what’s behind

A “war” involving banks and payment machines and which has the “special participation” of the Central Bank and Congress could put consumers and merchants in a complicated situation: the end of interest-free installments for credit card purchases.

Interest-free installments are one of the main sales mechanisms for retailers. Merchants, including online ones, give deadlines of up to 12 months to pay for interest-free purchases. At an event last month, in Curitiba, the president of the Central Bank, Roberto Campos Neto, said that 40% of Brazilian retail sales are made using this modality. In emerging countries, this percentage is between 10% and 15%. In the United States, 28%.

Behind this war is the end of credit card rotation. The modality, used by customers who fail to pay the full bill, has one of the highest interest rates. In July, the average cost was 445.69% per year, one of the highest rates since the beginning of 2017, according to the BC. This means that, in 12 months, a revolving debt of R$1,000 turns into a debt of almost R$5,500. The revolving loan also has one of the highest defaults: 49.51% of the portfolio.

BC, Ministry of Finance and financial institutions have set up a working group that is discussing the modality. Entities linked to retail and representatives of the payment machine segment were included in the discussions in the middle of last month.

In a Senate hearing at the beginning of August, Campos Neto said that the solution to these high interest rates is heading towards its end. The commission must present a solution to eliminate the rotating modality by November.

It would be replaced by credit card installments, whose average interest rate was 198.43% per year in July – a cost that makes a debt almost triple in size in 12 months.

The issue is that, with the end of the revolving system and its replacement by card installment credit, the much-used interest-free payment runs the risk of being extinguished. The pressure for this comes mainly from banks, which say they bear the risk of defaulting on these installments.

On the other hand, consumers who pay their bills on time will be harmed if they can no longer pay interest-free installments on their purchases. And retailers consider that banning the modality could make part of sales unfeasible.

The battle reached the advertising medium. Banks asked for the removal of two advertisements about interest-free installments, one from the Brazilian Internet Association (Abranet) – an entity that represents companies linked to payment machines – and another from the Brazilian Association of Bars and Restaurants (Abrasel). Both were suspended by the National Advertising Self-Regulation Council (Conar).

Abrasel appealed, through an announcement, to the Minister of Justice. According to the entity, Bradesco, Itaú and Santander sued Conar to restrict freedom of expression in a cause of enormous interest to society.

Abranet formalized, this Tuesday (12), its disaffiliation with Conar because it believed it had been censored. The council, at the request of Febraban, suspended the broadcast of Abranet’s information campaign advertisements in defense of maintaining interest-free installment payments.

See below how credit card sales work, who the parties involved are and the reasons for the controversy:

How does a credit card purchase work?

Paying for a purchase with a credit card is an operation that involves several agents, in addition to the consumer and a commercial or service establishment. The card issuing bank, a credit card brand and a machine company, which processes payments, also participate.

What is the role of each party in credit purchases?

The bank is responsible for issuing the card, providing credit and assumes the business risk. The card brand is the company that regulates the payment process. The machines (or acquirers) are responsible for accrediting commercial or service establishments. And the store owners are charged a fee that is divided between the agents in the process.

How much do credit card sales make?

The payment method generated more than R$1.1 trillion in the first half of the year, according to the Brazilian Association of Credit Card and Services Companies (Abecs). This is a growth of 10.1% compared to the same period in 2022.

What’s behind the war between banks and machines?

Behind the war between banks and machines are receivables. They are a title that shows that the seller has the right to receive, within 28 days, the amount related to the operation from the financial institution that issued the card. Payment is made even if the customer does not pay off the credit card bill.

Receivables also function as a “loan” for store owners made by the machines and have become a big business, with no risk of default – the risk remains with the banks.

The greater the number of installments, the better the deal for independent acquirers. In their resistance against the end of interest-free installments, they have small and medium-sized retailers as allies, who are more dependent on the anticipation of receivables.

What do banks propose?

The Brazilian Federation of Banks (Febraban) stated, in a note, that it and financial institutions “will pursue a path that dilutes the credit risk between the links in the chain and eliminates cross subsidies, in a transition without disruptions to the card product credit and how it is financed”.

The federation says that there is no intention of ending purchases in installments on credit cards. “The entity participates in multidisciplinary groups that analyze the causes of interest rates charged and alternatives for redesigning the revolving system, on the one hand, and, on the other, improving the purchase installment mechanism. Therefore, neither of the two models under discussion presupposes a disruption of the product and how it is financed”, he informed in a statement.

What is the relationship between the end of the revolving system and the debate about interest-free installments?

According to behind-the-scenes reports, banks are pushing to limit the practice of interest-free installments, claiming that it ends up influencing the high interest rates on revolving credit cards.

Behind this argument is the idea that interest-free installments enable sales to consumers who will not necessarily be able to pay off their bills – and will therefore end up “contracting” revolving credit. And the risk of default remains with the banks.

Merchants and service providers, especially small ones, believe that maintaining the current rules is important for their survival.

What does the machinery sector suggest?

The machines or acquirers discard the banks’ proposal, as they consider that they already pay the interchange fee to the issuer for each transaction. This tariff would have the role of compensating for risks.

The president of the Brazilian Internet Association (Abranet, which represents the machine industry), Carol Conway, stated in an article in Folha de S.Paulo that the big banks want to attribute responsibility for the high interest rates on revolving payments to interest-free installments.

“The consumer is not charged interest and on the seller’s side the annual interest is only 19% (interest-free installments in advance). Furthermore, it is not prohibited for the seller to give a discount to receive cash”, highlights the director.

Who is behind the machines?

The machines have existed for decades in Brazil, but their regulation dates back to July 2010, when the BC opened the market to competition. Until then there were only two operators, one for Visa cards and the other for Mastercard. Both were partnerships between several banks.

The opening overturned exclusivity. Other companies, not linked to banks, entered this market. This is the case of Stone, from 2012, and PagSeguro, from 2013. However, there are still companies linked to financial institutions. Cielo (formerly Visanet) is controlled by Bradesco and BB; Rede, through Itaú; GetNet, through Santander. Safra also operates in the sector.

Deregulation led to a strong expansion in the number of machines. According to the BC, there were 3.1 million in 2011. Last year, 20.8 million.

How are negotiations at the Central Bank?

A working group is discussing alternatives to the high interest rates on revolving card credit. One of the proposals under analysis, according to statements given by the president of the BC, Roberto Campos Neto, in a hearing in the Senate, is the extinction of the modality. A group decision must be made by the beginning of November.

Campos Neto recognizes that the solution is not simple and depends on finding a balance between the different agents, as a considerable part of sales is made using cards.

What does the Chamber of Deputies propose?

The Chamber entered this dispute with the approval, last week, of the bill that establishes the rules for Desenrola, the debt renegotiation program endorsed by the federal government.

The text provides for a maximum interest rate of 100% per year of the original amount of the debt for revolving credit and for paying credit card bills in installments. The measure will only be valid if there is no self-regulation by the financial sector within 90 days from the publication of the law.

It is also foreseen that credit card debt and other debts related to it can be transferred free of charge to another institution.