trends in payment instruments 2015

In collaboration with

Tecnocom Report onTRENDS IN

PAYMENT INSTRUMENTS 2015

Tecnocom Report onTRENDS IN

PAYMENT INSTRUMENTS 2015

Tecnocom Report on TRENDS IN PAYMENT INSTRUMENTS 2015

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01. Highlights of the

Tecnocom Report 2015

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01. Highlights of the Tecnocom Report 2015

We concluded the previous issue of the TECNOCOM Report by mentioning the imminent launch of Apple Pay in the fourth quarter of 2014. In 2015, we have witnessed successive launches by other operators and tech companies (Samsung Pay, Google Pay, Line Pay) which have had a high profile in the media. Moreover, today practically all financial institutions have electronic wallet solutions, confirming the analysis with which we illustrated this section last year. The search for interoper-ability and the integration of payment networks has been another common factor in many of the markets analysed

In Brazil, we have seen corporate activity which has increased the concentration in the credit card merchant-acquiring market, despite the reform which sought to promote the greater participation of agents. The mobile point of sale devices (mPOS) continue to dominate efforts to install terminals in small businesses, as in the case of the massive campaign in Mexico undertaken by Bimbo, iZettle and Banamex. In Chile, what is notable is the issuance of retail credit cards through alliances with international credit cards. In Peru, Movistar y MasterCard are now providing the first electronic money service (“Tu Dinero Móvil”). Meanwhile, the long-awaited “Modelo Perú” project led by the Peruvian banking association (Asociación de Bancos del Perú - ASBANC) remains in the testing phase. On the other side of the Atlantic, as well as the development of digital wallets, we have seen the rebirth of prepaid cards, especially those sold by non-financial entities, such as the Spanish post office (Correos).

In the regulatory field, there have also been important developments: after the early application in Spain of the limits on inter-change fees established in Royal Decree Law 8/2014 of 4 July, the Bank of Spain's Circular 2/2015, of 22 May, announced that it will publish quarterly all the information relating to the discount and interchange fees applied in credit card transactions. In October, when this report went to press, the European Parliament adopted the revised Directive on Payment Services (PSD2).

In Latin America, meanwhile, important regulatory initiatives have been adopted, such as Law 1735 in Colombia, which creates the companies specialising in electronic deposits and payments (SEDPEs in Spanish), aimed at improving financial inclusion; the regulatory changes established by the Bank of Mexico (Banxico) as a result of the implementation of the Finan-cial Reform launched in 2013, together with the authorisation of the mobile payments operator (Operadora de Pagos Móviles de México) responsible for setting up and running the first clearing house for transfers on mobile devices.

There is a steady trend for the differences between the two regions to narrow year by year. That said, the means of payment executives interviewed noted many regional and national peculiarities, confirmed by official data and reported by users, which will be described and analysed. The three major lines of innovation that we have identified in our conversations this year with payment systems executives are instantaneous electronic transfers (faster payments), the growing development of mobile wallets and the advances in e-commerce.

From the point of view of supply, globally it is credit transfers that are undoubtedly taking the leading role in the universe of retail payments in terms of the value of the transactions. In Latin America, they account for 81.9% of the value of the pay-ment transactions recorded in 2014 (USD 11.1 trillion). Direct debits have yet to take off and reach the popularity they enjoy in Spain and Portugal.

Chart I. Value of payment transactions in Latin America between 2009 and 2014 by instrument (USD, billions)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2009 2014

Cash (M0)

Cheques

Cards

Direct debits*

Credit transfers

0.51%

0.91%

3.2%

5.0%

24.7%

10.8%

1.4%

1.5%

8,541.56

13,629.18

70.1%

81.9%

* Direct debits include intrabank transactions in Peru.

Source: central banks and banking supervisors.


