The Company
Credit Cards
Our main product is the capture, transmission, processing and settlement of transactions using credit cards. Our income from credit card transactions corresponds to the net merchant discount rate.
In the Brazilian market, credit cards may be used in two ways:
- One-time payment: when the cardholder pays the full amount of the transaction in a single installment to the card issuer and pays the respective bill, on average 26 days, after the date of purchase. We settle these transactions for the merchants, on average, 30 days after the date of purchase; and
- Payment in installments: when the cardholder pays the card issuer the full amount of the transaction in installments. The installments may be made in two ways: (1) with interest-bearing financing, which is granted by the respective card issuer, and whereby the merchant is paid the sale amount in one lump sum, on average 30 days after the date of purchase (“rotating credit”), and (2) with interest-free financing, which is granted by the merchant so that payment for the sale is made in the same number of installments extended to the cardholder; the first of which is settled on average 30 days after the date of purchase (“store installment”).
A credit card transaction is initiated by the merchant by using the electronic capture equipment. After being authorized by the card issuer, and validated by and registered in the Visa International systems, the transaction is completed when the respective receipt is printed.
The settlement process for credit card transactions begins when Visa International sends instructions to the housebanks and to us. We confirm the amount to be settled with each card issuer, which in turn sends credit card bills to the cardholders to charge the amounts they owe. The card issuer transfers the transaction volume to us, net of the interchange fee to which it is entitled. We, in turn, deposit the remaining amount to the merchant, net of the merchant discount rate, in the merchant assigned housebank. The diagram below presents the credit card transaction process.
D: Date of transaction.
D+26: Average date of payment of the credit card bill by the cardholder. This period may be up to 40 days.
D+28: Date of payment of the transaction amount from the card issuer to us, net of the interchange fee.
D+30: Average date of payment of the transaction amount by us to our merchants, net of the merchant discount rate.
The receipt by the merchants of amounts spent by Visa cardholders is backed by a system of guarantees, where the card issuers guarantee us against potential cardholders’ default and we guarantee the merchant against card issuers’ default in case they undergo a Central Bank intervention.
Our system of guarantees takes into account the rating analysis of each card issuer, determined by our card issuer risk committee (Comitê de Risco Emissor). According to the analysis of our issuer risk committee on a case-by-case basis, we may require additional guarantees. Visa International manages the system of guarantees that are required of card issuers in this process and is also the final guarantor of the system and ultimately our guarantor. For further information regarding our card issuer risk committee, click here.
The transaction volume of Visa-branded credit cards in Brazil that we captured and processed reached R$71.2 billion in 2006, R$88.0 billion in 2007, R$110.9 billion in 2008 and R$134.8 in 2009. There has been an average annual increase of 29.7% over the last three years and an increase of 21.5% compared to 2008.
Credit card transactions we captured, processed and settled by one-time payment accounted for 53% of the credit card transactions in 2009. Credit card transactions with interest-free installment repayments were 47% this total.
The interchange fee was increased by Visa International on February 22, 2008 as a result of a new policy implemented by Visa after a negotiation with card issuers and us.
The new rates were based on an independent market study as well as on individual negotiations between Visa International and each of the card issuers and on negotiations between Visa International and us and was prepared in conjunction with an independent entity.
The interchange fee depends on the type of credit card used and the merchant’s industry. Since this change came into effect and until March 31, 2009, there have been no further increases.
The Brazilian credit card industry ended 2009 with more than 136 million credit cards issued and R$256 billion in transaction financial volume, according to the Brazilian Association of Credit Card and Related Services Companies (ABECS).
Revenue from credit card transactions increased by 20.7% from the same period in 2008 to R$2,012.0 million.
Debit Cards
We capture, transmit, process and settle transactions using Visa-branded debit cards, known as “Visa Electron”. Our revenues from debit card transactions correspond to the net merchant discount rate.
In the Brazilian market, debit cards have been replacing checks due to the greater security they provide to merchants, as they require a password and electronic confirmation of cardholders’ data. Debit cards are also convenient for cardholders who do not want to carry checks or cash.
