earns by not charging more for purchases in installments, plus the amount paid in advance of receivables;
2. the interchange fee – which the machine companies (called acquirers) pay to the bank. The value is greater when the buyer pays in installments, considering the risk of the customer not honoring payments later on.

Banks want to share risks; consultant remembers that they are the ones who approve client limits

What Febraban and the institutions seek, according to a note published by the entity on September 14, is the dilution of credit risk between the links in the chain and the elimination of cross subsidies, such as the absence of interest on installments.

Cristiane Schmidt, consultant at Millenium, argues that it is difficult to understand the banks’ reasoning. This is because, despite the easy sales conditions offered by the retailer, the bank itself is the one who sets the credit card limit, in advance, in analyzing the customer’s risk. In other words, it is the bank that first offers credit to the consumer.

Furthermore, the consultant notes, banks make money by charging the interchange fee, which in the case of installment payments is higher precisely due to the additional risk.

For Schmidt, the high default rate on the revolving loan does not seem to be related to interest-free installments, but rather to more permissive analyzes by banks when granting credit to their customers.

Credit card transactions are on the rise

Data from the Brazilian Association of Credit Card and Services Companies (Abecs) show that, in the first half of the year, R$1.1 trillion were transacted through credit cards, a growth of 10.1% in relation to same period last year.

To get an idea of ​​the expansion of this market, six months of sales this year already exceed the values ​​transacted in the entire year 2018 (R$965.7 billion).

Abecs highlights that in the last five years the number of cards in circulation has more than doubled: there were 99 million in 2018 and now there are 210 million. At the same time, default rates on revolving credit soared, rising from 36.1% to 49.5%, according to the BC.

Forte, from Mackenzie, highlights positive and negative aspects with the eventual end of the rotation. On the one hand, it would inhibit inattentive, ill-informed, compulsive consumers or those without the necessary financial education from committing abuses that harm them.

On the other hand, this would make banks more protagonists, since 82% of credit is in the hands of the five largest, and would reduce the role of machines, resulting in changes in the sector’s earnings.