Instrumentos de Pagamento de Varejo: Cartões de Crédito – Questionário

1. Cooperation versus Competition The Brazilian Case Instrumentos de Pagamento de Varejo: Cartões de Crédito – Questionário World Bank Washington, D.C. May - 2007

2. Outline • The Brazilian Retail Payments System – main features • The Banco Central do Brasil – BC´s Policy and Role • The main actions of the BC • The main reaction of the Market • Next steps

3. Funds Transfer Systems – Clearing and Settlement Infrastruture Cheque Credit transfer Payment card Payment card and Direct debit “bloqueto de cobrança” DOC TED Credit Debit Compe Multilateral D+1 CIP – Siloc Multilateral D+1 CIP – Sitraf Hybrid D+0 Tecban Multilateral D+0/D+1 STR – Central Bank RTGS

4. Payment Cards Industry in Brazil – Structure • Payment Card Societies • Visa (53%) • Mastercard (37%) • Others (10%) • Issuers • 5 issuing banks hold 88% of the market share • 45 banks (40 conglomerates) issue Visa • 55 banks (36 conglomerates) issue Mastercard • 3 banks issue Amex • Acquirers: • Visanet – Visa (53%) • Redecard – Mastercard and Diners Club (38%)

5. Acquirers Only one acquirer per card brand Acquirers are bank-owned but are not banks Vertically integrated industry: acquirers provide infrastructure services and authorize merchants Lack of cooperation on infrastructure: networks are not shared (ex. POS terminal) Large array of products and services: network is used for other products (cash-back, prepaid mobile phone recharge, “correspondente bancário”) Payment Cards Industry in Brazil – main features

6. ATM Market – Number of terminals Thousand 160 140 120 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 Open access Restricted access Total ATM sharing Quantity 2003 2005 (%) (%) Transactions in shared ATM´s 1,0 7,4 99,0 92,6 Transactions in private ATM´s Data source: Banco Central do Brasil, Banks and ATM networks

7. Average number of transactions per ATM – 2005 Data Source: Banco Central do Brasil, Banks and ATM networks

8. Low usage of installed capacity, raising fixed costs per transaction Low interoperability, geographical overlapping High costs of networks logistics, development and maintenance Insufficient standardization of communication protocols, systems, methods and processes Network infrastructure perceived as a competitive advantage in offering payment services ATM Market – main features

9. Brazilian Retail Payment System – 2004 Diagnosis • Points of inefficiency • Infrastructure for clearing and settlement of retail payments is fragmented • Low infrastructure interoperability among payment instruments distribution channels • Few innovations in products and services

10. Retail Payments – Scenarios and trends BC Opinion Supply Technological advance Transactions increase Opportunities for economies of scale and scope Demand More options More quality STP to business Lower costs Processing of increasing volumes, handling distinct products and offering new services in an efficient, safe and reliable way Usage of electronic instruments and Integration of retail systems and networks

11. Demand side the price mechanism does not work out on the resource allocation, as all bank-customer relationship is priced together (information asymmetry) – bundling Supply side does not encompass network effect (positive externality) governance – moral hazard infrastructure as an entrance barrier Market failure

12. Focus of the Banco Central do Brasil (BC) Promote economic efficiency in currency’s usage Objectives Increase relative share of electronic instruments vis-à-vis paper-based instruments Economic efficiency and a higher social welfare Retail Payment System – BC Policy

13. Banco Central do Brasil’s role • To indicate policies, directives and objectives • To foster private and cooperative solutions • To coordinate investment decisions and expectations • To act as a catalyst for the relationship between relevant parties and public authorities interested in the subject • Regulation, when needed

14. Main actions of the BC • 2002 – BC began talking about interoperability and the use of electronic payment instruments • May 2005 • Report on the Brazilian Retail Payment System • May 2006 • Included an Annex on Statistics in the Diagnosis • Directive 1/2006 (May 4th, 2006) • July 2006 • Agreement BC – Competition Authorities • September 2006 • Cards industry data collection

15. Non-cash instruments - Total volume in millions Main reactions of the Market intrabank

16. Main reactions of the Market – 2006/2007 • ATM Network • Sharing agreements are expected to increase – four of the largest banks have already begun • Two bilateral agreements between three major banks • Between one large bank and an open-access ATM network • New services and products • Board of Directors of the largest ACH and of the Brazilian Federation of Banks announced: • Centralize services currently performed individually by the banks • Standardization of business models • Less overlapping • Safer and better quality services • Payments portal – e-commerce

17. Main reactions of the Market – 2006/2007 • Card Industry • Issuing banks (88%); Payment Card Societies (100%); Acquirers (100%): • Showed huge interest in the results of the Report • Merchant (main commercial associations): • Showed interest in reducing their final costs • Complained about infrastructure, fees etc

18. Next Steps – 2007/2008 • Publish report on payment card industry: • Interchange, merchant discount, and customer fees; Concentration; Profitability; and Governance • Induce another round of talks among main retail market players • Regarding the fragmented infrastructure, the payments card industry and new services and products, in order to keep the BC in the center of the discussions • Publish new directives focusing on the retail payment system efficiency • Transparency in BC policy • Continue to monitor • Keep following market evolution, acting as catalyst for conflict resolution • Regulate if necessary

19. Contact Mardilson Fernandes Queiroz mardilson.queiroz@bcb.gov.br +55 (61) 3414-1629