A “Visa Electron” transaction begins at the merchant by the use of electronic capture equipment. The card issuer authorizes the transaction, which is completed when a receipt is printed. The transaction is settled one business day after it is captured. The diagram below presents the debit card transaction process.
D: Date of the transaction and of the debit of the respective amount on the cardholder’s checking account.
D+1: Date of payment of the transaction amount by the card issuer to us, net of the interchange fee.
D+1: Date of payment of the transaction amount by us to the merchant, net of merchant discount rate.
According to the ABECS, the Brazilian debit card market had more than 233 million debit cards issued and was responsible for R$129 billion in volume of transactions in 2009.
The transaction volume of Visa-branded debit cards we captured and processed reached R$1.4 billion in the period ended December 31,2009. There has been an average annual increase of 15.5% over the period ended December 31,2008.
The financial volume of transactions made with debit cards processed by Cielo totaled R$ 79.2 billion, for growth of 22.4% from 2008. A highlight was the performance of the AgroCard, which posted growth of 197% from a year earlier to reach transaction financial volume of R$ 4.6 billion.
Revenue from debit card transactions grew 21.6% from a year earlier to R$638.0 million.
Rental of Electronic Capture Equipment
The POS electronic capture equipment and some of the PIN pads linked to the point-of-sale, or PDV, we own are rented to the merchants. We provide a variety of electronic capture equipment, including:
- POS desktop electronic capture equipment;
- POS wireless electronic capture equipment; and
- PIN pad, which is used to read credit and debit cards. PIN Pads are integrated with computer and PDV networks for use with electronic funds transfer, or EFT, normally used by large retail networks or merchants with a high number of transactions.
POS electronic capture equipment
The POS electronic capture equipment captures transactions made by all types of Visa cards.
As of December 31, 2009, we had 1,630 thousand units of POS electronic capture equipment in our electronic capture equipment base (an increase of 19.4% compared to December 31, 2008). We had a POS electronic capture equipment base of 1,362 thousand, 1,060 thousand and 886 thousand as of December 31, 2008, 2007 and 2006, respectively.
Pin Pad
The PDV, as opposed to the POS electronic capture equipment, may be owned by the merchant. The merchant chooses its model and optional extras depending on its needs and its number of transactions.
A PIN pad is necessary to read and encrypt the transaction and credit and debit card data from the PDVs. We have invested in PIN pads as part of our efforts to improve the security of the whole capturing network.
Other Products and Services
- Co-branded private label cards
- Prepayment of Receivables
- Installment Debt
- Use of Network for Prepaid Cards
- Withdrawals using Debit Cards
- BNDES Card
- Agro
- VCorp
- POS Recharge of Credits
- Correspondent banks
- Promotional platform
- Healthcare Service Provider
Co-branded private label cards
The credit cards known as co-branded private label credit cards are those issued by large retailers aiming at increasing customer loyalty. They have the advantage of being associated with the Visa brand, which enables the cardholders to use their cards throughout our affiliated merchant network. We launched the co-branded private label cards in November 2005. The main Visa co-branded private label card issuers are Boticário, BR Postos, Casas Bahia, Carrefour, Centauro, Dicico, Leader, Livraria Saraiva, Lojas Colombo, Lojas Maia and Porto Seguro.
Currently, various banks issue Visa co-branded private label cards, such as Banco do Brasil, Bradesco, HSBC/Losango, Panamericano, Safra and Unibanco/Fininvest. This product has allowed us to increase our portfolio of card issuers, adding the retail network to our network of card issuers, and has helped us access customers from the lower-income segment, a segment that had previously been poorly explored by card issuers in Brazil.
Revenue from transactions using private label/co-branded cards at merchants, referred to as on-us transactions, is generated by a fee per transaction charged by the issuer. The number of transactions using private-label/co-branded cards at merchants totaled 58 million in 2009, down 23% from 2008.
