The Brazilian E-commerce Market And The Hassle Of International Payments
We are now in the third decade of the 21st century. E-commerce continues its inexorable advance towards total commercial dominion. Worldwide, e-Commerce will have sales in excess of 3.9 trillion dollars in 2020 and more than 6 trillion by 2022.
Given the sheer size of the global e-commerce trade, and that virtually every market in every country is growing rapidly. Cross-border e-sales is the way of the future. Especially for companies looking to expand their operations and increase revenue.
However, penetrating international markets can be a daunting task for merchants. Factors such as language, culture, politics, and economic aspects, may hinder a company’s ability to reach customers overseas.
Thanks to increasing access to the internet, it is no longer necessary to establish a local presence to access global markets. Consumers are now primarily looking overseas for their electronic purchases. Some countries in Asia and Latin America showing the highest forecasted growth.
Among these countries with a promising e-commerce potential, we find Brazil.
Brazil, a country of more than 210 million people, possesses the ninth-largest economy in the world. It is also the 8th largest if we look at purchasing power parity. As a result, the Brazilian e-commerce landscape already boasts hundreds of millions of potential customers.
Brazil’s Digital Economy Grows In Potential
The sheer volume of electronic commerce purchases that occur in Brazil every day place it in 10th place among digital markets worldwide. This is just below Russia, but in first place among its Latin American neighbors.
Retail is the main category for digital commerce. This is due in large part to the popularity and ease of access to the internet in the country. 151 million people (over two-thirds of the total population of Brazil,) enjoy internet connectivity and make internet purchases regularly.
It is this substantial number of internet users that drives the booming digital economy of Brazil. Companies spend considerable energy and countless hours trying to capture this vast audience. They do this through targeted advertising driving them to their online stores.
Brazil’s internet audience is composed primarily of urban households with higher-than-average incomes. Moreover, the last few years have seen a distinct upward trend in the economy. This has manifested in increased spending and even more widespread internet use. Data published by the German online statistics portal Statista, suggests that internet access will surpass 70% this year (2020). Hovering around 80% by the year 2023.
As a result, the digital economy of Brazil will only get bigger and bigger as the years pass.
More Money, More Problems
Here are a few data points to give a better perspective to the Brazilian digital landscape:
The Brazilian e-commerce market represents over $23 billion. And is expected to reach an impressive $28 billion by the year 2023.
Brazil has a balanced market share of products purchased over the internet. The four largest categories are Consumer Electronics, Travel, Household Appliances, Clothes, and Apparel.
Brazil has five holidays where retail sales skyrocket: Christmas, Easter, Mother’s Day, Father’s Day, and Valentine’s Day. Other retail events that represent a significant uptick in Brazilians’ online spending are: Carnival, Children’s Day, Consumer’s Day, Black Friday, and Cyber Monday. Which line up with their U.S. counterparts.
There are only around 500,000 online retailers in the country. However, Brazilians hold the 10th position in the global ranking of digital purchases made.
Cybercrime
Unfortunately, there are still more than a few complications regarding e-commerce activity in Brazil. The most critical issue being cybercrime.
With hundreds of millions of people conducting business online, cybercriminals have a significantly easier time targeting unsuspecting folk. This is a problem of which the pertinent Brazilian authorities are aware. Every year new measures are taken to reduce the risks associated with online purchasing.
With this extensive use of online shopping, comes cybercrime. Like in every country in the world, Brazil is no exception. Online fraudsters exist and people are conscious about how they use online shopping checkouts as a result. 6 out of 10 Brazilians wish to opt for alternative payment methods, such as Boleto Bancário. A local cash slip payment method, to minimize their risk of falling victim to cybercriminals. Credit cards are usually only preferred for their speed of purchase (instant vs batched for Boleto). Or for the ability to make payment in installments.
This preference creates a new wrinkle for international e-commerce shops looking to do business in Brazil. This is because only local companies, or companies that use a cross-border PSP like epag, can offer local payments. This is a big draw for customers. Without these options, your revenues will pale in comparison to their potential when offering Boleto & local credit cards.
epag Provides E-Commerce Operators With A Worthwhile Alternative
Brazil is the largest and most desirable digital market in Latin America. According to a Big Data Corp survey, 75% of e-commerce traffic in the region is Brazilian. The Brazilian e-commerce market is almost ten times that of Mexico. The second-largest market in Latin America.
However, there is a shortage of useful tools to help those companies who are looking to conquer the Brazilian e-commerce market. Especially when we consider the fact that there are some substantial obstacles to maneuver. Such as the language, the culture, and most importantly, the available cross-border payment methods.
A large portion of the Brazilian population does not have the means to enact an international payment. Decline rates for international cards are more than 98%.
This situation is then compounded by the fact that international companies have to pay exorbitant processing fees. And having to deal with the world’s second-most complex tax system.
How epag Can Help You
epag can provide your company with the means of countering that harsh climate. We do this by providing a seamless cross-border operation. It maximizes market coverage, minimizes local processes, and significantly reduces your organizational complexity.
Through a simple integration with the epag platform, you get local payment processing, international remittances, a secure platform, and the most uncomplicated market entry possible.
epag is a tailor-made, low-cost solution with a one-stop-shop and modular server-to-server API. If your company needs ways to access hundreds of millions of potential customers while reducing risk, costs, and complexity. Then epag has something to offer you.
