| Debtors: For whom the gong tolls. |
Borrowers new to personal debt don’t always know what they’re getting into. At Casas Bahia, a Brazilian housewares and appliance powerhouse that primarily sells to low-income buyers, customers frequently make purchases on a monthly payment plan without asking the interest rate. Their worry is meeting the payment, not the total they’ll pay over time. Better-off Brazilians sometimes skip the fine print as well. History plays a role: Brazilians of borrowing age, or their older relatives, remember the hyperinflation that reigned before the real’s introduction in 1994. In 1993, inflation ran at 2700%. In such an economic climate, any interest rate bears a touch of the fantastic.
While inflation for 2006 is expected to run at 4.3%, Brazil’s interest rates are still among the highest in the world and credit card rates there top 150%. In Mexico, rates hover around 40%. A few short months of delinquency on even a modest loan can leave borrowers in Latin America’s two largest economies staring upward from the bottom of a deep sinkhole of debt.
Lending in Brazil is not for the faint of heart. Renegotiation of debt there is common, especially when the loan approaches its statutory limit of 5 years. Loans are sometimes discounted by as much as 50%, and even then, payment may be made in installments. For smaller lenders, the collections process is painfully slow. “We get claims from one year to five or six years old,” says Octávio J. Aronis, a lawyer with Idel Aronis Abogados in São Paulo. By contrast, US collections agents usually get claims no more than 180 days old, according to ACA International, an association of debt collectors based in Minneapolis, MN. “Of course, the oldest claims are the hardest to [collect],” Aronis adds.
Just finding individual debtors can be close to impossible. “If the customer doesn’t have the correct address, telephone number, or area where this person lives, it’s very hard to find a person in Brazil,” says Aronis. Once the debtor is found, if he acknowledges the debt but can’t afford to pay it off right away, then Aronis will arrange for the debtor to pay in installments. Aronis then drafts a new credit agreement, and typically, the debtor honors it. “Usually, the client has just lost track of the debtor,” says Aronis.
Larger creditors, however, can keep a far tighter rein on their loans. “Generally, we get claims 60 days after the expiring date,” notes Ricardo D. Costa, general counsel for Way Back, a São Paulo-based collections firm. “As a rough average, claims have been paid on the 86th day after we have initiated proceedings.” Besides handling claims for personal loan collections and credit cards, Way Back also helps some of the largest companies in the world – including Coca-Cola, Exxon-Mobil and FedEx – collect past-due payments in Brazil. Way Back itself is part of Belgium-based TCM Group International, a collections empire that operates in 144 countries. Like Idel Aronis, Way Back sends letters and calls debtors on the telephone. Personal visits are not a common practice, notes Costa.
Good Guys, Rude Guys and Thugs
Worldwide, collectors’ techniques vary from polite to publicly embarrassing to outright thuggery. In the US, threats and harassment are forbidden under the Fair Debt Collections Practices Act. Worldwide members of ACA International – an association of debt collectors based in Minneapolis, MN – also abide by those rules. Under the Act’s provisions: collectors must contact debtors twice by mail before they make telephone calls; they can’t phone at odd hours or call repeatedly at the debtor’s workplace; and they can’t make threats. “[Agencies] can probably say that a person’s credit rating may be damaged,” says Nathan Thompson, a spokesman for ACA International. “But they might want to consult a compliance lawyer first.”
In Mumbai, India, one collection agency has raised eyebrows by sending sari-clad transsexuals to make noise in the street outside the debtor’s door. And in China, one agency got started 10 years ago after a retired man, annoyed when his son couldn’t collect a debt from a friend, bought a two-foot gong and a red vest reading “Debt Collector.” Setting up outside debtors’ homes and places of business, he drew crowds and, in four out of five cases, quick repayment.
At the far end of the civility scale are some Asian collections practices. In China, collectors regularly vandalize debtors’ homes by gluing up the door locks and splashing the walls with red paint. The vandals may also hit neighbors’ houses to enlist peer pressure. Not infrequently, these collectors of dubious ethics will hire teenagers to do the dirty work. The Taiwanese government, after reports that banks were hiring gangsters to collect, set up a hotline in February 2006 so consumers could report threats and harassment. The police, meantime, cracked down, arresting more than 300 people believed to be collection thugs. Both nations have seen a steep increase in debtor suicides after debtors have been repeatedly harassed by collection agents. In Hong Kong, suicide by charcoal fire – that is, carbon monoxide poisoning – has become in vogue among debtors in over their heads. A study published in the British Journal of Psychiatry in 2005 found that “many, if not most, of such suicides had been driven by financial indebtedness.” |
The poor customers at Casas Bahia may not be sophisticated borrowers, but they have proven to be reliable ones. Founder Samuel Klein has been quoted as saying, “The poorer the customer, the more punctual his payments.” Installment loans, however, bear their own kind of security. “These loans are most often secured by the property,” explains Nathan Thompson, a spokesman for ACA International. A car can be repossessed, but not an expensive restaurant meal. With credit cards, “Most of the time there’s nothing to take back,” says Thompson. “The lender may be able to prove that that $1,500 in debt was used to buy this particular big-screen TV, but in most cases they don’t want the TV – they want the $1,500.”
