Wednesday, December 19, 2018
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the battle of brazilian interest rates

brazil’s government, retailers and banks are all interested in reviving the jaded brazilian consumer, the the driver of economic growth in recent years.

but interest rates in the country are phenomenally high, with users of credit cards, for example, paying an average of 238.3 per cent a year, according to anefac, a financial sector association. worse, the charges aren’t always as clear as they might be to the shoppers at the tills.

brazilian shoppers, typically, buy almost anything on credit, even when they know they are paying very high interest rates.

often, though, they’re not aware of the true cost of interest. the stores offer shoppers the chance to pay for clothes, for example, in four or six “interest-free” installments. as samantha pearson reported last week, that can often mean hidden interest rates of 6 per cent a month.

some shopkeepers give discounts to people paying cash upfront. but many don’t or cannot, especially in big chains where the assistants are given little freedom to negotiate with the shoppers.

so, brazilian retail prices are much higher than they otherwise would be – the ticket price, in effect, contains a financing cost.

until recently, most consumer credit took the form of payment in post-dated cheques to the shop. consumers would write out four, six or more cheques, equal to the ticket price.

shops would take these cheques to their bank and sell them at a discount. the bank then carried the risk against the shopper and in return profit from the discount it had paid to the shopkeeper.

but cheques are cumbersome things that are expensive to distribute and clear. so as credit cards have become more common in recent years, shops have started accepting payments in multiple installments by credit card.

as before, the shop sells the credit card payment pledges to a bank and gets the money up front from the bank, which assumes the risk of the shopper defaulting, now with the added complication of the credit card company as intermediary.

this, complain the big banks – which are also big credit card operators – has caused them a problem. they profit from the discounts they earn from the shops. but if the shoppers, paying by installments, pay their credit card bills on time, they earn no interest from the shopper directly.

given the sky-high level of credit card interest rate charges in brazil, they could earn much more from the shoppers if they were extending the credit directly to them.

roberto setubal, head of itaú unibanco, brazil’s biggest private sector bank, says this form of “interest free” credit makes up almost 80 per cent of his bank’s credit card portfolio. this, the banks and credit card operators say, is why they have to charge such exorbitant rates of interest on credit cards – otherwise, with most people paying their bills on time, they wouldn’t turn much of a profit.

enter the government. in an effort to restart brazil’s consumer boom, it has forced the big state-controlled banks – banco do brasil and caixa econômica federal – to cut interest rates on consumer lending, including credit cards. the non-state banks have had to follow suit, with two main results.

one is that some credit cards are becoming as cheap to use, as the consumer credit offered by big retail chains. the chains may have to cut their rates as a result, eating into profit margins that are already very narrow. this week, the shares of big retailers like lojas renner and lojas marisa have taken a knocking in anticipation (more in this story in business daily valor econômico).

the other result is that some banks, led by itaú unibanco, are threatening to charge shops for using “interest free” installment plans on credit cards. bradesco, the other big private sector bank, and banco do brasil and caixa say there is no need – which is easy for them as they offer less of this kind of credit than itaú unibanco does. the government is firmly against any charge.

it’s hard to feel much sympathy for the banks. after all, they already charge shopkeepers a hefty whack to buy their receivables.

and here, according to valor econômico, are the monthly interest rates banks charge on their credit cards after the cuts forced on them by the government:
itaú unibanco     9.9
bradesco           6.9
banco do basil   5.7
caixa                  5.65
hsbc                15.95

as any reader able to do a compound interest rate calculation will know, these annual rates are still eye-watering, ranging from 94 per cent per year with caixa to 490 per cent per year with hsbc.

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