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Interview with Tim Werner, CEO of PrimeiroPay, on the chances of German online merchants on the Brazilian market.
TW: The market is dominated by credit cards. In second place come the various cash payment methods. A particularity for Brazil is that not all cards can be used abroad. Meaning that they cannot process payment in currencies other than Brazilian Reals. That is problematic when an online store has prices in another currency, e.g. Apple iTunes using US dollars, as most of the issued credit cards cannot be used. Approximately 60 to 70 percent of the Brazilian credit cards (including Visa or MasterCard) are working this way. There are even a few local credit cards working only within Brazil.
TW: In this case, we offer two options. The price can be left in euros and we tell the Brazilian customers, the shoe costs 100 euros. The European payment provider then debits the customer’s card with this sum, in euros. The chance that the payment goes through is around 30 percent, as most of the cards issued in Brazil are not unlocked for foreign currencies. The reason for this is taxation. If the card is used with foreign currencies, the Brazilian user is automatically charged a 6.38% tax, against which he cannot do anything. The credit card statement contains, on the left, a column with transactions in Brazilian Reals and, on the right, a column for US dollar transactions. The Brazilian bank converts the transaction from euro into US dollars and then into Reals.
In the end, the customer pays twice the exchange rate fees. The 6.38% tax is then calculated on the final sum in Reals. These are automatically debited on the credit card bill, along with two exchange rate fees and international usage fees. This fee is usually between 2 and 3 percent. That is, if the shoe shop in Germany sells shoes to Brazil, then the Brazilian client pays about 10-12% more than the advertised price, which he might not be aware of. For this reason, the Merchant risks a higher chargeback rate, because the customers can be aggravated about the higher costs and can blame the shop operator for a lack of transparency.
When a chargeback is triggered, that’s where the fun begins. The European payment provider in Europe reverses the transaction. Chargeback charges apply for the shop. The shoes might have already been shipped. There's a big overhead here. It is therefore absolutely not recommended to calculate a Brazilian order in the foreign currency with a foreign payment provider.
TW: The dealer should offer his products in Brazilian Reals. This offers several advantages. If physical goods are sent from abroad to Brazil, the revenue is tax-free for the shop owner. At PrimeiroPay, we charge the Brazilian the 100 euros in Reals and pay the shop operator in Germany the 100 euros. Everybody wins, the merchant gets his 100 euros, the Brazilian customer can pay in his currency using any card that he has. In addition, the shop owner has no risk.
The customer knows exactly how much he pays. He does not have to pay taxes or exchange rates, and is not surprised when he gets his credit card bill next month. The bank also does not use the exchange rate of the day on which the transaction took place, but rather the one on which the credit card settlement is issued. The exchange rate might also differ.
TW: Yes, we offer a fixed exchange rate for certain shops, but also to a lot of companies from the travel sector, such as hotels and airlines. The exchange rate is valid for 24 hours. Thus, the trader can recalculate his price every day without any risk of exchange rate. Our exchange rate is guaranteed.
TW: All that are available. We process all the credit cards, debit cards and local credit cards. ELO is a local credit card that is very popular in Brazil. Bradesco, the second largest private bank in Brazil, releases ELO credit cards for every new account opened. Few customers then make the effort to apply for an additional visa card. For this reason, local credit cards schemes play a major role in Brazil.
Boleto Bancario dominates the cash payment market with about 13-14% market shares. This system functions via a barcode printed on a receipt. It can be bought cash or with a debit card in supermarkets or even online. Boleto Bancario is widespread, with people using it to pay their rent, their electricity bill, their gas bill and their mobile phone bill. Boleto Bancario is not an online payment method per se. It was taken online because it can be used by everyone. You do not even need a bank account to use it. Another advantage is that there are no chargebacks.
Several prepaid cards are available in Brazil. This is rather interesting for e-commerce products such as online gaming, less so for physical goods, like our shoe shop. Because cards are usually sold with a set value of 10 or 20 euros. There are many branded prepaid cards for online stores such as Playstation, Spotify or X-Box. Overall, there are few payment methods in Brazil. With the combination of credit cards, debit cards and Boleto Bancario you achieve a 100 percent coverage of the market.
TW: True. While there are several other local schemes, they hardly play a role.
TW: Merchants can maximize the conversion vastly by offering local credit cards. Also interesting, for example, for the shoe shop in Germany, are installments. In Brazil, credit card payments can be made in installments. Brazilians are happy to pay in installments from 30 to 40 euros. This is an advantage for merchants. For example, an order costing 500 Reals and being paid in five monthly installments. In other words, the customer pays 100 Reals every month through his credit card bill. As soon as the transaction takes place, the 500 Reals are authorized, i.e. the 500 Reals are blocked on the card. The issuing bank has authorized the transaction, meaning that they take over the risk. If, for example, the customer becomes unemployed after two months and can no longer pay his credit card, the provider and merchant will not be impacted.
TW: We see this for all e-commerce products. Installments are always used. If the customer chooses to pay in five installments, we get, as a provider, also five installments. The dealer usually does not want to wait for his five installments, therefore, the total amount is paid out immediately. This is made possible since the issuing bank must supply the provider with a credit line. It finances this or assumes the factoring for the provider, the provider does the same for the dealer. Customers in Brazil are accustomed to paying fees for the installment payment.
The dealer gives the option to purchase shoes for 400 Reals at the time of purchase. However, if the customer wants to pay in six installments, the shoes won’t cost 400 Reals, but rather 450 Reals to cover the costs. This is common practice, even offline. When you go to a shopping mall, there are promotions, for example, where you can pay in installments. For example, a promotion might offer the first three installments free of charge, with charges applying from the fourth payment onwards.