Don’t let the complexity of entering an international market blind you. Brazil will remain the largest e-commerce market of the Latin American region for the foreseeable future. Contact us here to discuss further!
Installment payments across the world have long been a payment option for consumers to pay for goods offering buyers a more affordable way to shop. Brazil is no different, where for decades credit card use, and the ‘buy now, pay later’ mantra, has been a key part of the country’s economy. In fact, Brazil even has its own name for the practice – ‘parcelado’.
Installments are effectively paying for something in stages, but getting to take home the product right away. A bit similar to layaway plans in the US, but instead you’re able to enjoy your goods or services immediately while paying for the entire value (usually with a fee for doing so) along the way. Almost half of online purchases in Brazil are made with installments.
But what are the pros and cons to businesses that adopt this model? And how does it all work? Keep reading to find out!
Installment payments in Brazil – how did it all start?
If you have ever been a consumer or seller in Brazil, you may have noticed that installment payment plans to purchase goods are fairly prevalent. You’ll often see in Brazilian shops or online e-commerce sites the original price of a product dramatically slashed through with a line and the more affordable installment price written over it. The option for customers to pay in smaller installments is applied to a large variety of products, from shoes to washing machines, furniture to cars.
The installment payment trend started in Brazil during the 1950s. It helped bridge the gap between the country’s desire for western consumerism like its northern neighbors, and the challenging realities of a not quite stable economic landscape. Fast forward 70 years, and installment plans are now as popular as ever, having become ingrained in the cultural habits of Brazilian buyers. They have become almost a necessity for the general population of Brazil, enabling lower income consumers to get their hands on more pricey items that would have been firmly out of their budgets in the past.
How do installment payments benefit businesses?
As suggested above, the introduction of installment plans makes the purchase of goods more accessible to customers on a lower income, opening the market up to potentially millions of more customers. After all, a car that costs R$ 70,000 (Brazilian Real, BRL, reais) (which is just under $17,000 USD) will look far more attractive to a customer who can pay just R$2,000 a month as opposed to a lump sum of R$ 70,000.
This, of course, is great news for businesses as a bigger market means more potential customers and ultimately more sales.
Interestingly, this psychological theory has actually been proven in studies. One survey even found that Brazilian consumers were persuaded to buy an item because they were able to pay in installments. So not only did the option to use an installment plan give them the opportunity to purchase an item they otherwise couldn’t afford, but it also sealed the deal, persuading them to part with their cash. The study also revealed that the average transaction size of customers increases when they are offered installment plans and they tend to be more inclined to buy what they put in their cart (as opposed to removing items by the time they get to payment time).
What are the barriers to offering installment payment plans in Brazil?
Of course, as with everything in life, with the good comes the bad. Despite the clear advantages of setting up installment plan options when selling products in the Brazilian market, there are also some downsides to consider.
As a business owner or senior member of your organization, you’ll know that cash flow is of huge importance to any business. After all, to make investments and grow your company, you need the cash to do so. But when you have orders to fulfill but don’t actually have the money from these sales in your bank account, things can get a little tricky.
And that’s the difficulty with using installment payment plans. If you are a vendor using a Brazilian PSP (payment service provider) and require the money to be paid into a bank account outside of Brazil, all installment payments will have to be anticipated (i.e. paid) before the cash can leave the country. So, if your customer has elected to pay their installments for your product within 12 months, you’ll have to wait 13 months to receive any of the money, even the very first installment the customer paid 12 months ago.
However, there is a way to get around this issue…
You may, or may not, already be aware of this, but there is such a thing as an ‘anticipation of receivables’, which is also known as ‘factoring’. Factoring is popular in Brazil as it eradicates the issue of cash flow. In basic terms, it means that a business can sell the income it expects to receive from a lump of orders to a third party (called a factor). This results in the business being paid the money before all the invoices are collected. In short, the ‘factor’ pays the business upfront an amount of money, then, after time when the orders are settled and invoices paid, collects the cash that the business was expecting to receive in the first place.
Thanks to this common Brazillian business practice, companies can earn money straight away from their installment payment orders and avoid waiting for the whole invoice to be settled, which could take weeks, months or even years. However, it’s also important to consider that for this service, factors (the third party organization setting up the anticipation of receivables) will charge an anticipation fee. The full cost of this fee depends on factors such as the overall cost of installments andhow many orders are anticipated.
How do Installment Plans work in Brazil?
So we’ve established why it makes good business sense to offer installment payment plans to Brazillian consumers (and the disadvantages associated), now it’s time to explore exactly how it works.
Traditionally, customers are given the decision of how many installments they want to pay in order to purchase an item. Perhaps two or three options are made available by the vendor, enough to make the buyer feel in control yet not inundated with too many choices.
Despite the problems that business can run into when offering installment payment plans to consumers in Brazil, according to the clients we work with, the benefits far outweigh the potential challenges.
Companies who use the plans in their business models have access to more consumers with a higher purchasing power. This, combined with the ability to offer local payment options for installments, will be an unbeatable combination for your business to help maximize your commercial potential in Brazil.