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Meanwhile, the use of credit and debit cards in Latin America has been rising, with the result that in 2014 they accounted for 5.0% of all transactions, compared with 3.2% in 2009. Cards, used in over half the payments in the region as a whole (excluding cash), prevail over other forms of payment, with a history of steady growth in overall terms (63.1% in 2009), as can be seen in Chart II. Cheques, in turn, record a fall in the number of transactions (to 5.4% of the total), due to their gradual replacement by electronic transfers (17.4%), which are the second most used means of payment and so, to a lesser extent, do direct debits. The number of interbank direct debit transactions in Latin America continues to grow very slowly in many countries compared with other forms of payment; there is considerable margin for their use to grow in the region, which implies the need for additional investment to fully adapt the ACH infrastructure to this form of payment (as is the case in Peru), together with financial education for the population as a whole.

Chart II. Number of payment transactions in Latin America, 2009-2014 (millions)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2009 2010 2011 2012 2013 2014

Cards

Credit transfers

ChequesDirect debits


Both in Spain and Portugal and in Latin America, payment methods have developed in similar ways with regard to the re-placement of paper-based instruments, but we see that the total number of transactions in Spain fell by a cumulative 1.9% between 2009 and 2014, thus slowing the decline seen since 2008. With regard to direct debits, Spain is a unique case in our sample of countries due to the high proportion of direct debits, inasmuch as this type of transaction accounts for 18.2% of the value of the payments recorded in Spain in 2014, as shown in Chart III. They are seen as a mechanism for keeping track of spending (easy reconciliation of the debits recorded in the statements of account) and for the automation of payments, making it particularly attractive for routine and recurrent payments (basic services, telephone bills, financial products, instal-ments, subscriptions, etc.) whose automatic debit through a mandate or direct debit order becomes a flexible, secure and efficient instrument of payment. That is why direct debits, credit transfers and cards have gained ground among the available means of payment, due partly to increased availability and the use of remote or virtual channels such as internet or mobile banking, which free the user from the need to visit their bank branch to carry out such transactions.

In Spain, the use of cash rose by 9.1% in 2014, accounting for €117.87 billion, equivalent to 11.15% of GDP. This exceeded the value of card payments in the same year (€105.85 billion), returning to the levels recorded by the Bank of Spain in the years prior to 2010, when annual growth exceeded 10%, double that of the 2010-2013 period.

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01. Highlights of the Tecnocom Report 201501. Highlights of the Tecnocom Report 2015

Chart III. Value of payment transactions in Spain by instrument, 2009 - 2014 (EUR, billions)

Cash (M0)

Bills*

Cheques

Cards

Direct debits

Credit transfers

16.8%

45.9% 51.4%

18.2%

4.9% 6.2%

21.9% 14.6%

5.6%

2.7%

4.9%

6.9%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2009 2014

1,704.5 1,874.5

* Bills are credit notes that can be collected (if due) or must be paid (if drawn) at maturity

Source: Bank of Spain.

In the last year, Spain recorded a 3% fall in the number of cards in circulation, with the number of cards per thousand in-habitants falling more sharply in the case of debit cards; this ratio has been declining since we began to collect data for this report (from 733.5 in 2005 to 518.3 in 2014), while the ratio for credit cards has held steady. The numbers of both credit and debit cards in circulation have fallen in the last year, by 0.05% to 43.2 million in the case of the former and by 7.8% to 24.4 million for the latter, though nearly all the cards abandoned are debit cards. From the record number of 76.4 million cards in circulation in 2008, the increase in commissions, the intensive concentration of the banking industry in Spain and the fall in consumption until well into 2014 together reduced this figure to 67.6 million in that year. Of that fall of 8.7 million, 7.1 million were debit cards: some banks have increased commissions to offset the fall in income from financial intermediation, encour-aging users to decline to renew some cards. In addition, the merging of banks has caused 'duplicated' cards to be retired, reducing the overall and individual stock of available cards.

Considering the variation in the past year (a fall of 2,090,000 cards in circulation, all debit) compared to 2013 (an increase of 940,000), together with the culmination of practically all the mergers and the return to economic growth - and hence growth in consumption - for the first time since 2008, we could be witnessing the end of the decline in this indicator.

Overall, the number of purchases in Spain using Spanish cards increased considerably in 2014 (up 8.5%), a higher growth rate than the previous year (2.4%), according to Bank of Spain data.

