P.O.D. — plastic on delivery? Visa International and a Dominican bank charge up distribution in Latin America

Latin Trade, March, 2003 by Mike Zellner

The Dominican Republic was growing so fast by the end of the 1990s that the credit and collections departments of the country's largest distributors began to resemble small banks, recalls Dennis Simo, vice president of corporate and personal banking for Bancredito. Sales teams struggled to check credit worthiness and chase bad debts even as they signed big, new contracts.

Major distributors in the Domincan Republic sought help managing the credit and collections process from local banks. Working with Visa International, Bancredito, the nation's fifth-largest bank, launched a pilot program in 2000 called Visa Distribution that allowed the bank to manage the payments of a distributor's clients with a credit card.

Two years later, the "plastic on delivery" approach has grown to a half-billion-dollar business in the region, according to Visa.

"The bank gives me capital for working with it" says Isidro Melo, sales manager for Dominican autoparts distributor Arias Motors, one of the first companies in Latin America to adopt the system. The bank pays Arias Motors in 24 hours, so Melo has worked hard with the company's 37 sales agents to convince its 2,000 clients to switch to the new system.

Bancredito has US$350 million in sales under the program. Brazilian development bank Banco Nacional de Desenvolvimento Economico e Social (Bndes) and Bradesco, the country's leading private bank, used it last year to launch an approximately US$90 million program for 12,000 supermarkets nationwide. In Colombia, animal feed company Purina and Banco Sudameris will use the card with 250 distributors, a plan expected to generate $40 million in sales volume a year.

"Visa Distribution started from a small business's point of view toward a distributor," says Rafael de la Vega, vice president of commercial solutions in Latin America for Visa. "The store owner saves cash because he uses the card and maintains the same payment terms."

Visa developed the distribution product for small and medium-sized businesses in its Asia-Pacific region as part of a global effort to promote card use in the corporate segment. Its studies show that smaller companies in Latin America spend $60 billion annually to buy inventory for resale.

Fine-tuning distribution. Ranging in size from major retailers to mom-and-pop shops, customers use a credit card to purchase from distributors. The bank charges a distributor an average administration fee of 3% of the value of transactions and extends credit to customers for 30 to 90 days. Because the bank pays within 24 hours, the distributor usually offers customers fast-payment discounts that range from 3% to 20% of the purchase value.

Banks are picking up on the system because it offers a cheap way to attend to small and medium-sized businesses, as well as sell various financial products to the same customer. Bancredito's Simo says the Dominican financial group, which also owns phone, insurance and credit card companies, struggled at first to identify the right products to sell to the credit card holders.

"Past-due loans were greater than expected and cross-sales of other products to credit cardholders were less than desired," says Simo, whose bank launched 20 programs in the first year. "We didn't have [client] demographics completely defined. For example, the cardholders' incomes were lower than we thought."

Bancredito made some adjustments. It stopped taking 100% of the risk on loans, sharing some of it with the distributors. Simo and his team also changed the focus from the distributor to the client. They analyzed the clients of the leading distributors for pharmacies, hardware stores, autoparts, among other businesses, and chose insurance and financial products appropriate for small and medium-sized companies.

The tweaking did the trick: The business boomed to $350 million during a 15-month period starting at the end of 2001. An estimated 40% of the companies were new customers for Bancredito. The Visa Distribution program covers its costs, but the cross-selling of products represents a huge opportunity says Simo.

Creating credit history. One product that distributors' clients are using is bank loans. Melo, of autoparts distributor Arias Motors, says that a key benefit of the program for his clients nationwide is access to credit. "It gives the client a lot more flexibility," he says.

In the Dominican Republic, many businesses use banks as nothing more than a safe place to store money. Distributors traditionally meet credit needs, but those loans do not show up on credit bureau reports. As a result, small and medium-sized companies often have no credit history. The Visa program with Bancredito "allows the client to get clear bank information," says Melo. "That serves as a reference for seeking other loans from banks."

In most cases, Bancredito offers better credit terms than a distributor. A store's payment time often extends from the 30 days offered by a distributor to as much as 90 days from the bank.

The distributor also has a strong incentive to convince its customers to switch to Visa Distribution: Cash flow. Ferreteria Ochoa, the largest hardware distributor in the country with annual sales of $45 million, has converted almost 15% of its 20,000 clients to the new system. "It generates more cash for us," says Dionisia Acevedo, finance manager at Ferreteria Ochoa. "If only we could have a more universal product so that we could work with other banks."