Expanding your business into Brazil should be an exciting undertaking, and it definitely will be. As the largest market in Latin America, it’s bound to provide you with hundreds of millions of potential new customers and that’s not something you want to miss out on, right? But if you’re going to start doing business there you’ll need to know some important factors, like how you’re going to pay your taxes.
How the Locals Are Taxed
Let’s start by taking a look at how individual people pay taxes in Brazil. First, residents pay taxes on any income that they earn, from anywhere in the world. Those who are non-residents are only required to pay taxes on income that is earned within the country. When determining what taxes need to be paid on the evaluation is on where the person making the payment is from. If they are from Brazil then the income is made in Brazil.
If you are a non-resident of the country then taxes are actually flat at 25% and include no deductions. Of course, this is contingent upon what type of income is being earned. Rental income, for example, is flat at 15%. Residents, on the other hand, pay taxes through withholdings. When it comes to money earned from someone outside of Brazil or through other individuals in Brazil they also make monthly tax payments. These payments are made according to a progressive rate, based on the amount of income brought in and range from earnings of 1,903.99 BRL to 4,664.68 BRL.
Now, this should make it a little easier to understand what’s happening for individuals paying taxes within the country, however, what about the people who run businesses?
Understanding Business Taxes
Now, when we take a look at how to complete business taxes things start to get a bit more complicated. Regularly, in fact, Brazil is considered one of the most complex systems in the world. There are three levels to taxes in Brazil, and beyond this there are a huge number of specificities foreign companies are not used to. To give you an idea of just how complicated: if you printed out all of the Brazilian tax code, you’d have a document that weighs more than an African elephant and taller than famous American basketball player LeBron James. Taxes are also much higher in Brazil, and while the current administration has indicated that they would like to minimize these complexities and costs for the individual and businesses, we haven’t yet seen the result of such campaign promises.
Keep in mind that doing business taxes in any country outside of your own is always going to require some additional education and effort. You’re going to need to do a whole lot of research into the rules and regulations of the country that you’re entering into– to help you get a head start in Brazil, we’ve already compiled for you, so you can jump start your company’s introduction to the BR market.
Types of Taxes in Brazil
First, there are a number of different types of taxes that are done in Brazil. They have federal, state and municipal taxes that are required to be paid. However, it’s important to note, single actions can lead to multiple taxes being applied at the same time and on multiple levels.
Federal taxes include:
Income tax – Imposto de Renda
Social contribution on net profits – Contribuição social sobre o lucro líquido
Import duties – Taxas de importação
Export tax – Imposto de exportação
Federal excise tax
Tax on financial transactions (IOF – Imposto sobre Operações Financeiras)
Rural property tax – Imposto sobre a propriedade rural
Contribution to the Social Integration Programme -Contribuição para o Programa de Integração Social
Contribution to the Social Investment Fund – Contribuição para o Fundo de Investimento Social
Contributions for intervention in the economic domain – Contribuições para a intervenção no domínio econômico
Taxes on labor relations – Impostos sobre relações de trabalho
And these are just the ones for the federal government. You’ll also have to take a look at the state taxes, which include:
Value added tax for goods and services – Imposto sobre o valor agregado de bens e serviços
Gift and estate tax – Imposto de doação
Tax on vehicle property – Imposto sobre a propriedade do veículo
And then we add in the municipal taxes that go along with this process, including:
Service tax – Taxa de serviço
Real estate property tax – Imposto sobre imóveis
Real estate transfer tax – Imposto sobre transferências imobiliárias
Municipal fees – Taxas municipais
Okay, so, if you’re reading through these you can probably tell that you’re not required to pay all of them, but even just paying some of these things can be complicated.
If you are considered a legal entity in Brazil, you will pay an actual flat tax, at 15%. On top of that there’s a 10% additional tax on higher levels of income and there’s the social contributions tax above, which is either 9% or 15%. Not to mention you’ll pay those additional taxes on other types of contributions that are made.
Withholding and Excise Taxes
If you carry out any type of financial transaction and earn income or make capital gains this is actually taken as the same as what a resident would be charged. You would pay the same rates in these cases, but you would then have to pay some of the additional taxes we had mentioned above, including service taxes of up to 5% and contributions to several of the social aspects we had mentioned.
Double Tax Treaties
If you are covered under what’s called a double tax treaty while doing business within Brazil you will actually have entirely different regulations. That’s because the double tax treaty or a multilateral tax treaty will actually override any other tax laws or regulations that take place within the country. As a cross-border corporation you would first need to look for one of these double tax treaties and see what they say about the payments that need to be made.
The information provided above is related to domestic tax laws within Brazil. If you are based in a country on the list below it means that you currently have a double taxation treaty with Brazil and may be able to utilize these rules for taxation rather than the standard.
Argentina
Austria
Belgium
Canada
Chile
China
Czech Republic
Denmark
Ecuador
Finland
France
Holland
Hungary
India
Israel
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
Norway
Peru
Philippines
Portugal
Slovakia
South Africa
Spain
Sweden
Ukraine
Note that the rules and regulations for each country are slightly different and you would need to look into the convention documents in order to determine the specifics of this process and how you would follow the taxation rules applicable to you.
Are You Required to Pay?
So the question is, are you actually required to pay corporate taxes in Brazil as a cross-border company? Well, that’s going to depend on a few different factors. You’ll need to be a non-resident of the country and your business is not considered a legal entity within Brazil in order to be considered ‘cross-border.’
