Retailer Financial Services in North and Latin America

0.0 EXECUTIVE SUMMARY

The research is based on a survey of 1,015 major retail brands across 12 countries

Well over one third of major retail brands in the Americas operate their own pay. card scheme…

… with over a half of these classifiable as private label or store card programs…

… and with captive banking subsidiaries accounting for more than one in four of these initiatives

Loyalty cards with no pay. function are offered by a slightly lower percentage of major retailers

Retailer provision of consumer credit rarely takes the form of classic point-of-sale finance…

… with retailer-owned banks in Latin America tending to focus on general purpose loans

There is a growing number of successful retailer bank. ventures in both North and Latin America…

… with this activity also having been instrumental in the relatively strong growth of retailer ins

The international ‘credit crunch’ may place a temporary brake upon retailer financial services…

… although the longer term prospects for this strategy in the Americas remain encouraging

Underlying credit card markets are growing rapidly in a number of countries in Latin America

Store cards can be internationalised and loyalty cards can be converted into payment cards

Retailers partnerships represent an important strategic option for banking and insurance entities

1.0 INTRODUCTION

Finaccord

Rationale

Retailer financial services can be broken down between ‘traditional’ and ‘non-traditional’ services

Retailers can take advantage of rapid growth in consumer finance and credit card markets

Consolidation among conventional banks provides justification for the entry of retailer banks

The evolution of the retailing market itself is also favourable to the integration of financial services

Methodology

Finaccord’s research covers 1,015 major retail brands across North and Latin America

Product definitions

2.0 REGIONAL OVERVIEW

Introduction

Retailer payment cards

Retailers in Brazil, Chile and Mexico are most likely to have introduced their own payment card

A number of major retailers operate payment cards through captive entities

Almost three quarters of department stores have introduced their own co-branded or store card

Over 50% of retailer payment cards are not linked to an international payment network

The strength of the main international card networks varies substantially by country

Initiatives attributable to Citigroup, GE Capital and HSBC account for almost 30% of programs

Retailer loyalty cards

In relative terms, loyalty cards with no payment function are most widespread in Chile and Peru

Retailers of books, music and videos display a high propensity to develop loyalty cards

Almost two thirds of loyalty cards do not run in parallel to a fully-fledged retailer payment card

Consumer finance / personal loans

Classic point-of-sale finance is relatively uncommon across the Americas for several reasons…

… although the captive banks of several retailers are targeting lower and middle income clients

Penetration rates for consumer finance do not exceed 40% in any retailing categories

Most retailers have chosen to partner with a single, external lender or to op. through a captive

Captives and joint ventures

Captive retailer finance arms can be of significant interest to mainstream banking institutions

Insurance

Retail brands are active in promoting insurance in ten of the 12 countries investigated…

… with much of this activity being driven by retailer-owned banking subsidiaries in Latin America

Schemes for motor insurance and life insurance account for almost half of the total identified

Supermarkets and department stores benefit from high ‘footfall’ and burgeoning e-commerce

3.0 ARGENTINA

Introduction

Retailer payment cards

The majority of retailer payment cards in Argentina can be classified as private label cards…

… with several retailers, including Carrefour and Falabella, using their own captive finance arms

Argentina’s payment card market has made strong progress since the 2002 economic crisis

Retailer loyalty cards

30 major retail brands in Argentina have introduced loyalty cards with no payment function

Consumer finance / personal loans

Comparatively few significant retailers in Argentina offer point-of-sale finance to their customers

Banking products

Argentina’s retailers have yet to diversify into the provision of mainstream banking products…

Insurance

… although Falabella has ventured into the insurance affinity marketing arena

4.0 BRAZIL

Introduction

Retailer payment cards

Over a half of the retailer payment cards identified can be defined as private label programs

C&A’s Banco IBI has built up a portfolio of around 20 million customers across Brazil

Cards carrying the Aura logo are accepted by over 30,000 merchants across Brazil

Brands within the Wal-Mart grouping are affiliated to Unibanco’s Hipercard multi-partner scheme

