Brazil seeks credit card regulation, competition

* Proposals seek to end dominance of VisaNet, Redecard

* Legislators want more oversight by central bank

* Credit card industry association warns of over-regulation

By Natuza Nery and Fernando Exman

BRASILIA, July 15 (Reuters) - Brazil's Congress is moving to heighten competition in the $190 billion credit card industry, where customers and merchants complain about exorbitant costs and a dearth of options.

Last week the Senate approved a bill intended to force a reduction in the fees charged on credit card purchases. At an average of 4 percent of the sales price, the fees are roughly 70 percent higher than what is charged in Europe and the United States, according to a study by Senator Adelmir Santa.

The bill would allow retailers to offer discounts for cash sales, thereby putting pressure on credit card operators, including VisaNet VNET3.SA and Redecard (RDCD3.SA), to cut fees.

The Chamber of Deputies, the lower house of Congress, could vote on the bill as soon as today (Wednesday).

Other proposals are in the making. One, supported by both government and opposition parties, is to end the market dominance by Redecard and VisaNet and attract more players to the field. The measures could reduce the merchant fees, but would also undermine profit margins for card operators.

VisaNet and Redecard, which have exclusive contracts with Visa (V.N) and Mastercard (MA.N), respectively, have a combined market share of more than 90 percent. Both companies authorize merchants, issuers and transactions and act as a clearinghouse.

A proposal from the opposition Democratas party proposes to end such exclusivity, allowing a credit card brand to be managed by several operators. The ruling Workers' Party, or PT, backs the proposal, making its approval in Congress likely, analysts say.

"We want to stimulate competition and break this duopoly," said PT Senator Ideli Salvatti.

Former Finance Minister Antonio Palocci, a PT member of the Chamber of Deputies, recommends that existing operators be forced to share their networks with new competitors, including the machines used by retailers to swipe cards for authorization.

Legislators across the political spectrum are also working on a new regulatory framework to attract new players and centralize currently dispersed supervision under the central bank.

NO SUPERVISION

"This duopoly occurred precisely because no institution is formally in charge of supervision," said opposition lawmaker Paulo Bornhausen, head of the bloc of legislators representing retailers in the Chamber of Deputies.

The central bank currently has a mandate to supervise only part of the credit card industry.

But critics question whether credit card operators should be treated as financial institutions or be supervised at all.

The association of credit card companies, Abecs, said it was open to discussion of the end of exclusivity on credit card brands but warned that over-regulaton could hamper the industry's growth and investments.

"Government intervention in this area should be limited and cautious," Abecs said in a letter to the government.

The volume of credit card transactions has jumped from 275 million in the first quarter of 2002 to 2 billion in the third quarter of 2007, according to a government study.

But the use of credit and debit cards as a share of consumer purchases amounts to only 22 percent in Brazil, compared to 45 percent in the the United States and 60 percent in France, according to Abecs.

VisaNet raised more than 7 billion reais last month in an initial public offering that was the biggest-ever IPO in Brazil.

The company is controlled by Bradesco (BBDC4.SA), state-run Banco do Brasil (BBAS3.SA) and Spain's Santander (SAN.MC). Visa International, a unit of Visa Inc, sold its 10 percent stake in VisaNet as part of the IPO.

Redecard is controlled by Brazilian group Itau Unibanco (ITUB4.SA), Latin America's largest bank by assets.

A draft regulatory framework will be presented to President Luiz Inacio Lula da Silva in September. (Reporting by Natuza Nery and Fernando Exman; writing by Raymond Colitt; editing by John Wallace)