You would then need to be doing business within Brazil, including selling your products, services, etc. or earning income through other means such as real estate and rental properties. But not all of these are subject to corporate taxes either. You would also need to be carrying out activities utilizing a Brazilian resident as your agent or representative.
That is still not the end of the situation, however. The individual that is carrying out the duties must have some form of power to bind you to the process, or they must be acting on behalf of a domestic branch of your foreign business. If these are the case then you would be subject to the corporate taxes that we’ve discussed so far.
If you have an agent taking care of things on the ground in Brazil but all of your transactions are actually taken care of abroad you are still considered a non-resident and a non-cross-border company. This would mean you are actually not subject to the corporate taxes either. You are not required to pay taxes in Brazil in this case.
Recapping What You Need to Pay
So — we’ve gone through the details of what taxes in Brazil look like, let’s take a bit of a recap on what types of taxes you could be required to pay if you run a cross-border company that does business in Brazil. Assuming the different factors we’ve discussed already all apply to you and you are required to pay taxes at all, you could be subject to:
Income Tax – This is the basic portion of taxation that covers things like your operating profits. It can actually be calculated utilizing actual income or a presumed income.
Withholding Tax – This includes interest (15% for non-residents or 25% for those in tax havens), royalties and technical service fees, each of which are also 15% or 25% for those in tax havens.
Payroll/Social Security Tax – This one only applies if you have actually employees working for your company within the region, which would apply if you have a physical location there.
Real Property Tax – This is also only applicable if you actually set up a business within Brazil, rather than if you’re operating a business from outside as a cross-border company.
Social Integration/Social Security Financing/Other – All of these taxes can still be applied to your business as well, and they’re going to charge smaller amounts between 0.65% up to possibly as much as 11.75%. Each of these are based on income on good and services and can apply to anything that is imported into the country.
What it All Means to You
If all of this is sounding a little bit overwhelming, don’t worry. Taxes are definitely not meant to be simple because everyone wants to make sure that they’re getting their share. Countries, organizations and different government entities want to make sure that they know all about your corporation and they definitely want to know everything there is to know about how much money you make and where they can get it. But how are you going to get it to them? The best way is to let us take care of it.
Going through all of these steps to pay your taxes in Brazil may be making you question whether you even want to expand into the region, but the truth is you can do it a whole lot easier than this. All you have to do is set up payments through our system, which allows you to accept your payments without actually setting up any kind of legal entity. When you do, you’re going to be subject to far fewer tax requirements and a whole lot less complicated system.
How We Can Help
Our job is to make sure that the payments you’re receiving from Brazil are done in a way that makes it much simpler for you to take care of taxes and more. We’ll take care of all the hard stuff and we’ll make sure that you’re not responsible for all of those different types of taxes. After all, your payments are going to come through our service, and that means you’re not actually doing business without the local entity.
Even better, we accept all of the major credit cards and the major payment methods that are used in countries throughout Latin America. That way, you don’t have to worry about losing a potential customer because they don’t have the right payments available. We make sure that you have fewer taxes, fewer complications and more customers. That’s what you’re looking for by expanding into the market after all, right?
Getting involved in Brazil is an amazing opportunity that’s going to put your business in front of millions of people who could potentially benefit, not to mention increase your revenue. But do you want to spend all that more time trying to do your taxes? Or growing your business into an ever expanding market? We know what we’d rather be doing, and that’s why epag is the way to go for all your cross-border needs. We can take care of the hassle and cut down on the mess.
Have you heard of Boleto Bancário? Chances are if you are based in the United States or Europe then you might not have, but since its launch in 1993, it has grown to now account for around 15% of all payments in Brazil. This means there are billions of transactions being made annually by consumers – making it an essential payment option if you are considering operating in Brazil and Latin America.
As of 2018, only 6.5% of Brazilians have an international credit card; that’s 196,350,000 people that have no access to any form of international payment. Another consideration is the large amount of the population, 25% in fact, who are “unbanked” (or desbancarizados in Portuguese), meaning their only method of payment accessible to them is cash, and cash-like products, such as Boleto.
In general, companies that are not able to offer local payment options in Brazil are missing out on a huge pool of potential customers, but even more so if they offer only local credit cards, when 100% of the population have access to Boleto Bancário, a payment option more like a cash slip. By adding Boleto, among your other local payment options, to your payment portfolio, you can truly revolutionize your business by accessing more clients than ever before.
What is Boleto Bancário?
Boleto Bancário is a payment method that is regulated by the Central Bank of Brazil (Banco Central do Brasil – BCB) as part of the Brazilian Payment System (Sistema de Pagamentos Brasileiro – SPB) and works in a similar way to that of a wire transfer or cash payment. Boleto literally means “ticket” in Portuguese, and when it was first introduced in the early 1990s it was primarily used for utility payments and rent and was designed to work solely with cash – however, the rise of technology has reinvigorated it and it is not one of the most popular ways of payment for e-commerce.
Put most simply, a Boleto works like an invoice or ticket that is provided to the end-user and instructs them on the amount due and the date payment is due by. Boletos can either be printed or remain virtual and allow millions of Brazilians to then pay their bills at one of over 40,000 processing locations. These locations vary and include typical financial places such as ATMs, bank branches, lottery stalls and even at some supermarkets. Boletos can also be paid from any online or mobile banking app.