Table 1: Number of credit and debit cards in circulation, 2014

Debit cards Credit cards TotalBrazil 295,476,065 162,035,939 457,512,004

Chile* 18,445,899 10,012,086 28,457,985

Colombia 20,869,341 12,684,370 33,553,711

Mexico* 134,524,245 28,549,240 163,073,485

Peru 21,500,000 8,300,355 29,800,355

Dominican Republic 3,504,387 2,339,569 5,843,956

Spain 24,410,000 43,240,000 67,650,000

Portugal 13,734,816 6,149,499 19,884,315

* Does not it include credit cards of commercial establishments



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In general, the Latin American countries covered by the analysis saw a good performance in debit cards, which continue to grow faster than credit cards. Chile, with compound annual growth of 17.8% over the 2009-2014 period, remains the country with the fastest progress, exceeding 18.4 million debit cards, only sightly better than Mexico with 17.2% growth and a total of 163 million cards at end 2014, nearly all affiliated to Visa or MasterCard. Peru has seen the ratio of debit cards to credit cards rise in recent years (from 2.4 in 2009 to 2.6 in 2014), due to higher growth in the former (10.3% in the last year) com-pared to the latter (3.3%). The reverse occurs in Colombia, where credit cards are growing faster: while in 2009 there were 2.1 debit cards for each credit card, in 2014 this ratio had fallen to 1.6. Similarly, the Dominican Republic has experienced faster growth in credit cards (7.1%) than in debit cards (4.4%), though the difference is smaller than in Colombia, with debit cards in circulation continuing to predominate.

With regard to the average amounts of debit and credit card payments, it can be seen that in every country studied, except Colombia, the use of debit cards is similar, with average amounts of around USD30 in Brazil, Chile, Mexico, Peru and the Dominican Republic. The behaviour in the use of credit cards is more differentiated between the countries of the region

Chart IV. Average payment amount on debit and credit cards in 2014 (USD)

Debit Credit

0

20

40

60

80

100

120

USD 79.3

USD 34.5

Brazil Chile Colombia Mexico Peru Dominican Republic

Spain

Source: central banks, banking supervisors, Visa y MasterCard

The intensity of card use varies between credit and debit cards. In debit cards, use is most intense in Chile, with almost 45 transactions per inhabitant per year, compared with less than 10 in the Dominican Republic. In Spain, like Brazil, use is around 30 transactions a year, or 2.5 per month. In the case of credit cards, there are two main patterns: on the one hand, the greatest intensity of use is found in Spain, again equalled by Brazil in the last year, with close to 27 transactions per inhabitant per year, On the other hand, the other countries record less than 10 transactions, except Chile which has made a quantitative leap since 2011.

The network of ATMs and POS terminals in Latin America has recorded notable growth in recent years, in contrast with the trend seen on the other side of the Atlantic since the onset of the crisis. With regard to POS terminals, Mexico and Colombia have chalked up compound annual growth of 11.4% and 18.9% respectively sin 2009. Brazil, with almost 4.5 million POS terminals and growth of 7.4% over the period, leads this indicator by a wide margin, as it does in ATMs, though in the last year the number of POS terminals barely increased. In Spain, as we announced in our previous issue, we have observed a notable change in the trend, most likely due to the recently introduced limits on interchange fees for card payments and greater dynamism in the acquiring activity of financial institutions: though the 2009-2014 period saw negative growth (1.8%), in 2014 the number of POS terminals grew by 6.6% to 269,000. Something similar occurred in the same period in Portugal, where the number of POS terminals has also fallen since 2010.

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Chart V. Number of POS terminals per million inhabitants in 2009-2014

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2009 2010 2011 2012 2013 2014

Brazil

Colombia

Mexico

Dominican Republic

Spain

Portugal


With regard to non-bank correspondents, a concept which is non-existent in Spain and Portugal, it can be seen that the number of correspondents in relation to the population in Colombia exceeded that in Brazil for the first time, with growth of almost 100% in the last year. Growth in Brazil, a world leader in this area, has moderated significantly in the last two years. Peru is close behind, with nearly all municipalities covered due to the speed with which the correspondent networks have spread. By contrast, Mexico has progressed much more slowly in the spread of correspondent networks, despite the fact that it has a long way to go to cover all its populated territory. In 2014, the Dominican Republic witnessed the establishment of this new function, with growth rates that, in only one year, will allow the country to reach the same number of points per thousand inhabitants as Mexico, where this function was authorised in 2010.

