Interest free Installment Plan: Who Wins and Who Loses?
Once small and shy, the Credit Card Industry has changed levels after the real plan.
With the end of hyperinflation, it is no longer “burnt” in the hands of the consumer, who has begun to plan their purchases and budget.
At that time, there were only two card accreditors in Brazil, Visanet (now Cielo), then except for Visa Flag, Redecard (now rede) accreditation only MasterCard. In practice, they did not compete: the store owner who wanted to accept Visa and MasterCard was obliged to hire two accreditors.
The big competitors for charterers at the time were cash, cash payment and post-pass checks.
For card endorsers, competing with the cash check was not difficult, but it was necessary to invest in a product to compete with the mail check. This is how the “interest-free payment” appeared. Banks never liked the solution, but they took no concerted action to prevent it, perhaps because at the time credit card issuers, as well as accreditors, were, for tax and employment reasons, companies other than banks. , which makes it difficult for a regulator to understand.
The trade quickly adopted the product and, in addition to eliminating the labor of processing, holding and transporting checks, also transferred the risk of default and fraud to card stock.
An absolute success, the value of “interest-free” transactions now represents more than 60% of all credit card transactions on an annual average, and in December it exceeds 80% at Christmas.
But this genuine Brazilian invention is a major distortion.
First, since there is no “free lunch”, of course, interest is included in the prices of “interest-free” products. When the retailer tells you, that’s the price; I don’t give discounts, but Parcelo simply doesn’t give the client the option of financing elsewhere. A consumer with a strong credit history, for example, might get a lower rate from another organization. But the “interest-free” payment prevents competition between different financial agents and vets over access to cheap credit.
Moreover, interest rates cascade down the entire value chain, inflating prices at every step: the builder prefers to sell the “interest-free” timeframe to the distributor, who in turn prefers the timeframe to the retailer, who in turn , which in turn duplicates the strategy. The result is frankly unfavorable to the final consumer. Often, even if a consumer wishes to pay cash for a product or service, they only receive a small portion of the interest on the final price.
The big winner of the “unexciting” lot, it turns out, is retail – perhaps one of its only gains with an ever-tighter margin. No wonder “I don’t discount but Parcelo” is the retail mantra: “interest-free” payment boosts retail revenue and materials, while banks run the risk of default.
Increasingly in search of volume, the banks are really scrambling to rearrange the rules of the game and get a piece of this good deal. Of course, banks are already in the game when their accreditors (Cielo, Network, and GetNet) are waiting for merchant claims, but if the rules change, banks should just earn them.
But banks are the direct beneficiaries of another market distortion: 30 days to settle credit card transactions.
The two topics seem to have nothing to do with each other, but they are related.
30 days for retail revenue settlement transfer to banks; The “interest-free” payment is transferred in the opposite direction.
An extension of the settlement period occurred in 1984 when, due to rising inflation, the industry extended the term for retailers to pay to get rid of negative float and avoid a collapse of the system. (In the rest of the world, issuing banks pay the merchant within two days, and receive from the cardholder, on average, 26 days after the commercial transaction.). To understand in detail, see the post “30 Days on the Card: A Brazilian Credit Story”, published here in Brazil Magazine.
There are two Jabuticabas, each with a winner and a loser on the other. It will be up to the central bank to organize the discussion around the subject and come up with an exit that enhances competition and consumer preference.