Example of a boleto bancário
The logistics of Boleto
Alongside the amount and date due, each Boleto contains a unique barcode, serial number, issuing bank code and description as well as customer information. In essence, the Boleto barcode is the DNA of the account, with 48 numbers split as:
The initial three digits identify the bank
The fourth digit indicates the currency – 9 for Brazilian Real, 0 for other currencies
The next 25 digits make up the free field, helping to provide the customer information to the bank
The check digit identifies the Boleto as a whole and is created from a mathematical formula
The field verifying digits ensure each field is correct
The numbers after the check digit inform of the due date
The final ten digits indicate the value of the document, without discounts.
With nearly 140 million Brazilians not having access to a credit card, Boletos help the majority of citizens manage their finances.
Registered & Unregistered Boletos: what should I know?
Registered Boletos are sent to the bank once they are requested for a verification process, and whoever generates the Boleto (ie. the consumer) is required to pay for it at the time it is issued. Because they require a confirmation from the Bank to be validated, their timeline for delivery can be a bit longer than an unregistered Boleto – usually between 2-6 seconds vs. 1-3 seconds for unregistered ones.
Unregistered Boletos are what they sound like: they haven’t been registered with the Central Bank, and therefore they are only issued when the customer makes the payment. However, as of the end of 2017, these have been phased out, and only registered Boletos are allowed for e-commerce. This rule applies to Boletos of all values and was implemented with the intention to reduce fraud because without being registered, the Boletos are quite hard to trace and therefore can lead to either fraudulent or suspicious activities that merchants have little recourse over.
How does a Boleto Bancario work?
Originally, the Boleto was designed to work almost like an IOU. The customer was given the printed Boleto at the same time when they purchased goods or with their utility bill and they would then have until the designated date to complete the payment. To do so, they would simply need to head to a relevant processing point and pay the amount due in cash to complete the transaction.
The rise of internet banking and the invention of smartphones has transformed this slightly and whilst the cash option is still a viable way, nowadays a consumer can purchase something online with Boleto and then simply enter the number into their online banking system or scan the barcode via their banking app on their smartphones. Many Brazilians prefer this method as it helps to keep their online shopping more secure.
From a retailer’s point of view, when a customer chooses this option to purchase something they will issue the Boleto which will contain the amount, customer information and due date. The customer will then have until the expiration date to pay otherwise the transaction will fail or a late fee will be added.
Why should your business adopt Boleto Bancarios?
If you are looking to expand your business into Brazil and the Latin American markets, then adopting cash-based payment methods, such as Boleto Bancário, is essential if you want to reach the whole consumer base. If you restrict yourself to only accepting international payment methods, then you will be limiting yourself to just 6.5% of the population. To really excel in this market, it is advisable to accept local credit cards (as most credit cards Brazilians use are indeed local, not international) and Boleto.
In 2017, 21% of all online purchases in Brazil were made using Boleto Bancário. Whilst you could accept foreign currency, international companies operating in Brazil are subject to expensive processing fees that are hidden in FX rates, which can often end up being up to 70% more expensive than traditional rates you might be used to.
Nearly every Brazilian uses a Boleto at least once a month so it is an incredibly familiar payment method and by accepting the method for your business, you are adopting a local tradition. By offering the option of using Boleto, you will be welcoming a population of people who would be otherwise unable to make international payments and purchase from your store.
How can your company start offering Boleto Bancario?
Boleto Bancario payment processing can only be handled by a local entity in Brazil, in direct connection with an authorized financial institution. So you could open your own local branch, but this is an incredibly complex process. It would require a lot of paperwork and experience, whilst you would also need the knowledge of a local expert who is able to help you to navigate the various laws and taxation rules. Since Brazil has the second most complex tax system in the world, this is a lengthy process.
A far easier way is to utilize the skills of a company that already lives in Brazil, like us here at epag, who are legally allowed to operate international payments. We are already working with merchants from around the world helping them unlock the potential of Brazil and expand their sales. With epag, you will not need any local entities, bank accounts or registration – we collect the funds locally on your behalf and will then settle them in either EUR or USD; without applying any hidden FX fees. Get in touch with us for a consultation on how we can help you grow your business.
We can also remit them anywhere in the world and our state-of-the-art platform has been specifically built to meet the highest security standards so you can rest assured that you are receiving the very best service possible.
We offer a complete one-stop-shop for our customers and using the latest technology in cross-border payments allows us to maximize your profits. Not only that, but we offer free setup and sign up whilst ensuring no monthly fees; so you will always be able to know what your expected cash flow will be.
What makes epag different from others?
We truly understand the complexity of the region – our team has lived and worked in Brazil and Latin America extensively, so we have a deep understanding of the complex systems. Our aim is to offer a truly local service on a global scale and we understand that there are vastly different requirements between large enterprises and SMEs, so we work closely with each of our clients to offer a personal and tailored solution.
Our all-in-one integrated solution enables you to focus on your e-commerce without having to worry about the transactions. So if you are looking to expand your business into Brazil and take advantage of nearly 200 million potential new customers, get in touch with us today and speak with our experienced team to find out more.