Our in-depth section provides an economic analysis of the activity of forms of electronic payment in the banking business, focusing on the three principal forms provided by banks: direct debits and credits and card payments. The electronic pay-ments business is very important to the banks that provide it, whether directly or through companies in which they have an interest, due both to its current size and to its growth prospects.

Chart VI. Retail electronic collections and payments services

Collections and payments services

Cards

Debit Credit

Transfers

Traspaso (interna)

Transfer (external)

Direct Debits/Credits

Payments Collections

Source: Afi.


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Through their banking associations, the financial institutions are the owners or exclusive administrators of the infrastructure for the clearing and settlement of electronic transfers and direct debits/credits in the countries studied. Thus they are the beneficiaries of the profits generated by the services provided by this infrastructure. This is in addition to the commission income that the banks (as issuers and receivers) earn from providing these services to their customers, for which the prices may vary according to the loyalty to the bank demonstrated by the latter.

In the card business, the banks continue to be key actors in the value chain, unless they have delegated some or all of their functions to a third party. Nevertheless, the centrality of the banks' role in the card business is undergoing profound changes due to the breakdown of the value chain, with key functions being taken on by new entrants which are, in principle, uncon-nected with the world of finance.

Two types of fees or commissions are applied in card payments, apart from the issuance commission, generally charged annually to the card holder. On the one hand, the discount fee is the payment made by the merchant, user of the POS ter-minal, to the acquiring entity, usually a bank or card network normally owned by a large number of banks. On the other, the interchange fee is paid by the owner of the POS terminal (the acquiring entity) to the card provider (the issuing bank) for the use of this payment instrument. The discount fee may be set freely in practically all the markets, but it is more common to find regulatory limits (in the EU) or market limits (Mexico) on the interchange fee, with distinctions made between those for debit and credit card payments. A theoretical comparison with the total commissions generated by banks for the provision of services reveals that the card payment business (issuance and acquiring) represents a significant proportion of the commis-sions earned by these institutions, showing their high degree of dependence on collections and payments.

As discussed in this Report, we highlight the trend towards internet banking, which accounts for an increasing share of low-value transactions on both sides of the Atlantic. The importance of internet and mobile banking highlights the feedback between the ITC and banking sectors, which offers enormous opportunities for collaboration between operators in the two sectors. In Latin America, e-commerce has seen exponential growth over the past five years, quadrupling sales through this channel (CAGR of 34% in the 2009-14 period). E-commerce is forecast to record YoY sales growth of 25% in the re-gion, where Brazil has the largest share of sales by value, followed by Mexico at an increasingly short distance. Chile has overtaken Colombia to occupy third place. In Spain, meanwhile, e-commerce has almost tripled its turnover in the past five years, due mainly to the rise in the number of internet users, the higher proportion of these who make purchases online and the unstoppable growth in the range of products and services available to the consumer: 2014 saw 190 million e-commerce transactions with a total value of USD 21.1 billion, a 25.9% increase over 2013, which had in turn recorded a similar rise, of 24.7%, over 2012.

E-commerce now represents a third of the turnover of the retail businesses that use it. The form of payment most favoured by online merchants is by card, credit or debit, followed by immediate transfers and PayPal.

For the first time, this issue of the report includes, in the final section, an analysis of the acceptance, use, associated equip-ment and attitudes to means of payments among retail merchants. This information is the result of a quantitative investiga-tion of retail merchants in the formal sectors of the countries covered.

Unlike the approach taken in previous years regarding the holding and use of means of payment among the general popu-lation, this study aims to provide a complementary vision within the market for means of payment. Retail business is very relevant for an understanding of the dynamics of acquiring and the sector's growth potential, as well as for its key role in the distribution of goods and services and in the effective formalisation of purchase transactions.

