E-commerce merchants with online presence in different countries must take several variables into account in order to determine the total cost of their cross-border operation. Elements such as payment processing fees charged by their local payment provider, the costs of developing and implementing marketing strategies targeted to each market, added to the logistical expenses and, last but not least, the currency exchange rate applied to the money conversion for the repatriation of capital, can have significant impact on merchants’ revenue. However, the exchange rate is often overlooked by online retailers who tend to focus mainly on the payment processing fees.
Why Can Currency Exchange Impact on Merchants’ Revenue?
While factors such as payment processing fees, marketing and logistical costs and even tax burdens are usually considered by merchants when planning an international expansion of their online businesses, they often neglect to check the impact that the currency exchange can have on their revenue. This point is particularly worthy of attention for online businesses selling to Brazil. As the country has a volatile currency, the exchange rate applied can considerably increase the total cost of the business in Brazil.
The local payment provider is often responsible for the payment processing and money collection, as well as the currency exchange and international remittance. However, each player can define its currency exchange model. In some cases, the model used is not transparent, creating a hidden fees environment. For instance, it is a common practice in the Brazilian market for payment providers to present merchants with a commercial proposal that contemplates the use of the tourism dollar exchange rate for the currency exchange. However, such exchange rate ceased to exist as an official rate in 2005, as we have previously explained in this article about the hidden costs of tourism dollar rate.
By presenting the exchange rate as tourism dollar, payment processors can add their spread to the rate without informing how much it adds to the official market rate published by the Brazilian Central Bank daily, which is set based on the average of all the transactions carried out in the marketplace each day. All players that offer currency exchange, from banks and bureau de change to payment providers, can define their exchange rate based on the one published by the Central Bank, which only serves as a reference. However, the lack of transparency makes it difficult for merchants to predict the impact of the currency exchange on their revenue as the spread applied can vary significantly. In fact, a study by Melhores Destinos identified that the spread used by the different market agents can add up to 7% to the final cost of the exchange rate.
For this reason, it is essential that merchants look into the exchange model used by the different payment providers before choosing a local payment partner. Opting for a player who provides verifiable sources for the rate used in addition to making clear the spread applied is key to minimize the impact of the currency exchange to the business revenue and profit margins. In addition, by being able to predict such impact, merchants have a better understanding to define prices in BRL that will keep their margins steady. It is worth noting that by being able to pay in BRL on a foreign website, Brazilian consumers save 6.38% in concept of IOF tax, in addition to up to 7% for exchange rate fees charged to their international credit cards. Because of that, international businesses selling to Brazil can define a slightly higher price in BRL to compensate for the overall costs of their cross-border operation.