In our line of work, cross-border payments processing, we talk a lot about the benefits of accepting local credit cards in LATAM – particularly in countries like Brazil, where only 6.5% of the population has access to international cards.
But this begs the question: What is exactly the difference between a local and international card?
This article seeks to explain what divergences consumers may see between local and international cards, and why local cards are so prevalent in LATAM – and how you can best position your business in the region based on this knowledge.
What’s the difference?
Have you ever really taken a look at your credit card and where you’re able to use it? If you have one with a major company, like American Express, Visa, Discover or MasterCard, you might have assumed that it’s a card you can use anywhere you want, but that’s not necessarily the case. That’s because there’s something called ‘local credit cards’ which are actually only able to be used in the country from which they originate. These are common in many countries around the world, however those coming from the US may not be as familiar with this topic, as credit cards generally issued in the US are enabled for international purchases as well.
We’re going to take a look at the landscape of credit cards in Brazil, the differences between the two types, and what you should consider when determining what payment options your business accepts in Brazil.
Some points of differentiation between local & international cards
Two key features of international cards, that set them quite apart from their local counterparts, are the safety features built in and where you can use them.
Advanced Safety Features – There are a number of different safety features that are standard in international cards, primary among them, 3DS — a security feature that triggers multiple checks amongst stores, acquirers, banks and issuers, and utilizes security tokens at the point of sale to protect against fraudulent activity. While many issuers have implemented this in Brazil, most e-commerce stores have not, so this won’t be accessible for local cards.
Global Acceptance – For individuals with international cards, they can of course use them around the world, as they are going to be more widely accepted. While international cards are more widely accepted around the world, they are also far more difficult to get for an individual, and therefore not as widely used as local cards. This is an important distinction for merchants doing business around the world to take into consideration.
So, why are local cards so popular in Brazil?
Lower Fees – In general, local cards are going to have lower fees for ownership than an international card. For the benefit of being able to use that card anywhere, the credit card company pays a premium, so the end-user sees some of the cost, as well. With a local card, one can expect lower annual fees (or none at all,) making them even more attractive to a wider population. Beyond that, if users pay for a transaction with an international card, they must pay the IOF (Imposto sobre Operações Financeiras,) which increases the transaction by 6,38% to the user.
Easy Access – Getting a local credit card is generally much easier as well, as there are fewer barriers to entry created by card providers because the stakes are significantly lower, and therefore risk is reduced.
For all of the reasons listed above – local cards are significantly more popular than international cards in Brazil. They are easier to get, largely the only card really needed in the country, and often have lower fees, so are overall more attractive for consumers that are primarily buying nationally anyway.
Some things to know about Credit Cards in Brazil
Types of Cards – Brazil has of course, the standard schemes found around the world, in addition to a few schemes that are particular to the country. Visa and MasterCard are the most common, and they’re names that are known internationally. But national Brazilian brands like Elo and Hipercard are extremely popular as well. Most recent data shows that 35M people have Visas, 55M have MasterCard, 3.3M Hipercard, 3.9M Elo, 143k Diners, 408k Amex.
As further noted below, just because a card is labeled Visa or Mastercard, doesn’t automatically make it an international card. International cards certainly are available in Brazil, however they are used by such a small part of the population, that they are not a payment option to be counted on for significant revenues if you are looking to grow your business in Brazil.
Installments – The majority of Brazilians prefer to pay in parcelado, or installment payments, as a way to purchase via e-commerce, and this option requires local acquiring. Approximately 45.8% of purchases in 2018 were made via installments. Installments means that the customer purchases the item and pays a set amount every month until it’s paid off. This option should be offered by all companies doing business in Brazil, however installments can only be paid for with local credit cards–yet another reason to accept local options.
Not All Visas Are International (And Other Companies Too)
A common misconception among consumers and merchants is that just because a credit card is branded with a specific company that is international, it’s an international card. The same challenge arises for merchants: you may think you are accepting all kinds of Visas (local and international) because you accept International via your site, however without a specific implementation of local payment products, your site is likely only accepting the international cards from these schemes.
There’s an important distinction to make between an issuer and the scheme – the schemes we all know and recognize (like Visa, Mastercard etc.) are the parties that actually operate the “behind the scenes” payment processing of transactions. The issuers, like Chase or Bank of America, are the financial institutions that provide (issue) the cards themselves. So, an issuer of a local bank can therefore work with an international scheme like Visa to develop a card that is both local but may appear to an untrained eye to work internationally. Buyers & merchants beware!
Since Brazilian credit cards are local cards, if a customer gets a local credit card in Brazil, even if it’s on a Visa or MasterCard scheme, they can’t use it anywhere but Brazil and not in any currency other than the Brazilian Reais (BRL). This becomes particularly problematic for foreign operators wanting to sell things in Brazil — if you don’t offer prices in BRL and as a “local” product, all of those local card holders won’t be able to buy the services offered.
If you’re going to be setting up shop in Brazil you need to use local processing, either by setting up a local entity in Brazil or leveraging a cross-border PSP like epag to run your processing for you. This is the way you’ll have the ability to accept domestic and international credit cards.
In general, there are a number of differences between local and international credit cards, as we have outlined here, and why they see such popularity in Brazil. The main takeaway is that there are quite a few options within both local and international cards, but ultimately, local cards are the key to success in Brazil — to accept local credit cards, maximize your audience and revenues in the country, and avoid setting up a local entity yourself, get in touch with us here for a consultation on how we can help you grow your business.