The store card sector continues to expand more quickly than the pay. card market as a whole

Retailer loyalty cards

Under a quarter of major Brazilian retailers persist with loyalty cards with no payment function

Consumer finance / personal loans

High penetration rates for retailer payment cards restrict the potential for point-of-sale finance…

… and the majority of Brazilian consumers benefit from little or no annual disposable income

Banking products

Banco IBI is the only retailer-owned bank in Brazil to offer a savings account to customers

Insurance

Six major retail brands in Brazil have commenced marketing of mainstream insurance lines

5.0 CANADA

Introduction

Retailer payment cards

A significant number of Canadian card issuers are involved in retailer payment card schemes…

… although several retailers issue cards through their own captive financial services arms…

… including the Loblaw grouping which has established President’s Choice Bank brand

Pre-paid cards are also commonly offered by retailers in a mature market for payment cards

Retailer loyalty cards

Many major Canadian retailers adhere to the AIR MILES multi-partner reward program…

… which claims to have built up a portfolio of more than nine million active accounts

Consumer finance / personal loans

Widespread usage of credit cards impedes traditional retailer point-of-sale finance in Canada

Banking products

President’s Choice Financial Services has built up a portfolio of around three million customers…

… and has diversified into new areas of banking and insurance since its original launch in 1998

Insurance

Group major retailer groupings have started promoting insurance products to their customers

For regulatory reasons, the acts. of the HBC Insurance Agency vary by region across Canada

The initiatives of London Drug and PC Financial are also characterised by regional differences

6.0 CHILE

Introduction

Retailer payment cards

Retailer-owned card issuers dominate Chile’s payment card market…

… with around 8.8 million store cards having been issued by such banks…

… mainly to the low and middle income earners traditionally ignored by mainstream banks

Retailers and traditional banks are collaborating to circumvent problems linked to interoperability

Retailer loyalty cards

Almost a half of the retailers operating a loyalty card have not launched a parallel payment card

Consumer finance / personal loans

The provision of personal loans by Chilean retailers is driven exclusively by retailer-owned banks

Banking products

Cencosud, Falabella and Ripley have all entered the banking sector in the relatively recent past

Rising provisions for bad debts pushed Banco Ripley into a pre-tax loss during 2007

Insurance

Insurance marketing initiatives are invariably driven by retailer-owned banking subsidiaries

7.0 COLOMBIA

Introduction

Retailer payment cards

Only two retailers adhere to an op. model other than a link with a single, external card issuer

GE Money returns to the Colombian consumer finance market by taking a stake in Colpatria

Retailer cards divide more or less evenly between co-branded and private label propositions…

… with high transaction fees having persuaded some retailers to develop their own store cards

Retailer loyalty cards

Loyalty cards with no payment function enjoy a relatively high rate of penetration in Colombia

Consumer finance / personal loans

Retailers constitute an important distribution channel for consumer credit in Colombia

Banking products

Cafam, Falabella and Hiper Centro have all commenced initiatives in mainstream retail banking

Insurance

AIG has established retailer distribution relationships with both Falabella and Olímpica

8.0 ECUADOR

Introduction

Retailer payment cards

The Supermercados La Favorita grouping offers cards managed by as many as six issuers

Retailer loyalty cards

Several retailers, including Mini Market, are affiliated to the Av Card multi-partner scheme

Consumer finance / personal loans

A majority of consumers do not qualify for credit through the mainstream banking system

Banking products

Diversification into mainstream bank. products remains a possible future development objective

Insurance

Only retail brands belonging to Supermercados La Favorita have launched insurance products

9.0 MEXICO

Introduction

Retailer payment cards

In terms of outright number of partners, Banamex dominates the retailer payment card sector…

… with its position having been strengthened by the launch of the Affinity Card in March 2007

Coppel and Elektra both issue payment cards through captive banking operations…

… while Chedraui has preferred to established a joint venture company for this purpose

