Cielo Follows Starbucks Amid Brazil Pay-by-Phone Doubts

The rampant fraud that spurred Brazil’s banking industry to become one of the world’s most technologically advanced is turning into a hurdle as credit-card processor Cielo SA tries to persuade consumers to use mobile phones for payments.

Cielo, which has had phone-payment capabilities since the end of 2010, will expand its mobile and e-commerce offerings as soon as next year in Brazil after buying Redwood City, California-based Merchant e-Solutions for $670 million in September, Chief Executive Officer Romulo Dias said.

Brazil’s biggest card processor is looking to digital applications -- used in the U.S. to pay for a range of products from Starbucks Corp. lattes to street parking in downtown Salt Lake City -- to help offset a forecasted drop in fees amid increased competition.

“The world will use mobile -- we have to get in,” Dias said in an interview at Bloomberg’s Sao Paulo office. “People think it’s not a secure transaction, that it’s not encrypted.”

Cielo also expects to boost revenue by offering services such as the management of loyalty programs for retailers, Dias said.

While Brazil has been quick to adopt advances such as table-side card readers and biometric automated teller machines, the mobile-phone technology may face resistance from consumers afraid of credit cards being cloned, said Carlos Eduardo Picchi Daltozo, a Sao Paulo-based analyst at BB Investimentos.

Electronic fraud cost 1.4 billion reais ($640 million) last year, after a toll of 1.5 billion reais in 2011, according to the Brazilian Federation of Banks, known as Febraban.

‘Main Focus’

Brazilian banks are “among the most advanced in the world,” Daltozo, who recommends buying Cielo shares, said in a telephone interview. “The question of security is the main focus that companies have in getting more people using mobile-payment platforms.”

Mobile-banking offerings are already available at U.S. banks, including Citigroup Inc.’s Citibank and Bank of America Corp. Both have smartphone apps and banking via text message. U.S. consumer companies such as Starbucks say their customers are embracing the technology.

“We are approaching 4 million U.S. mobile payment transactions per week, accounting for roughly 10 percent of total U.S. tender,” Linda Mills, a spokeswoman for Seattle-based Starbucks, said by e-mail.

Loyalty programs for store owners, social-network marketing through Facebook Inc.’s namesake site and mobile apps are part of Cielo’s plan to transform into a “services company,” with Brazil’s central bank expected to begin regulating the market soon, Dias said.

Competitive Threats

Rules under consideration could end exclusive agreements between companies and popular meal-voucher programs, as well as break Barueri, Brazil-based Cielo’s hold as the nation’s only processor of American Express Co. cards. It is also Brazil’s only publicly traded card processor.

New competitors, including Banco Santander Brasil SA and Banco do Estado do Rio Grande do Sul SA, known as Banrisul, probably will get greater access to consumers and drive down fees in coming years, Dias said.

Those companies each have less than 5 percent of the market, trailing Cielo’s 53 percent and about 37 percent for Redecard SA, which was bought in 2012 for $5.17 billion by Itau Unibanco Holding SA, Latin America’s largest bank by market value.

“Cielo is the market leader and has the most advantages,” said Francisco Kops, an analyst at Banco Safra SA, in a telephone interview from Sao Paulo. “It’s the company that has the most to lose.”

Index Beater

Cielo rose 11 percent this year through yesterday as the benchmark Ibovespa index fell 23 percent. That left the shares trading at 16 times estimated 2013 earnings, compared with an average multiple of 11.8 for Ibovespa companies, data compiled by Bloomberg show. The stock rose 3.9 percent, the most since October, to 54.90 reais at the close in Sao Paulo.

Cielo expanded its market share in six of the last nine quarters, Dias said.

“Our expectation was that after the Itau merger, Redecard would become more aggressive in conquering market share,” Daltozo said. “But this hasn’t happened yet.”

Redecard should start picking up market share next year after it is integrated into the bank, he said. An Itau press official declined to comment.

Cielo’s purchase of Merchant e-Solutions will help “differentiate the company in the future,” Dias said.

“People are becoming more familiar with buying online,” said Dailton Felipini, a consultant and editor of, a website dedicated to online-shopping research and articles. “Card operators and processors are conscious that in terms of Internet sales, the sensation of security is fundamental.”

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