Brazil remains a favorite destination for companies looking into international expansion. Although small in comparison to other markets, Brazil is the 10th largest e-commerce market in the world, reaching USD 13 billion in revenues in 2018. This makes it the largest online market in Latin America, representing over 40% of the region’s e-commerce sales – more than the combined sales of Mexico and Argentina, the second and third largest markets in the region.
Brazil remains a favorite destination for companies looking into international expansion. Although small in comparison to other markets, Brazil is the 10th largest e-commerce market in the world, reaching USD 13 billion in revenues in 2018. This makes it the largest online market in Latin America, representing over 40% of the region’s e-commerce sales – more than the combined sales of Mexico and Argentina, the second and third largest markets in the region.With a rising middle-class population, comes more access to the internet and online services. Today, 76% of the Brazilian population has access to the internet either via mobile devices or computers. Out of approximately 130 million online users, 58 million are active online shoppers. According to Ebit Webshoppers, the southeast region (which includes São Paulo, and Rio de Janeiro) has the highest concentration of online consumers, accounting for 57% of the total country sales.
In addition, cash-based methods such as Boleto Bancário are highly popular amongst the entire population, not just to those without access to credit cards.
In order to serve the Brazilian market better, merchants can choose to invest in a local entity and process via a local acquiring network. However, this might not be a viable option for some merchants as Brazil may not represent a big market share and investments in creating a local presence can be costly and logistically or legally cumbersome.
Alternatively, merchants that wish to drive more revenue and capture Brazilian market share without investing in a local setup can partner with local Payment Service Providers (PSPs) who are connected to local acquirers and have the ability to offer cross-border online payments to international companies.
Access to more consumers and local payment methods
Only 40% of Brazilians have access to credit cards, and 95% of these credit cards are not enabled for international payments. Offering local payment methods and cash-based alternatives, such as Boleto Bancário (which are easily accessible by the entire population), will give you access to more consumers and thereby also increase your revenues.
Ability To Offer Installments
Many people in Brazil find it extremely convenient and prefer to pay in installments. When your business offers local payment, it includes paying in installments which is an attractive alternative for most consumers. The average income of Brazilians is somewhere around $2700 per month. This includes people that earn less than that as well. With the current global financial situations and inflation in the country, the majority of the citizens in Brazil can only afford to buy products on installments. This has not only helped Brazilian citizens but also the Brazilian government as well.
Higher Authorization Rates
The bank approves of the payment methods that are done locally through credit or debit cards. Local payment methods have high authorization rates because of the fact that they are viewed as relatively less risky as compared to foreign transactions.
Lower Taxes And Fees
Alternative payment methods may charge a lot of taxes and service fees which is not the case for local payment methods. This is due to the fact that foreign transactions take into account the tax policy, exchange rate and financial situation in the base country. The platforms that support and carry out the financial transactions tend to charge a hefty foreign transaction fee as well. This is why local payment methods have lower fees and lower taxes.
If businesses want to enable local Brazilian payment methods, they need to invest time and resources in creating a local setup which is ultimately an extremely time consuming and complex process. However, when businesses partner up with PSPs, they do not need to worry about creating a local setup in order to accept local payment methods.
It’s Extremely Convenient
Setting up a local entity takes several years but through a PSP, everything is extremely convenient and much less complex. All you have to do is integrate your API with the platform, and let your local payment provider do the rest of the job. Some PSPs charge a fee just to have the agreement in place, whereas others (like epag) only charge for “pay for what you use” strategies in place.
Increase revenue through the best-fit payment methods
The payments landscape has changed quite a lot over the years as businesses keep emerging and entering the market. This expansion has resulted in new Brazilian payment methods being introduced that are far more convenient. The advancement in technology is one reason that businesses have been able to offer a wide range of payment methods to their clients. Technology has actually revolutionized the way people pay for goods and services. Brazil is a very populous country and a higher population translates to higher customers. So it was only a matter of time that new and improved payment methods supported by technology were introduced in the market.
Businesses who want to maximize their revenue should be aware of the fact that they won’t be successful in this initiative without accepting technologically advanced local payment methods because they are preferred more by consumers.
They can easily enable and allow their customers to pay through these methods when they partner up with PSPs without the need of going through the hassles of creating a local entity.
Foreign companies can also take advantage of the fact that these payment methods are accessible to most of the population of Brazil. They can easily partner up with PSPs and establish a flourishing business within the region of Brazil.
The bottom line is: you cannot fully take advantage of the market when you restrict your customers to a few payment methods that are accessible to only a handful of the public.
Brazil’s new payment system called PIX was announced on February 19th, 2020 by the Central Bank of Brazil (BCB). It is intended to replace not only bank transfers and debit card payments, but also the outdated and current de facto standard form of payment: boleto bancário. PIX is set to become the new default infrastructure for companies and individuals in Brazil to transfer money and pay for goods and services – online as well as in brick and mortar stores. It will function 24/7/365 – and all payments will be settled in around 2 seconds, with a maximum time limit of 10 seconds. The infrastructure will be open to all market participants, and all financial institutions and payment service providers that hold 500,000+ accounts are obligated to implement it by November 2020, so we can assume this will be made available to the bulk of account holders in Brazil.