For a variety of reasons, the Mexican authorities are keen to encourage usage of pay. cards

Retailer loyalty cards

Over a third of leading Mexican retail brands operate a loyalty card with no payment facility

Consumer finance / personal loans

Wal-Mart is one of several retail groups expanding into Mexico’s consumer finance market…

… with Soriana’s joint venture with Banamex also seeking to grow in this arena

Banamex possesses the most distribution relationships for point-of-sale with retailers

Banking products

Several retail brands have developed straightforward savings products for their customers…

… and Mexico’s mortgage market may also offer them an eventual avenue for expansion

Insurance

The Elektra grouping is unique in having bought its own insurer in the shape of Seguros Azteca.

Most retailer dist. initiatives are organised through a deal with a single, external underwriter

10.0 PARAGUAY

Introduction

Retailer payment cards

Three of Paraguay’s larger retail brands have launched co-branded or private label cards

Retailer loyalty cards

Avon, Caro Cuore, Hering, Nike, Quijote Música y Libros and Sporthouse all offer loyalty cards

Consumer finance / personal loans

With one exception, no Paraguayan retailers appear prepared to offer credit to their customers

Banking products / insurance

Paraguay’s retailers have yet to diversify into either mainstream banking or insurance products

11.0 PERU

Introduction

Retailer payment cards

Peru is characterised by a mix of captive and externally managed retailer pay. card schemes

Banco Azteca harbours ambitious plans to roll out 120 branches serving lower inc. households

The development of Banco Ripley’s Financor will benefit from Ripley’s own investment plans

Cards are steadily replacing cheques denominated in US dollars as a preferred pay. method

Retailer loyalty cards

A majority of major retail brands in Peru have introduced a loyalty card with no payment function

Consumer finance / personal loans

Few major Peruvian retailers have organised non-card credit facilities on behalf of their custs

Banking products

Three retailer-owned banks target lower income consumers with mainstream banking products

Insurance

A number of major retailers have begun acting as distributors of insurance to their customers

12.0 URUGUAY

Introduction

Retailer payment cards

Co-branded cards have been introduced by four supermarket chains in Uruguay

Retailer loyalty cards

A dozen retailers possess loyalty cards that could be converted into payment cards in the future

Consumer finance / personal loans

Only around 30% of Uruguay’s cons. currently borrow from the country’s mainstream banks

Banking products / insurance

Uruguay’s retailers have yet to diversify into either mainstream banking or insurance products

13.0 USA

Introduction

Retailer payment cards

Well over one third of major retail brands in the USA offer a co-branded or private label card

World Financial Network National Bank is one of several major competitors in this sphere…

… although there are over 20 issuers of retailer cards in total, including retailer-owned captives

A significant proportion of retailers have developed pre-paid cards for a well-defined audience

Retailer loyalty cards

Over one quarter of major retail brands in the USA provide a loyalty card with no pay. function

Consumer finance / personal loans

Point-of-sale finance is provided by a relatively small proportion of major retailers in the USA

Bill Me Later has been adopted as a payment facility by a significant number of retail brands…

… as on-line retailers, in particular, are increasingly inclined to offer alternative payment options

Few other finance providers possess more than a handful of exclusive relationships in this field

Banking products

Kroger and Wal-Mart branch out into mainstream bank. services through contrasting strategies

Other major retailers in the USA simply prefer to lease store space to banking institutions

Insurance

Costco and Kroger overcome state-by-state regulation to launch retailer insurance propositions

14.0 VENEZUELA

Introduction

Retailer payment cards

The few retailer cards to have been launched in Venezuela are all private label products

Banesco offers credit facilities to inds. belonging to the Club Inteligente multi-partner scheme

Retailer loyalty cards

Almost a half of the major retail brands surveyed offer a loyalty card with no payment function

Consumer finance / personal loans

A handful of Venezuela’s larger retailers act as dists. of consumer finance to their customers

Banking products / insurance

Retailer distribution of insurance has yet to develop to any great extent in Venezuela