Defending business at the cost of the economy: The story of Transbank

Monday, September 12, 2011

Katherine is the owner of a minimarket in southern Chile. As part of a move to upgrade and modernize her shop, she decided to implement an electronic payment system provided by Chilean credit card administrator Transbank, aiming to increase sales and provide other payment methods to her customers.

Transbank is the only such service provider in the country, and "they have this amazing advertising campaign on TV just to attract clients. But in reality what we [as small shop owners] don't realize is that they have the power to destroy an SME, like mine," said Katherine, who asked that her last name not be used for fear of reprisal.

Her complaint has to do with the charges that the company applies per transaction, as well as the service.

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According to this SME executive, for every credit card transaction, Transbank charges 2.95% of the total and 2.50% per debit card. Also, the company charges a monthly rental fee of 0.9 of the inflation-linked unit, the UF (which comes to about US$46.35) for each fixed machine installed in the shop and 1UF per each wireless machine.

"Apart from the extremely high charges, the service is appalling. When the system is down, they don't come back with a solution. It doesn't matter how many times you call them," she said.

Over the last few years, voices of discontent such as Katherine's have grown. Customers and store managers alike are now seeing in everyday transactions what has been a rumor in the market for some time now - that Transbank's technology is out of date and that the company is doing little to fix this. Stories abound of the card administrator's dominant position in the market and a lack of service capacity to deal with today's increasing market demands.

But what's the reality behind these stories? And what about the current legislation - how can a growing economy like Chile's accept the existence of a service so poorly rated that even a lawmaker ended up filing a complaint against the operator?

To find out, BNamericas contacted more than 10 different sources, from retailers to large e-commerce companies and SMEs. While the majority of them mentioned the word "monopoly," only a few gave permission for their names to be used. The reason? The same as Katherine's - there's no other option at the moment, and they were scared to speak out publicly against the sole operator that enables them to run their day to day business.


Transbank was set up in 1989 by seven banks in Chile, creating the Sociedad Interbancaria Administradora de Tarjetas de Crédito, which currently has more than 19 shareholding institutions. The shareholders are also clients, such as the Royal Bank of Scotland, Banco de Chile, BCI, Santander, Security, JP Morgan Chase Bank and Scotiabank Sud Americano.

Transbank operates credit card processing for Mastercard, Visa, Magna, American Express and Diners Club. It also processes payments coming from debit card system Redcompra and online payment gateway Webpay.

And herein lays the main problem, according to a high-profile e-commerce CEO.

"The banks are the owners, so there's no interest in changing the system. We have two banks - Banco Santander and Banco de Chile - that own over 50% of the equity in Transbank. If you add BCI bank, they control the market. And if the system doesn't work properly, they will reprimand or fire a manager or employee, but nothing concrete is done to address the underlying issue," the CEO said.

In July this year, Chilean lawmaker Gonzalo Arenas filed a complaint with the economic unit of the district attorney's office (FNE), accusing Transbank of abusing its dominant position and of charging excessive commissions for credit card use.

Arenas told BNamericas that Transbank has a "gentlemen's agreement" with the banks to not allow any other payment system to operate in the country. "Access is blocked for any possible competitor that would like to enter the market, because they [the banks] are also the owners of the payment processing service."

For example, Jean Christian Mies, Latin America manager at the Dutch internet payment system Adyen, told BNamericas that the company is looking to offer its payment services in Chile. Adyen has been in conversations with Transbank in recent months to find a solution to operate locally, but the situation is "complicated," he said.

"The main barrier for other competitors in the country is that Transbank has a monopoly and they have no intention of opening the market to other companies that could offer services similar to theirs," Mies said.

According to the executive, one of the main problems is that Transbank does not accept foreign credit cards in online transactions - thereby limiting possibilities for local companies to do business abroad.


It has become commonplace in Chile to hear employees in shops and retail stores say, when a customer is trying to pay a bill, "the system isn't working, it can't read the card." This occurs more often on days of higher demand, such the day prior to a holiday, during Christmas season or even on a Friday evening.

On April 15, this year the credit card system was down for two hours across Chile because of a fault in Transbank's network. At the time, online discount seller Groupon Chile said it lost almost US$50,000 in transactions during the downtime.

In an interview with CNN Chile, Groupon's Latin America founder, Daniel Undurraga, said that in times of high demand for online payments, the Transbank platform fails and simply stops offering the service, "but there's no place to go and complain." And when Groupon wants to renegotiate the fees, to base the payment on service quality indicators, Transbank takes its time to respond. "This would be completely different if there was another competitor in the market," Undurraga said.

Groupon is currently in a quiet period and was unable to talk to BNamericas about the issue.

On the same day that the service was down nationwide, Chilean internet registration site also reported problems with the payment system.

Margarita Valdés, Nic's legal and business manager, placed the blame squarely on Transbank "because it was they who contacted us saying that there were unfinished transactions or duplicated ones." Unfortunately, she said, companies like Transbank do not have the culture of reporting problems or explaining to users why a problem occurred and how it was solved.

When contacted by BNamericas about these issues, Transbank executives declined to comment.

Many other examples have come to light, all pointing to the same issues - poor service availability, lack of an alternative supplier and slow response in problem solving.

The question is how a government schooled in the tradition of laissez faire economics and a champion of the free market can allow this monopoly to continue unfettered from legislative restraint.

As a player in a world that is more connected every day, Chile is moving toward a cashless society where these financial services are like the economic system's veins and arteries. Any blockage or interruption is like a stroke that damages the Chilean economy's health. And if the government fails to act quickly, the system may need to head to intensive care.