Transactions executed outside the merchant card issuer stores, called “off-us transactions,” are treated like credit card transactions and are recorded as a portion of the total described under “—Credit Cards.” The transaction volume processed using co-branded private label cards using our affiliated merchant network was R$7.6 billion in 2009, which represents an increase of 88% compared to 2008. In the two-month period ended Febrary 28, 2010,the transaction volume processed using co-branded private label cards using our affiliated merchant network was R$18,5 million, which represents an increase of 40% compared to the same period of 2009.
Since September 2008, we have offered prepayment of receivables to our network of affiliated merchants that are not subject to lock-in bank domicile services.
A merchant, in order to receive the amounts from the sales carried out with cards and the prepayment of receivables, needs a card issuer to function as its housebanking domicile. Therefore, the merchant will generally agree not to change its housebanking domicile for a certain period.
As an acquirer, we offer the service to the card issuer, upon approval of the merchant, of blocking any transfer of receivables from that merchant to another bank.
Only merchants that are not subject to lock-in bank domicile may receive in advance payments from transactions carried out with Visa credit cards paid in one time or in various installments and payments from debit card transactions. Although we currently believe it would not be necessary to increase the volume of prepayment of receivables, we may study ways to, in the future, stimulate card issuers to unlock merchants (including through the payment to card issuers of part of the commercial discount rate charged from merchants for the prepayment of receivables service).
If the card issuers decide to lock-in our affiliated merchants, we will not be able to offer the prepayment of receivables as we expected and may be adversely and materially affected. For more information, see “Risk Factors—Risks Relating to us and to the Merchant Acquiring and Payment Processing Industry—Our results of operations and strategy may be adversely and materially affected by competition in the Brazilian merchant acquiring and payment processing industry.”
The financial volume of prepayment transactions was R$6.8 billion in 2009. Net financial revenue was R$218.0 million in 2009, corresponding to 5.3% of our credit portfolio in 4Q09.
Installment Debt functions like a debit card and consists of a pre-approved financing line by several banks for their checking account holders, aimed at entering into a higher average ticket price segment. Through the use of this financing line, the cardholder makes its purchases using Visa Electron and pays the amount they owe in installments directly to the card issuer. For the merchant, the Installment Debt works like a debit card transaction since the net amount is deposited in its assigned account one business day after the sale.
The transaction volume using Installment Debt was R$272 million in 2009 and R$42 million in the two-month period ended February 28, 2010.
Use of Network for Prepaid Cards
The Company makes its network available for transactions using prepaid cards under the Visa brand (Visa Buxx, Visa Gift, Visa Travel Money) and those using vouchers (Visa Vale Alimentação, Visa Vale Refeição and Flex Car Visa Vale). For prepaid cards and Flex Car Visa Vale, the Company provides acquirer services (capture, routing, data transmission and settlement), while for the vouchers Visa Vale Alimentação and Visa Vale Refeição, which involve only capture, routing and data transmission, the Company earns revenue from the volume of transactions captured and routed, based on the support services fee.
Products for which the Company settles transactions receive the same treatment as debit transactions, as described in the "Debit Cards" part of this section.
In 2009, revenue from these services totaled R$ 39,136,121.43, while in 4Q09 this revenue totaled R$ 9,900,529.89.
This product enables holders of Visa Electron cards to make withdrawals associated with purchases at merchants affiliated and authorized by the Company to offer this product, such as supermarkets, drugstores and pharmacies, providing greater convenience for cardholders who wish to withdraw cash. Withdrawing cash using Debit Cards also provides greater security for merchants since it reduces the volume of paper money in cashiers. Although this service does not generate direct revenue, it supports the activation of Visa Electron cards. In 2009, 95,500 merchants offered this service, with a total of 527,600 withdrawal operations.
The BNDES Visa Card is a rotating, pre-approved credit card issued to micro, small and midsized companies established in the country that generate revenue of up to R$90 million/year, enabling them to finance the purchase of equipment, services and inputs. Transactions using the BNDES Visa Card have the same treatment as a credit card transaction.
