Brazil is a very interesting market for international e-commerce businesses. According to a study by Ebit, 53% of Brazilians made purchases on international websites in 2016. However, when starting to sell in Brazil with international payment methods, merchants usually find an unexpected obstacle in conversion rates. The main cause of the low conversions is the lack of local payment methods, as international payment service providers cannot process Brazilian payment methods. This includes credit cards, as a vast majority of cards issued in Brazil are not enabled for international use. Still, even those consumers who have an international card hesitate to make a purchase in a foreign currency. The use of an international card drives up the price of the product or service and the total amount is uncertain for the consumer when making the payment.
Why do International Cards Drive Up the Price of the Purchase?
When buying on international websites that do not offer local payment methods, Brazilian consumers must consider a series of charges that are applied to the purchase, such as:
- Card Maintenance Charges
- Uncertainty on Exchange Rates
- Overpriced Currency Conversion
The IOF (Imposto sobre Operações Financeiras), Tax on Financial Transactions, is a tax that affects credit transactions, currency conversion and insurances. This tax generates a high charge on transactions carried out in foreign currency. While a purchase made with a national credit card is not subject to IOF, when the same purchase is made in a foreign currency, consumers are obliged to pay 6.38% of the amount as IOF. The amount is charged directly to the buyers’ card as an extra cost, without affecting the merchant.
Apart from paying more for purchases made with internationally enabled Brazilian cards, it is also more expensive to maintain them. Maintenance charges for cards enabled for international use can be up to three times higher than those of a national card. For example, National MasterCard from Itaú bank has a yearly cost of 66 BRL, whilst the International MasterCard ItauCard has a cost of 156 BRL per year. This factor does not affect the individual cost of purchases, but many people prefer not to have international cards to avoid paying higher maintenance fees.
Buyers have no way of knowing exactly how much they will pay for what they are buying at the moment of the purchase. Regardless of the day on which the purchase is made, the exchange rate used for currency conversion on the credit card statement will be that of the day the billing cycle is closed. However, uncertainty can be extended until the second month after the purchase, when the difference between the exchange rate of the invoice day and the payment day is adjusted, with an amount due or receivable in the next invoice.
The exchange rate can vary for each card, as each bank defines its exchange rate daily. Instead of using the official exchange rate published by the Central Bank of Brazil, each financial institution can use its own exchange rates. As a general rule, a spread is added to the official exchange rate, varying from 0.3% to 7.3%, according to a study published by Melhores Destinos.
Real Cost of Purchases in Foreign Currency
Adding up all the factors affecting Brazilian buyers paying in foreign currency with an international card, the purchase can be up to 14% more expensive than a purchase made with local payment methods. This calculation does not consider the fluctuation of the exchange rate, whose variation cannot be predicted. Apart from additional costs, international purchases processed by an international provider cannot be paid in installments. Payments in installments are a resource used in nearly 60% of online purchases in Brazil, according to the latest Ebit report. The sum of all these factors makes it difficult for online stores that do not offer Brazilian payment methods to convert Brazilian buyers.
For this reason, international merchants who sell to the Brazilian market need a local payment provider, such as PagBrasil, to boost sales. In our experience, international e-commerce businesses increase their sales immediately after the migration to a Brazilian payment processor system that offers a wide range of local payment methods, as in this way they have more available alternatives to encourage conversions.