Tim Werner – managing Director at PrimeiroPay
TW: Payments made through SMS Billing are charged directly to the mobile phone bill. The problem is that the tax and charges applied by network operators are extremely high. Mobile payments are subject to a tax reaching almost 40%. This has something to do with the telecommunications law, which is adventurously structured. The tax is irrespective of whether the shop operator is located in Brazil or outside and whether it is physical or digital goods.
TW: It is possible, through Expedia for example, to book a hotel with Bitcoins. However, it is difficult to get rid of bigger amounts of bitcoins. The exchange rate fluctuations are also difficult to manage. Bitcoins vary in value, the Brazilian Reals also does, and a guaranteed rate on bitcoins does not exist - yet.
TW: Yes, Brazil is very renowned for its fraud problem. Thankfully, at PrimeiroPay, we have a very low fraud rate due to two factors. For one thing, we only accept cards issued in Brazil. Here, fraud is mostly committed using cards that were issued in other countries. Not accepting foreign cards thus dramatically reduces the risk of fraud. We also recommend that shop operators should not handle cards issued in Brazil via an acquirer abroad. Processing costs are comparatively high in Brazil. Interchange rates in Europe are capped and much more cost-effective than those in Brazil.
On the other hand, for each transaction, we ask the social security number and the CPF number. This is a number that Brazilians always use online, but also offline. The number is present in everyday life, everybody knows theirs by heart. This is like a personal ID number. In most states, you can use the CPF number when shopping or eating out. If you enter your CPF number in the payment process, you get 1 to 2 percent cash back from the state. This allows the state to track the turnover of businesses, bars or restaurants, and whether a receipt is being issued. We collect and validate the CPF number. This also helps us greatly with fraud prevention. However, what cannot be avoided, and which is also a big matter in Brazil, is friendly fraud. For example, a son borrowing his dad’s credit card to spend a few hundred reals in online games. This cannot be avoided and is very common in Brazil.
Then there are chargebacks, a complex process. For digital goods, a chargeback is almost impossible. In the case of physical goods or hotel bookings, documents such as registration forms from hotels can be handed over. By submitting such documents to the bank, we were able to successfully fight the chargebacks.
The acquirers give very little time for the process. The time window has now been slightly increased from initial 7 days to now 14 days. That is, you now have 14 days to get the documents from the hotel. For providers, chargebacks are an absolute loss business because the entire process is manual.
TW: Credit card acquiring is very expensive in Brazil compared to Europe or the USA. Acquiring is regulated in Germany and in Europe. Credit card fees are capped at 0.3% Interchange Fee. The Interchange rate is published in Europe, whereas, in Brazil, it is not. Here, acquirers give a blended rate for all cards; the interchange rate remains the great unknown. This makes things opaquer and more expensive than in Europe. We are talking about costs that are 10 times higher than in Europe. This may sound unattractive, but if you otherwise cannot reach the Brazilians, the customers cannot pay in installments and they are exposed to the whole tax and exchange rate problem, then one should consider adjusting the prices for the Brazilian market.
TW: Brazil has 200 million inhabitants. A relatively high proportion of the population, 60%, is online. The volume is there. Brazilians travel a lot and given the opportunity to use local payment methods (therefore allowing them to pay in installments) is absolutely a surplus. Everything related with travel, be it hotel bookings, car hire, flight tickets, tour packages, Disneyland, etc. is interesting. The market is also very interesting for digital goods sellers. Merchants with whom we work do not need a company in Brazil. They reach their customers in Brazil via the local payment methods and get paid the money in their home currency.
We support 25 different currencies. Achieving a "local experience" is relatively effortless. The merchant changes nothing. Sure, it is more expensive, but he also reaches a lot more customers and offers an improved customer experience.
What is very important to us and which is being discussed for Brazil is the issue of compliance. We always work with partners who have a name in Brazil and are very concerned about being compliant. We work with the largest acquirers, e.g. Cielo, the biggest acquirer in Brazil, who owns 80% of the market shares. We cooperate with large banks in the collection and extraction of funds. By choosing the right partners, we are insured that everyone in the process is committed to compliance.
TW: The greatest challenge will be the stability of Brazilian Reals. The US government has an incredibly high influence. Most loans of the Brazilian government are in US dollars. Therefore, the fluctuations of the US dollar have a direct impact on the Reals. A lot worse is when the base interest rate in the US is increased. The taxes for the Brazilians are then much more expensive, and the Reals is devalued accordingly. Therefore, it is important for the merchant to use products offering a guaranteed exchange rate. Another option is that the merchant and the PSP monitors together the exchange rate, while updating the prices dynamically. This is a challenge that will become even more difficult in the future.
Another challenge in Brazil is that laws come and go. There was, for example, a law exempting all tourism expenses from taxes, which was valid for four years. This expiration is quite inconvenient. Let’s take the case of a Brazilian tourist booking a hotel in London. A local PSP collects the money, then sends the money to the hotel in London. The money was then not burdened with tax. The law expired as of 31 December 2015 and on January 1, 2016, this has fallen into the normal withholding tax, which is 25%. The industries affected were quite surprised in January and many cases were brought before court. A judgement was then issued, according an adjustment of the tax to 6.38%.
TW: You simply cannot do without the largest nation in South America. The opportunities remain unchanged. These are also independent of economic crises, as Brazil has never had a longer stable period. People who have money to travel have money to travel independently from the country’s economic situation. Similarly, those who can spend 100 Reals on an online game can also do this regardless of a crisis. It is not about selling bread, milk and lemons to Brazil, but rather luxury goods. There, an online game, Spotify or travel are luxury goods.
Thank you for the interview.
PrimeiroPay is a payment service provider that allows traders to pay their sales in the desired currency internationally. All data is processed in a PCI-compliant, secure and real-time manner.
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