Why does it matter?
Brazil already has one of the fastest “real-time” gross settlement systems (RTGS) in the world, built decades ago to speed up bank transfers. At the time of its launch, it really improved the experience for bank account holders in Brazil by providing intraday bank transfers, changing the paradigm of having to wait for one or more business days to receive/send money. The current system works on business days on working hours only for bank account holders. Usually, in spite of being “real-time,” most users have to wait several minutes or sometimes even hours depending on which bank is handling the transaction, and the lack of a link between an invoice and the payment makes it very cumbersome to be used in casual purchases, online and at points-of-sale.
PIX takes the intraday experience to a truly real-time experience with 100% availability (24/7/365), expands access beyond bank accounts to e-money accounts and has a built-in capability of linking an invoice with a payment, making it suitable for transfers and purchases at any time by any channel and facilitating automated reconciliation.
With compelling features for customers and merchants, such as low cost and ease of use, a strong incentive for adoption by service providers, and particularly for online usage amongst the growing Brazilian internet population, PIX has the potential to become widely used, eating market share of some of the current mainstream methods, namely credit/debit cards, cash, and boleto bancário to become the Brazilian equivalent (in terms of market share) to iDEAL in the Netherlands, Sofort in Germany, or Swish in Sweden.
How will it work?
Brazil’s new payment system PIX will allow account holders to use their banks or FinTech apps to create instant payments using their smartphones and desktop computers. Similar to what is already mainstream in China, users will be able to use their phones to scan QR codes, use NFC technology or open payment links to get the transaction data, review it and approve it. After the approval, the payment is settled in seconds. The QR code may be static – the same for all transactions – which may well serve for paying for a hot dog or a doctor’s consultation, or dynamic – one unique ID per transaction – that will be a good tool for bigger operations like supermarkets or online commerce. Account holders will also be able to pay utility bills, taxes and other public services using PIX. For money transfers, PIX will offer different routing keys, like tax ID, phone number, email, etc.
The central bank will provide the settlement and routing layers and banks and payment providers will build their solutions on top of those layers. This architecture will allow for full interoperability.
Who gains?
In short, there are more winners than losers. Merchants will be able to accept low-cost hassle-free instant payments, users will have a very efficient and easy system to make payments, and individuals and companies will benefit from this tool to simplify fund transfer across the nation.
Will this impact your Brazilian operation?
Before the launch of the system in November 2020, no impact is to be expected. After the launch, the impact should be an overwhelmingly positive one. Supposing people adopt the system, we expect the overall volume of transactions to grow due to the simplicity of the payment process, plus a reduction in fraud and chargebacks because users will be strongly authenticated, similar to the standards included within PSD2 for Europe. On the treasury side, the cash flow generated by sales should be available sooner than when users pay through traditional methods, credit cards or boletos, and will likely also carry a lower payment cost.
What is the impact on the current payment methods used in Brazil?
We expect PIX to increase the overall volume of payments in Brazil, but to compete with all other payment methods, especially debit cards, boletos, and credit cards – in that order. How fast this will happen will depend on many variables and should be different for each payment method. Some things are very clear though:
Debit cards are the most vulnerable to PIX because they do basically the same thing – an instant debit from the user’s account and subsequent credit to the payee.
Boletos should lose some market share because PIX works well for people that don’t have a credit or debit card but have a smartphone or a computer, with the advantage of providing instant transactions. Payments made using the boleto bancário system can take several business days to be cleared and the goods/services are usually only released after clearance, which can lead to frustrating user experiences, especially for digital goods and services. On the other hand, boletos can also be paid with cash at the bank counter, meaning that people who don’t have a smartphone or are unable to handle the technological hurdles will likely still use boleto.
Credit cards can offer features that PIX does not have (at least by default), such as providing a credit line and the convenience of settling everything at a later stage in a single bulk payment.
Cash may also suffer some competition from PIX among users that have smartphones. Brazil’s new payment system processing costs might make it more suitable and practical for low-value transactions for which cash is probably the best solution until today. The more useful the balance held on PIX the more people will tend to move their “wallet money” to their e-wallet.
We shouldn’t ignore the merchant’s point of view and their economic incentives for receiving payments over PIX instead of cards – immediate settlement, lower costs and better security. This will certainly create economic advantages for users to pay using Brazil’s new payment system, the same way it happens with boleto today – some merchants offer discounts as high as 10% for boleto payments – and this should help PIX to gain significant market share from other methods.
Privacy
The only case where there is a loss in privacy is where people currently using cash for low-value transactions decide to use PIX instead. The current Brazilian law stipulates that all cash transactions bigger than 10k BRL must be reported to the Central Bank (Banco Central do Brasil – BCB) and all other payment methods are already visible to the government. This means that the only type of transactions that are lawful and private in Brazil are transactions using cash amounting to less than 10k BRL.
Our position
We are very supportive of this initiative and are keen to offer such innovative solutions to our partners as soon as they become available, and pledge to swiftly handle the necessary development to create a great user experience for increasing overall conversions and revenues.
For more information (in Portuguese), you can checkout the video from the Brazilian Central Bank for the announcement of Brazil’s new payment system PIX below:
