allpago: Ultimate Guideline for Local and Cross-Border
Payment Processing in Brazil
The population of Latin America is dramatically changing the way they shop. The last 20 years has witnessed a
transformation as consumers switch from shopping in physical stores, to buying online. Ecommerce is growing
at an incredibly fast pace. For those global, non-native merchants looking to take advantage of such exciting
markets as Brazil, the area is fraught with difficulty. The age of the snake-oil salesman has long since passed, but
allpago reckons that for every provider out there, there’s a different story on how best to keep control of costs,
ensure security and develop a successful business.
How are alternative payment methods different in Brazil?
In Brazil we differentiate between payment alternatives such as Boleto Bancário (24%), and international (21%) and national cards (48%) (Figure 1). The market shares for these vary, depending on target consumer groups, and the type of
products and services in question.
However, it’s worth noting that the Boleto Bancário is very popular within the B2B sector. Invoices, and utility and other
bills, often come directly with a Boleto, as wire transfers to banks that are not from the same branch are much more
expensive.
What merchants need to appreciate is that when it comes to cards, only 21% of the online buyers have an international
card such as VISA, or MasterCard that allows them to pay in foreign currency. The remaining 48% are split into two-thirds
which are locally issued Visa and MasterCard that are blocked for processing in foreign currencies (Figure 1). The remaining one third are ELO cards, issued only by Bradesco and Banco do Brasil (who own the CIELO acquirer), and Hipercards,
issued only by Rede (the acquirer owned by ITAU).
Who dominates the acquirer and issuers market?
Two bank consortiums, Banco do Brasil and Bradesco, that
own CIELO; and ITAU, that owns REDE, issue and acquire
more than 80% of the entire card volume in Brazil (Figure
2). These are also the only banks that issue AMEX, ELO and
Hipercards. Only CIELO processes AMEX and ELO cards, and
only Rede processes Hipercards. Altogether, these make
up around 15% of the entire online payment processing
volume.
This means, that if your provider does not acquire through
CIELO and REDE, the simple fact is that a merchant will be
missing around 15% of the entire market. Recently, regional media has reported that CIELO might acquire the majority in ELAVON, the fourth biggest acquirer in Brazil, leading
to even a higher concentration (Figure 3).
Therefore, there is no way around CIELO and REDE, although upcoming acquirers such as STONE are creating
great solutions especially for CNP transactions.
Why are installments so important?
1. Online Payment Methods Share Brazil in Brazil
Other,
7%
Boleto
Bancário, 24%
National
Credit Card,
48%
International
Credit Card,
21%
Source: allpago research
One important fact which confuses many new players in the Brazilian market is the popularity of paying for goods by
installments. However, due to the higher default risks for issuers, transactions for up to six installments and again up to
twelve installments lead to higher merchant discount rates (these are the fees charged for processing cards). In Brazil,
the price paid by the consumer normally includes the financial costs for up to six installments. This means that the
same price applies for up to six installments and merchants need to price that in.
2. Acquiring Market Share (per billed volume) 2013
Issuing Market Share (per billed volume) 2013
3. Issuing Market Share
(per billed volume) 2013
Itau, (per
39%
Acquiring Market Share
billed volume) 2013
100%
Others, 14%
Others, 3%
Getnet, 12%
Santander, 8%
75%
Rede, 37%
Itau, 39%
50%
Bradesco,
18%
25%
Cielo, 48%
Banco do
Brasil, 21%
0%
Source: allpago research
Market Share
Market Share
Source: allpago research
It is also a very popular tactic to anticipate these merchant installments, usually by discounting the cash flow to optimize
the working capital. This can be very expensive due to the fact the basic interest rate is above 14% per year. To this is also
added the financial transactions tax IOF of 0.38%. Therefore merchants need to ensure they do their homework. Often
banks do not anticipate more than 80% of the installment volume to reduce their risk.
An issuer ensures that even if a cardholder defaults, then the merchants get paid, which explains the higher MDRs. Only
chargebacks are discounted.
Are chargebacks significant?
Chargebacks in Brazil can be done up to 12 months after the transaction and the fact is that the contestation process is
not working properly, especially for digital goods. As a merchant, they are definitely more successful when contesting
transactions processed through CIELO and REDE, or if they use the exclusive allpago PAYPAL Brazil partnership that offers
a chargeback protection.
Can you explain cross-border withholding taxes: physical versus digital goods?
There are a lot of myths about taxes that apply on remittances. The fact is that even global merchants often do not pay
taxes and do not comply with local laws and regulations. One of the biggest myths is that there are no taxes on digital
goods. This is never the case, yet some providers simply take a higher risk by declaring remittances the wrong way. Generally speaking, there always needs to be a differentiation between digital and physical goods.
