Itaú Unibanco last night detonated a bomb among Brazil’s acquirers by cutting to zero the rate it charges to advance receivables to clients of its own acquirer, Rede, in a move one source said was tantamount to “a knife fight in the dark.”
The move, unprecedented in the industry, is a frontal attack on new market entrants — Stone and PagSeguro — and is the practical equivalent of a price war.
Stone stock is plunging 16% in today’s pre-trading, while PagSeguro is down 10.4%. Yesterday, they lost 4.1% and 1.6%, respectively.
Starting May 2, merchants processing credit-card transactions using a Rede POS and who agree to get paid through a Itaú bank account will get the funds in just two days at zero cost (in Brazil, they typically get paid in about 25 days and agree to pay a rate to get paid sooner). The conditions are valid for current and new Rede customers with annual sales of up to R$ 30 million.
The new entrants say this shall not stand.
Sources close to Stone and PagSeguro claim Itaú is engaging in predatory competition by offering at zero cost a product that has at least an opportunity cost of 0.5% per month (which is where Brazil’s benchmark interbank-deposit rate stands). For the new entrants, the practice amounts to ‘dumping’.
In addition, the sources say that by offering these conditions only to customers who agree to get through an Itaú account, the bank is making a “tied sale”, which is illegal under Brazilian law.
For the new entrants, both conducts violate an agreement that Itaú and Rede made last July with CADE, Brazil’s antitrust regulator.
The agreement was signed to end an investigation into alleged anticompetitive practices by Itaú and Rede. At the time, the new entrants complained to CADE that the large banks (which also own the largest acquirers) were preventing their access to the so-called Guarantee Control System (SCG) — a sort of clearinghouse for receivables prepayments. They claimed the SCG system was unable to “read” the receivables submitted by new entrants, effectively creating a market reserve.
The Itaú move also comes days after the Brazilian Central Bank issued new regulation on the SCG that changed industry dynamics.
Previously, banks could lock 100% of a customer’s receivables in escrow, even if they were making an advance on only a fraction of that amount to the client. The new entrants complained about this arrangement, which effectively hijacked the customer and kept the competition away.
The new rule, published April 8, provides that banks can only lock in escrow only the amount associated with the advance — but it also forced new entrants to join the ‘new SCG’.
The impact of the Itaú move on competitors will only become clear in the coming days. “The important thing will be to see if Itaú is lowering its take rate or just charging the same thing in a different way,” says one investor.
In other words, the question is whether the Itaú move equates to a final price reduction for the merchant — which competitor Cielo has been doing since August — or whether the bank will hide the lost revenue in Rede’s merchant discount rate, creating what the local industry has nicknamed a “fat MDR”.
Itaú’s advertising material says that its “MDR and rental rates remain the same.”
Frequently, the economics of the prepayment of receivables is not easy to separate from the overall result of the companies.
PagSeguro, for example, offers merchants the choice of getting paid in 2, 15 or 30 days — and sets the MDR accordinly, embedding the opportunity cost in the rate.
Stone, on the other hand, focuses on the so-called ‘take rate’ — the sum of all its revenues divided by its processed volume. The ‘take rate’ includes the transactional MDR, the monthly fee charged for the use of the machine and the software, and the revenues from the prepayment of receivables.
Itaú said the new conditions are here to stay.
“This is an initiative that positively affects millions of entrepreneurs with the potential to influence other movements in the sector, especially since this is not a limited time offer,” Rede CEO Marcos Magalhães said in a statement.
“It has to be good for everyone: customers, the company, shareholders and the country. Our commitment has always been and will continue to be to lead the industry through practices and conditions that stimulate the development of our customers’ economy and business.”