In 2009, the transaction volume for this product was R$2.76 billion. In the two-month period ended February 28, 2010, the transaction volume captured from this product was R$470.43 million.
Agro is a credit line for financing agribusiness expenditures and investments that is made available to rural producers with debit cards. The product allows holders to pay for purchases using funds held in the checking account of the rural producers and from pre-approved credit lines. Transactions using the Agro product are subject to the same treatment as normal debit card transactions.
In the fiscal year ended December 31, 2009, the financial volume of transactions using the Agro product totaled R$ 4.6 billion. In January and February 2010, the Financial Volume of Transactions captured from this product totaled R$ 199.49 million.
VCorp is an information platform for transactions involving the purchase of airline tickets and accommodation by corporate clients using Visa CTA (Central Travel Account).
VCorp optimizes operating processes at travel agencies providing services to these corporate clients in order to streamline the conciliation and management of these expenses by client companies of the issuers, and also captures the billing between airline companies, hotels, travel agencies and corporate clients.
In 2009, 310,800 transactions were made using Vcorp for some 280 corporate clients, and in the two-month period ended February 28, 2010 a total of 48,400 transactions were handled.
This service enables Cielo-affiliated merchants to recharge prepaid phones (fixed and mobile) using credit and debit cards. The Company’s revenue from recharging services is reflected in the revenue from transactions made using credit and debit cards. The major mobile phone operators (Claro, Oi, Sercomtel, TIM e Vivo) are already authorized to use the product. The Company believes this product boosts activation, creates a culture of using cards to make payments, helps increase the circulation of cardholders at affiliated merchants providing this service, and generates additional revenue for these merchants.
The Company captured 5.8 million transactions related to the POS recharging service in 2009, and in the first two months of 2010 captured 968,000 of these transactions. Transaction financial volume from POS recharging services was R$ 130.5 million in 2009 and R$ 23.5 million in the two-month period ended February 28, 2010.
Through banking correspondents, merchants using the POS electronic capture equipment act like bank branches in receiving accounts and bills for payment, which also may be paid using the Visa Electron card. We believe this product helps activate credit and debit cards and increases the use of cards as a means of payment. In addition, we believe it increases the circulation of cardholders at affiliated merchants’ stores that make this service available, and provide merchants with additional revenue. Transactions made with banking correspondents function like a debit card.
In 2009, we captured 14.7 million transactions from banking correspondents, 42% higher than the volume capture in the same period of 2008. In the two-month period ended February 28, 2010, the transaction volume captured from this was R$2.4 million.
The promotional platform is a marketing tool we use at affiliated merchants stores to activate more credit and debit cards, and stimulate their retention and use by cardholders. Through the promotional platform, merchants develop partnerships with card issuers, and Cielo to increase their sales volume. This platform also helps increase the use of chip cards.
The promotional campaigns are based on customers’ purchasing behavior and can also offer rewards based on specific events, such as birthdays, first time use of the card or a special event.
The customer is rewarded with (1) a discount deducted from the purchase price, (2) an electronic coupon stored in a chip on the card to be redeemed later for a prize or discount, or (3) a coupon printed by the sales terminal itself. Customer communication occurs directly at the time of sale through messages printed on the receipt. The promotional platform is available for cards with a chip and some card issuers of cards.
We indirectly hold 41.0% of the capital stock of CBGS. CBGS offers electronic authorization and billing products and services, connecting more than 70 healthcare operators and more than 65,000 service providers, according to the National Healthcare Agency (Agência Nacional de Saúde), or NHA.
The principal activity of CBGS is to provide interconnection services through an electronic network with a unique technological platform in order to facilitate the exchange of information between healthcare operators and medical service providers and hospitals and any other participants of the supplementary healthcare system and pharmacies.
In 2008, CBGS had a net income of R$11.1 million, a 41.4% increase in relation to 2007. In the three-month period ended March 31, 2009, CBGS had a net income of R$3.8 million, a 58.3% increase compared to the three-month period ended March 31, 2008.