Digital Goods: With digital goods, the importer needs to pay the withholding taxes which are normally around
15% IRRF (WHT), potentially 10% CIDE tax and definitively 0.38% IOF financial transaction tax. The withholding
taxes IRRF can normally be recovered locally and only represents a cash effect. Compliant providers collect the
taxes on behalf of the importers and pay them on behalf of them when remitting the funds. This is especially
important for legal entities because they are audited by tax authorities.
Physical Goods: The main point that needs to be properly understood, is that generally speaking, taxation occurs
when the goods enter the country, i.e. at the customs point. That means that many simply ship goods from overseas, declaring wrong values and thus they slip through the radar. When the money leaves the country through a
wire transfer, then there is no link from a tax point of view to the import process and thus only 0.38% IOF financial
transaction taxes apply. In this case, the banks only check money-laundering rules.
The right way to do this is to pay the carrier upfront. The general rules are:
•
up to 50 USD including carrier/logistics costs - 0 % taxes;
•
between 50.01 USD and 3000 USD including carrier costs - 60% taxes
•
above 3000 USD, a complicated individual import process need to be completed.
How does Forex affect merchants?
This is probably the biggest myth within the market and causes the most problems. In Brazil there are two exchange
rates: tourist and commercial. What is not always appreciated is that the tourism forex rate is 8% to 12% more expensive
than the commercial one.
At the end of the day, every company that remits to other entities abroad pays the commercial rate, no matter who purchased. Therefore, providers that tell you that they need to pay the tourism rate are generating an 8% to 12% in revenues
for themselves. This is why they often remit through third countries and do not provide their merchants with a copy of
the forex contract.
It is worth bearing in mind that the tourism rate is effectively an artificial exchange rate created by the banks many years
ago in combination with the former Paralelo forex rate. The idea was to officially price the logistic costs of carrying, storing and transporting physical bills during a time with high currency fluctuation.
What is important to understand is that banks also charge brazilian cardholders the tourist exchange rate. This makes it
8% to 12% percent more expensive for native customers to purchase abroad. Furthermore, local customers need to pay
6.38% IOF tax on purchases in foreign currencies with their cards. The tax was imposed due to the fact that when the
Brazilian Real was strong, there were many money outflows as Brazilians purchased goods abroad.
This is very important for all merchants, as it means that not only do the fees for payment methods matter, but also that
the forex will have a big impact on their total cost of the operation. So a merchant should always check if they are paying
the commercial, or the tourist forex rate, and they most definitely ask for copies of relevant forex contracts.
What role does the Brazilian Central Bank play?
The Brazilian Central Bank (BACEN) does not regulate collecting PSP yet. Currently, it focusses its attention only on
schemes, issuers, acquirers and wallets (issuers of electronic currency). Nevertheless, if a merchant is working with a
provider that is part of the payments system, then they (the provider) needs to inform the BACEN of its existence.
What about cross-border regulation?
Here the same rules apply as everywhere in the world. Alternative payment methods can be processed for merchants
without a legal entity. When it comes to the major schemes all merchants need to comply with their autoregulation
which says that they have to have a legal entity in the country. allpago provides these services, and many others, for
international merchants, in addition to offering all relevant local payment methods (Figure 4).
4. Brazilian Payment System Regulation
Source: Elavon, allpago research
Finally, what of the future?
Brazil, and indeed LATAM, is a very exciting market at the moment for global merchants and this is likely to be the case for
many years to come. But, the problem is that there are too many areas of confusion. Unfortunately, there are a number
of providers who are happy to exploit this situation and whereas we believe that honesty and transparency are the best,
some companies appear relaxed with the advice they are providing their clients. This is obvious when it comes to the
Forex dilemma, where many providers are happy to not tell their clients about the two-tier system and are effectively
taking an extra profit on a transaction that they are not really entitled to.
What provides hope of course is that allpago, and other companies operating in the sector, are trying to make it a more
transparent and simpler system. This will eventually be the case, but until it happens, merchants who wish to operate in
LATAM, need to take care.
About allpago
allpago is the leading payment provider for the LATAM region. allpago provides the relevant local payment methods
through one API and one single platform. allpago offers the best conversion rates ensuring state-of-the-art technology
and legal advice necessary for a successful e-Commerce operation in LATAM.
allpago enables start-ups to Fortune 500 companies to offer the necessary local payment methods in the LATAM market,
which account for around 80% of their revenues. Current clients include Art.com, Getty Images, Intel Security McAfee,
Paylogic, Sumup, Teamviewer and many other leading payment and digital companies.
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