The situation is mixed: In Brazil, Mexico and Spain, the situation for retail businesses is positive due to the high level of ac-ceptance of cards as a form of payment and merchants' high degree of satisfaction with aspects of the service. In the other countries, the retail trade still has ample scope to incorporate and intensify the use of these forms of payment.

As we would expect in a bilateral market, the data on the possession of credit and/or debit cards in these countries indicate that the progress in acceptance in retail commerce is associated to the possession of cards among the local population.

At the extreme of greatest development, the high level of acceptance of credit and debit cards in Brazil and Spain corre-sponds to the greater penetration of these forms of payment in those countries. At the other extreme, countries like Peru and the Dominican Republic have the lowest level of card acceptance and also the fourth lowest level of card holding. In an intermediate range are Colombia and Chile, the former more consolidated and the latter slightly below the expected level of development with regard to retailers. It is Mexico that fails to follow the pattern for the relationship between holding and acceptance: retail commerce in the formal sector is very advanced, close to the region's leading countries, while the penetra-tion of card holding among the population is on a third level, below Chile and Colombia.

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Chart VII. Holding of debit and/or credit cards in 2014 vs. acceptance of debit and/or credit cards in retail businesses in 2015

71.0%

18.6%

19.2%

29.0%

38.8%

29.1%

53.6%

55.5%

24.1%

26.0%

30.5%

39.8%

44.8%

60.1%

81.2%

29.5%

30.9%

39.7%

50.9%

51.7%

70.8%

Possession of debitand/or credit cards (2014)

Brazil

Chile

Colombia

Mexico

Peru

Dominican Republic

Spain65.9%

44.0%

40.6%

64.2%

58.6%

47.3%

76.8%

65.6%

47.0%

41.7%

65.7%

59.0%

46.3%

77.0%

65.9%

47.0%

41.7%

67.9%

59.9%

47.3%

78.7%

Acceptance of credit and debit cards in small retail businesses (2015)

Total cards Credit cards Debit cards

Holding of debit and/or credit cards (n = total per country ≈ 400 for 2014)

Source: Tecnocom Report on Trend in Payment Instruments 2014Acceptance of debit and/or credit cards in retail businesses (n = total per country ≈ 300 for 2015)

Source: prepared by Afi based on research.

The acceptance of credit and debit cards by shops is very similar in every country's results, confirming that, in general, retail businesses do not differentiate between the two types with regard to acceptance. However, other variables affecting the impact on the business and the financial cost do show differences between the two products.

Brazil and Mexico are the countries in which retailers accept the widest variety of forms of payment, followed by Spain, while Peru admits the smallest variety. Cards are the second most accepted form after cash, with ample differences between countries. Cheques and bank deposits and/or transfers find an uneven acceptance, the former being widely accepted in Brazil, the Dominican Republic and Mexico and much less so in Peru. On the other hand, bank transfers and/or deposits are very widely accepted in Mexico, with levels of acceptance of 10-20% in the majority of countries, and no more than a symbolic presence in Brazil..

However, an interesting share of retailers are quite ready to adopt the service in the next year: 7.1% of retailers consider it very likely (with a score of 7-10) that they will adopt the POS terminal in their business (Chart VIII). The most enthusiastic retailers are found in the Dominican Republic and Mexico (15.5% and 8.8% respectively). If we assume that these figures are indicative of growth in this market in the next year, Brazil and Mexico will continue to lead the field with growth of 5.6% and 8.8%, reaching levels of acquisition of 84.1% and 76.7% respectively. Spain (1.1%) would not experience significant growth, while Colombia (6.8%) and the Dominican Republic (15.1%) could see notable growth, rising to the second level. Chile and Peru would remain at lower levels of acceptance.


