The allure of double-digit payment card transaction volume growth and recent deregulation have prompted Elavon Inc. and Credicard, a subsidiary of Citigroup Inc., to form a merchant acquiring joint venture in Brazil, Elavon announced Dec. 9.
The joint venture, to be branded Elavon, should begin operations in the second half of 2011, Mike Passilla, Elavon president and CEO, tells PaymentsSource. Atlanta-based Elavon is a unit of U.S. Bancorp.
“This is our first step into South America,” Passilla says. “Hopefully it will provide bridge capabilities to serving other countries in South America over time.”
Earlier this year, Elavon expanded into Mexico (see story).
Elavon’s Brazil operation will be different from those of the two primary competitors there–Cielo, which acquires Visa Inc. transactions, and Redecard, which acquires MasterCard Worldwide transactions–because its processing platform is not built for one market, Passilla says.
“[The platform] will be used to drive cost competitiveness and bring [products] to bear in a market where others are leveraging just a national platform,” he says. Elavon is targeting a 15% market share within the first five years for its joint venture, Passilla says.
The joint venture also marks Credicard’s return to the Brazilian merchant-acquiring market. The company left Brazil two years ago as regulators granted exclusivity to other acquirers.
In the past year, however, Brazil deregulated its merchant-acquiring industry, opening the door to Credicard’s return, Leonel Andrade, Credicard president, tells PaymentsSource.
“We have a big market, growing a lot,” Andrade says, referring to the increasing usage of payment cards. Since 2005, the number of cards, including credit, debit and private label, has grown at an annual rate of 14%, Elavon says.
That the Brazilian merchant-acquiring industry is so highly concentrated is a benefit for Elavon and Credicard, suggests David Koning, an analyst Robert W. Baird & Co., a Milwaukee-based firm.
“The two big incumbents had very big operating margins,” which creates opportunity for new entrants to undercut them and still make a good profit, Koning says. “Secondly, you have a market that is emerging, where retail-sales growth in general has been very strong.”
The opportunity for new merchant acquirers in Brazil rests on the prospect of transactions with high profit margins and strong retail-sales growth, he says.
The growth potential is unlike more-mature payment card markets. Since 2005, total point-of-sale payment card transaction and sales volumes in Brazil have grown at annual rates of 20% and 24% respectively, Elavon says.
Andrade estimates the value of Brazil’s total annual merchant acquiring transactions at $306.4 billion, or 515 billion reals.
More specifically, he is confident about the prospects for additional growth, especially because Brazil will host the 2014 World Cup and the 2016 Summer Olympics.
Because of such events and other factors, airline and travel-and-entertainment spending in Brazil is poised to surge, Andrade says.
“T&E spending is growing at least 30% a year,” he says, noting Elavon’s experience with the airline industry also helps. Elavon has a “very good airline market share,” Koning says. Elavon says it processes transactions for more than 60 airlines worldwide.
As Elavon looks for ways to expand in South and Central America, it will rely on the partner model, Passilla says. “Our model for entering any new market has been a tried-and-true process for us,” he says. “It has largely been with a partner and a defined distribution capability in that market.”
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