Key Considerations for Expanding E-Commerce Into Brazil: Payments, Fraud and Taxation
Brazilian e-commerce is growing at a rapid pace. In 2011, online sales reached a volume of $11 billion, which was up 26 percent from the previous year, and in 2012, Brazilian online merchants generated $17 billion in revenue. According to some projections, the Brazilian e-commerce market will be worth $29 billion by the end of 2017, and Brazil should continue to lead growth in Latin America. Given the promise it holds, how can retailers break into this market and be successful selling online?
While there are many things to take into account when it comes to expanding e-commerce operations internationally, let's take a look at three key considerations for Brazil specifically around transactions: payment methods, fraud and taxes.
One of the most popular online payment methods in Brazil is credit cards, and around 75 percent of online purchases that are paid by credit cards are financed through installment options. Retail prices are often given as a combination of installment rates and the number of installments instead of the total price. The installment standard makes card payments more expensive (up to 15 percent merchant discount rate based on the duration of the installments), but by adding the installment plan consumers are more likely to make a purchase. Merchants receive the total payment immediately, but the credit card is charged multiple times with the acquiring bank giving that "credit" to the consumer. This is often called a "cash-in solution."
It's important to note that the majority of domestically issued credit cards aren't enabled for cross-border acquiring. This also applies to most of the internationally branded cards such as Visa, MasterCard and Amex. Only 36 percent of Brazilians own an internationally branded credit card that can be used for global payments. Therefore, merchants need local card acquiring contracts in order to accept domestic Brazilian credit cards and ensure a good conversion rate. For merchants without a legal entity in Brazil, money can be settled to existing international accounts in major currencies like U.S. dollars, GBP and Euros.
Card payments are usually restricted to domestic settlements in local currency. Therefore, U.S. merchants that wish to sell their products and services to Brazilian consumers should also offer local payment methods in order to include the 64 percent of prospects that don't own a cross-border enabled credit card. Otherwise, they risk a large fall-out rate for transactions that cannot be processed. Some popular local purchasing cards include AURA, Elo and Hipercard.
Boleto Bancário is another popular local payment method in Brazil, accounting for around 75 percent of online payments. It's overseen by the Brazilian Federation of Banks FEBRABAN. Merchants may generate and issue a financial document called Boleto, which can be considered as a proforma invoice. It's a consumer cash-in payment, which relies on the consumer to initialize the transaction. Boletos can be paid at ATMs, via internet banking, and at post offices or bank branches, and merchants will be notified accordingly.
Brazilian consumers also expect online bank transfers as a choice of payment. These are facilitated via dedicated websites hosted by Brazilian banks. After choosing this payment method online, consumers are redirected to the internet banking platform of their bank to finalize the transaction. Online bank transfers are often used in order to pay a Boleto.
Other online payment methods such as e-wallet solutions and direct debit don't currently have much traction in Brazilian e-commerce.
While fraud is obviously a key consideration when expanding into new markets, e-commerce in Brazil is fairly well protected against fraud. Brazilian consumers are usually required to state their 11-digit tax ID (CPF) and telephone number at checkout online. The CPF can be validated via an algorithm and queried against public databases. In addition, most credit cards can only be used domestically and are therefore not a prime target for criminals. Thus, online fraud is mostly limited to so-called "friendly fraud," where consumers might initiate chargebacks claiming a failed delivery of services or goods.
Brazil has one of the most complex taxation systems in the world and is a heavily protected market with taxes on imported goods of up to 60 percent of the goods’ value. Products and services are classified into more than 300 tax categories. The regular rate of withholding tax applicable to digital products (e.g., music) in Brazil is 15 percent. Tax regulations and rates might differ between federal states, and special sales taxes apply for inter-regional transactions. A lot to consider! One of the best ways to navigate the complexity of the Brazilian tax system is to work with a payment service provider that can help to reduce local taxes with optimized settlement procedures, taking the burden off of the merchant.
While some of these things may seem daunting, the opportunity that Brazil presents can make the leap worth taking. In addition to providing tax calculation, some payment service providers can also offer the necessary payment methods for consumers, easing market entry and helping to drive success. Ensuring you have the right payment solutions in place, coupled with a means for determining taxes, takes you one step closer to realizing the benefits that conducting e-commerce in Brazil can deliver.
Ralf Gladis is the co-founder and CEO of Computop, a global payment service provider.