Banco do Brasil and Caixa Economica Federal have announced that they will be lowering the cost of credit for consumers in Brazil. The government-driven move should finally provide ordinary consumers with the chance to make full use of credit cards in a country that is famous for its high APRs.
Following pressure from the Brazilian government, state-owned Banco do Brasil and Caixa Economica Federal have announced that they will be lowering the interest rates on a range of consumer credit products, including credit cards. Between them the two banks account for just over 25% of the credit card market in Brazil. As a result of the cuts a range of other major banks including Itau, Bradesco, and HSBC Bank Brasil have followed suit with announcements that they will be lowering their credit interest rates too.
In the long term the cut in interest rates is likely to increase the number of consumers who are willing to make use of credit cards to increase their purchasing power by revolving their balances. Having come from a situation where some annual percentage rates (APRs) were as high as 150%, however, it is highly unlikely that consumers' attitudes will change quickly and they will probably remain cautious in the short term. For example, 73% of Brazilian credit card holders who participated in Datamonitor's Financial Services Consumer Insight Survey 2011 said that they do not revolve their outstanding balance each month, making Brazil one of the most debt-averse countries in the world when it comes to credit cards. Once established, these habits can be difficult to break.
For those banks that have lowered the interest rates on their credit cards there is the potential to secure a range of new customers. This is because the number one factor that consumers in Brazil who are looking for a new credit card are interested in is a low interest rate, with 80% stating this to be the case. This indicates that there are significant risks for those issuers that decide against moving with the trend.
An interesting comparison with Brazil is South Korea in the late 1990s and early 2000s, when the government very actively pursued a policy of encouraging credit card use as a means for wider consumer spending and economic growth. As a result South Korea ended up going through a near implosion of the market, with extremely high card debt write-off levels. It is unlikely that Brazil will fall into the same difficulties, but the country does face potential downsides if its encouragement of card use proves too successful.
The move is likely to prove popular with consumers and have a significant impact upon the credit card market in Brazil over the longer term. The short-term economic boost sought by the government from increased consumer purchasing power, however, is almost certain to be a far more elusive goal.
For more information on the Brazilian credit card market, please consult Datamonitor's Payment Cards in Brazil report (April 2012, CM00219-001) or contact Matthew Heaslip at mheaslip@datamonitor.com.