By Aluisio Alves

SAO PAULO, Aug 13 (Reuters) - Brazilian lender Itau Unibanco Holding SA ITUB4.SA is shifting its payment services strategy to focus on its most profitable segments, a senior executive told Reuters, as competition in the card processing business has weighed on fees.

"We don't want to focus on card processing for our larger clients. That service should be priority for the mid-sized and small clients," Marcos Magalhaes, CEO of Itau's card processing unit Rede, said in a late Monday interview.

Supplying card processing machines and services to Brazil's largest retailers has become a money-losing business since the final quarter of last year, Magalhaes said. Still, the segment is still profitable with smaller clients, for which Rede zeroed fees in receivables-backed credit three months ago.

Magalhaes said Rede lost large retailers as clients, but has been gaining market share among companies with annual revenue of up to 30 million reais ($7.6 million).

For large clients, Itau is offering the use of its new payment app, iti, which uses QR codes for money transfers. Itau charges a fee of up to 1% on the transactions.

Magalhaes said the payments app was created to satisfy clients' demands for simpler payments solutions.

Analysts estimate Brazil has around 10 million operational card processing machines, known as POS — second only to the United States. New entrants such as PagSeguro Digital Ltd PAGS.N and Stoneco Ltd STNE.O have gained market share and are flush with cash after going public in 2018.

"Supplying terminals is not the solution over the long run", Magalhaes said.

($1 = 3.9635 reais)

(Reporting Aluisio Alves Writing by Tatiana Bautzer Editing by Chizu Nomiyama)

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