Annual Percentage Rates in Brazil: the awful truth
Most of us have heard at least once about Brazil: this enormously huge country, with crazy amazing beaches, great weather, great people, land of Gisele Bundchen, land of caipirinha and so on. For those who know a bit more about Brazil, perhaps you might know about Dilma Rousseff and its recent impeachment, the ongoing economic crisis that still hasn’t come to an end, the Olympics that were recently hosted in Rio de Janeiro and the Zika virus that apparently is still out there and conquering new countries. But I don’t want to talk about those topics that do deserve whole discussions and newspaper articles that should be read. I’m here to talk about an awful truth that sounds really threatening and unfair to me: Interest rates or so-called “annual percentage rates.”
As a Kiva fellow in Brazil, one of the things I’ve done is research interest rates, brick and mortar banks like Itau or Santander that suck money away from Brazilians, and of course, the microfinance players that do care about Brazilians (in my opinion). If you are a bit acquainted with the Brazilian banking industry, you might know that there is an ongoing fintech revolution happening in the country. The reason? Because brick and mortar banks such as Itau are literally sucking money away from Brazilians. Apart from the monstrous bureaucratic machinery that happens behind the scenes, there's IOF (imposto sobre operações financeiras) or tax over financial operations that accounts for 6.38% of any transaction made abroad using your credit card (I won’t get into details about IOF because it varies depending on whether you pay with card or buy foreign currency, etc.); bank transfer fees (because you cannot have a USD checking account in Brazil, but if you want to send money abroad--think twice!), you need to pay transfer fees+IOF and you can only send a maximum amount per month of US$10,000 (US$3,000/day) or you will need to fill in some paperwork for the government to know about your money games; and a crazy exchange rate--that has improved quite dramatically, though: Last year around October it was around 4.2 Brazilian Reais per USD, and now it is around 3.4 Brazilian Reais per USD; big banks are not providing Brazilian consumers with many options.
Bottom line: apart from government taxes and so on, annual percentage rates or APRs of big Brazilian banks are crazy high! Just to give you a sense of benchmarking: credit cards in the US have an APR of around 12% while Peruvian credit cards have APRs of around 35% (or perhaps a bit lower). On the other hand, Brazil is on a very different level. Big banks like Santander charge APRs of 400%+ for credit cards, and 60%+ for consumer loans. Imagine if you had to finance your MBA with a loan from a local Brazilian bank–> impossible! If you need a US$100K loan, you’d need to pay interest of US$60,000+ a year. Crazy. Apart from these big banks (Santander, Bradesco, Itau, you name it), you have different players like Nubank that supposedly have leaner operations and can charge lower fees and interest rates because they don’t have agencies, they run their operations through an app, etc. Nubank charges APRs of 140%+ for its credit card. Crazy high still.
Microfinance institutions like my field partner Banco do Povo Credito Solidario (BPCS), on the other hand, can charge APRs of ~30% (depending on the source of the loan). It is crucially important then that Brazilian consumers get more options that offer realistic rates. Note that these APRs do not consider other fees such as insurance fees, membership fees, etc. People say that big banks charge these absurd rates because of the high default rates from Brazilian consumers, so those who paid on time end up subsidizing those who didn’t. In the end, banks never lose. It is definitely a bubble that will end soon and probably with ugly consequences. For now, entrepreneurs have BPCS and Kiva to help them grow.