The Latin American Payments Blog
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).
Of course the other argument is that now customers in Brazil are so used to purchasing items in installments, they may actually be put off buying an item if this option is not offered.
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 and how 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.
Typically in Brazil, unlike some other countries around the world, buyers aren’t usually asked by businesses to pay any interest or fees for the installments. Instead, vendors usually incrementally increase the overall prices of the goods which can be paid for in installments, and lower it if customers are paying all at once, in a lump sum.
So are installment plans worth it?
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.