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Chart VIII. Expectations of growth of POS terminals in retail businesses in 2015

84.1%

54.0%

66.7%

76.7%

47.4%

62.1%67.0%78.7%

47.3%

59.9%

67.9%

41.7% 47.0%

65.9%

30%

40%

50%

60%

70%

80%

90%


Spain

Potential of businesses with POS terminals for 2016

Businesses with POS terminals

n = total per country ≈ 300


In the search for significant information for stimulating the broadening of the market in the retail sector, we have analysed to score given by those retailers not yet using POS terminals to a series of business proposals. In order to evaluate their potential as incentives, the retailers were asked to score nine different commercial and service initiatives on a scale of 0 - no incentive - to 10 - great incentive.

Chart IX shows the wide variety of scores for each of the proposed incentives, indicating that countries show varying sensi-tivity to the same range of alternatives. Chile shows most enthusiasm for the set of incentives taken together, with scores of 7 for five of the proposals. It is followed by Colombia, with an average score per incentive of 6.2 and higher than 7 for three of them. In the other countries studied, the predominant attitude is more lukewarm, or even cautious and distant. The attitude in Peru to the proposed commercial initiatives is in general slightly positive, while in Spain, the Dominican Republic and Brazil the scores are less favourable. Mexico shows the greatest resistance to the proposals, with the predominant attitude among retailers being one of scepticism, with an average score per of 3.6 and no incentive receiving more than 4 points.

Consistent with the reasons given for not accepting cards, the results of the survey confirm the importance of the financial aspect in acceptance of the service, with “reduce direct commissions per transaction” receiving the highest score in every country except Mexico. In every country, the proposals related to the use of contactless cards and mobile payments receive the lowest scores as incentives to accept cards.

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Chart IX. Scoring of incentives for the acceptance of cards, 2015

5.5%

7.8% 7.7%

3.6%

7.1%

5.2%6.2%

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

Reduce directcommissions per transaction

3.3%

7.7% 7.1%

3.6%

6.6%

3.9%5.5%

Reduce rental costs

5.3%6.8% 7.0%

3.8%

6.5%

4.3%

6.1%

Availability of some formof insurance/guarantee

of collections of card payments

4.5%

7.1%6.4%

3.8%

6.0%4.8%

5.6%Rates that combine thecosts of internet connection

and POS/dataphone

3.4%

7.0% 6.5%

3.8%

6.0%

4.1%5.4%

Reduce connection costs


Spain


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Chart IX (cont.). Scoring of incentives for the acceptance of cards, 2015

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

0%1%2%3%4%5%6%7%8%

4.1%

7.2%6.4%

3.7%

5.8%

3.8% 4.4%Provision by the bank of an advisor

specialising in our sector to keepus informed about the situation of

our sector, new ways of working

4.7%

6.6% 6.1%

3.3%

5.4%4.3% 3.9%My bank should offer me the service

(it has not done so until now)

2.9%

5.9%4.4%

3.2%4.3%

3.5% 4.0%Customers should be able topay with contactless cards

3.0%

5.3%4.0% 3.4% 3.8% 3.7% 4.1%

Customers should be able to pay with their mobile phones

(using technologies like NFC, QR codes, mPOS, etc.)


Spain

n = Businesses not accepting debit, credit or prepaid cards


With regard to the possible incentives directly related to the business, the Colombian, Chilean and Brazilian merchants showed the most interest in accessing statistical sales data as a tool for their commercial strategies. The most interesting data was considered to be "times and days of the week of greatest activity".

Chart X. Aspects of the business found most interesting for the statistical analysis of sales

30.0%

37.9%

28.3%

26.4%

10.6%

18.6%

41.3%

64.0%

50.7%

74.2%

50.4%

51.6%

64.8%

31.9%

59.6%

63.9%

63.4%

61.0%

62.9%

60.7%

44.0%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Spain

Dominican Republic

Peru

Mexico

Colombia

Chile

Brazil

Times of most activity

Days of the week of most activity

Average amount of purchases paid with cards

Choice of the two most interesting proposals. Multiple response

n = total per country ≈ 300


Madridc/ Miguel Yuste, 4528037 MadridTlf: (+34) 914 368 100 / 901 900 900Att. Comercial. 902 135 555Fax: (+34) 914 368 [email protected]

trends in payment instruments 2015

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