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The introduction of financial cards to many emerging markets not only gave many consumers a new way to pay, but it also gave them easy access to credit. Consumers could fund more purchases than ever before. Of course, this newfound access to credit also came with its own set of challenges as many consumers can attest. While card lending helped some markets to rebound more quickly from the global recession or expand the economy in general, this emerging category of lending also left numerous consumers deep in debt.
The debt troubles associated with this lending type for consumers were especially pronounced across Latin America more so than any other region. Three Latin American countries (Colombia, Argentina and Chile) ranked in the top 10 for the fastest growth in card lending debt since 2008. In addition, out of the top 15 markets with the greatest reliance on card lending as of 2013, four are located in Latin America (Venezuela, Colombia, Argentina and Brazil). In fact, Latin America is the most reliant on card lending only after Asia Pacific, which was heavily influenced by China.
Chile might best illustrate this Latin American consumer credit binge story. Over the last two decades, Chile has lifted millions of out of poverty and eliminated the slums that encircled Santiago. This newfound prosperity spurred a consumer spending boom made possible in part by easy access to credit. Chileans, who used to keep their belongings for decades, have started replacing them at a faster rate. In addition, Chileans could for the first time purchase products that normally required saving for months
Chile’s economic success spurred a consumer lending spree largely made possible due to the easy access to credit. While Euromonitor’s definition of card lending includes both revolving credit against a store or credit card and loans taken against these cards, it is really the rise of store cards that spurred this lending category across Latin America. As of 2013, Chileans had amassed the greatest amount of total card lending debt as a proportion of the country’s GDP compared with every other market in the world. In fact, the average Chilean has as much credit card debt as would typically be found among developed market consumers. As of 2013, the average Chilean had credit debt valued at over US$2,100, which puts Chile ahead of markets such as Norway, Australia and the UK.
In addition, overall consumer debt as a proportion of income in Chile is far greater than in any other Latin American country. Chile’s household debt-to-income was 103% as of 2013, though Euromonitor International projects it to fall to 95% by 2018. This ratio of debt to income is nearly three times that of its Latin American counterparts and, in fact, more closely resembles the household debt-to-income ratio that exists in the US, which is still heavily weighed down by mortgages. In Chile, the greatest proportion of that debt can be attributed to mortgages followed by card lending. In fact, card lending has been Chile’s fastest-growing debt category since 2008.
Store cards were attractive to Latin Americans as they not only received special prices for durable goods, but also for everyday grocery purchases. In addition, the screening process to obtain a store card is often less stringent than those for international card brands such as Visa, MasterCard and American Express. Although these international networks operate in Latin America, their greatest inroads into the region have been made by partnering with third parties, such as retailers, to offer consumers rebates in those brand stores or other related benefits. Despite the presence of traditional brands and payment networks, it is as commonplace for retailers to issue the first line of credit to consumers than it is for banks to do so.
This access to credit through non-bank entities, such as retailers, provided an avenue for converting the vast unbanked population, but oftentimes it was carried out regardless of the consumer’s financial standing. Credit was relatively easy to obtain for many Latin Americans. This opened the door to abuses, such as predatory techniques, annual interest charges that topped 200% or unilateral debt refinancing. In June 2011, for example, La Polar, which is one of Chile’s largest retailers, admitted it had covertly raised interest rates and fines on outstanding debt for more than a million of its credit cardholders in a failed attempt to boost profits of its department store during the global economic downturn. La Polar was known for targeting the lower end of the Chilean retail market by offering electronics, clothing and other goods that its customers could purchase with store-branded cards. The retailer has since received approval from creditors to restructure its own debt so it could continue operations in Chile and has agreed to compensate the victims.
The La Polar situation occurred because retailers were able to issue credit to Latin American consumers without facing the regulatory hurdles banks must overcome. As a result, retailers could leverage their massive, unregulated consumer lending operations to drive up profits without regard to whether those actions were risky. Public outcry in the wake of the La Polar scandal led Chilean officials to pledge regulatory changes, including transparency measures. In general, retailers such as La Polar have been able to provide consumers with misleading offers that were based on biased or incomplete delivery of customer information so that uninformed consumers would authorise debt renegotiations, purchase extended warranties or become victim to other such predatory practices.
Not only did this easy access to credit open the door to abuses that consumers are still reeling from, but the high levels of over-indebtedness that currently exists among consumers could constrain future economic growth. Simply put, if consumers find themselves stretched too thin in that it is difficult to make monthly payments on such debt, they will not have the level of funds needed to spur future economic growth. Consumer expenditure growth in Chile, for example, is expected to slow from a CAGR of 7% over 2008-2013 to a CAGR of 5% over 2013-2018 when measured in constant 2013 price terms to discount for inflation. Brazil and Argentina are also expected to experience a similar slowdown.