Nonetheless, in partnership with financial group Banco Bradesco, Casas Bahia is going into credit cards in a big way. Casas Bahia customers flocked to the new credit card, which bears the name of both the retailer and Bradesco, during a 40-day promotion in November 2005. Almost 85,000 new customers signed up. “Casas Bahia has been really a very huge success in the consumer finance strategy of Bradesco,” Jean Leroy, Bradesco’s general manager, said in a recent conference call with analysts. “And it has also been adding a lot of other businesses from other retailers because Casas Bahia is the leading company in Brazil, by far.”
Bradesco is leaping into the credit card pool with both feet. Since inking the deal with Casas Bahia, it has signed agreements with retailers Lojas Esplanada e Otoch and Lojas Salfer. Also, in June, the bank announced an alliance with retailer GBarbosa, a leading grocery and drug chain operating in northeastern Brazil. GBarbosa’s credit card, Credi-Hiper, already has 680,000 customers. Bradesco also purchased the Brazilian operations of American Express in March, paying $490 million.
| Manuel Armendariz, American Express |
Mexico’s banks rate credit risk on a scale, with A being the most creditworthy and E being the least. “We focus on the customers rated A through CC+,” says Manuel Armendáriz, head of American Express in Mexico. “Our customers are approximately the top 10%.” Besides credit cards, American Express Mexico also offers unsecured personal loans at rates that can run below 17%. “People use them for special events – weddings, trips – and sometimes for cars,” explains Armendáriz. The loans are up to $30,000 and 36 months in duration, and are usually paid back in about 23 months.
While American Express will divulge neither its default rate nor its collections techniques in Mexico, Armendáriz asserts that the group’s collections rate is 30% higher that of its competitors there. Collections are handled by telephone.
Elektra, a Mexican retail chain that, like Casas Bahia, has found success with borrowers at the bottom of the economic pyramid, has kept its default rates in check by employing a collections army that pays personal visits on motorbike to debtors. Elektra has been offering in-store credit for purchases since 1957. The business line was so profitable that the company set up bank branches – under the brand Banco Azteca – in its stores in 2002. “Elektra and now Banco Azteca’s default rate has been a stable 2-to-3% since we began giving credit,” wrote Daniel McCosh, a spokesman for the Salinas group of companies that owns Elektra, in an e-mail. Economic cycles have not had much effect on the retailer’s default rate, according to McCosh. “In fact, 1995, the year of the economic crisis following the 1994 (currency) devaluation, was a strong growth year for Grupo Elektra,” he notes.
Mexico’s collections agencies – like the population in general – tend to skip the mail. “Letters are really not much of a pressure,” says Romelio Hernández, president of HMH Legal, a Tijuana collections agent who handles cross-border business-to-business claims, typically of $15,000 to $20,000. Instead, an agent pays a visit. “If he doesn’t come back with a payment or an agreement, at least we know what the debtor’s condition is financially,” Hernández says. “He’ll tell us if the company is up and running, if they have the same company name, whether they have enough employees and a good flow of business.”
Craving Credit Reports
For Brazil’s Bradesco, one benefit of alliances with retailers is obvious: Retailers’ loan records provide a credit history for prospective cardholders. That credit record can become part of a fledgling credit-reporting system, a crying need for Latin America’s consumer creditors.
While Brazil has a federal list of people who have written bad checks, there is little else for lenders to rely on when gauging the creditworthiness of potential customers. Bradesco apparently aims to fill that need. In January 2006, the bank entered into a joint venture with Fidelity Information Services, a behemoth third-party credit-card processor based in the US. After two years of setting up its database, the venture, Financieros Processadora e Servicios SA, plans to sell its services to other banks.
For credit card lenders, at least, sticking to the very best credit customers bears one drawback: With high rates of interest, cardholders frequently use their plastic as a convenient substitute for cash, paying in full at the end of each month and leaving card issuers with only modest merchant fees for revenue. The trick, it seems, is to find customers who almost always pay on time. Until Latin America’s lenders can manage that, there should be plenty of repentance to go around. LF
Collectors in Costume
When the conquistadors first came to Latin America, Spain already had a tradition of shaming debtors in default by dressing them in eye-catching tunics and parading them through town on donkeys. Street theater style collections techniques live on in the Old Country. There, a debtor may be dismayed, but need not be surprised, to see a collector on his door with an outstretched palm, a top hat and a dinner jacket with tails. The tailcoat tradition – indeed, the modern trend of using costumes – apparently began not in Spain but in Argentina, where a Buenos Aires collections agency tried the tactic in the 1960s. |
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