Brazil offers an outstanding opportunity for ecommerce businesses selling cross-border into the country. The cross-border segment has never attracted so many consumers before and its relevance grows year after year, despite the devaluation of the country’s currency. In 2017, 22.6 million digital consumers took to international websites to carry out online purchases, 6% more than in 2016.
Out of several elements that must be taken into account when setting up a cross-border operation, merchants often fail to consider the impact that currency exchange rates can have on their businesses profit margins. In Brazil, a common practice among players providing international settlement and remittance is to offer the so-called “tourism dollar” rate for the currency exchange. However, this procedure creates a hidden fee model that raises the price and risks related to currency fluctuations.
The historical background of the tourism dollar
The tourism dollar rate was used way before the Brazilian real was introduced in 1994 as the country’s new currency. It has its origins in the many exchange crises Brazil has undergone over the years. The restrictions and controls imposed by the Brazilian government to carry out foreign currency purchases had fostered the emergence of a black exchange market, also known as “parallel market”.
In the 1980’s, the government limitations became stricter, which strengthened the parallel market. In a desperate attempt to regulate the transactions carried out in the black market, Brazilian officials created a floating exchange rate market segment in 1988, which became known as tourism dollar. Unlike the official market, also called “commercial dollar”, the floating exchange rate would vary accordingly to supply and demand, much like the dynamics of the parallel market.
Both exchange rates continued to exist until 2005, when the Brazilian currency exchange market underwent significant changes that ended up merging the commercial and tourism segments. From then on, Brazil has had only one legal currency exchange market which is based on a floating rate and the tourism dollar rate ceased to be recognised as an official exchange rate.
The tourism dollar rate and its financial impact
Both terms are still frequently used in Brazil to express different type of exchange operations and rates. André Almeida, Senior Account Manager – International at PagBrasil, remarks: “The commercial dollar is associated with business transactions such as import and export or money transfers. The Tourism dollar term, on the other hand, still might be used for exchange operations related to buying and selling currency for international travel. Because of that, the confusion international merchants are faced is natural, when presented with the tourism dollar rate for their remittances.”
Currently, the average official interbank exchange rate for the day is defined based on all the transactions carried out in the marketplace. The Brazilian Central Bank publishes the official rate on its website daily. “It is worth noting that the exchange rate provided by the Brazilian Central Bank merely serves as a reference for calculating the rate to be adopted.” continues André Almeida. Each player, be it a financial institution, currency exchange broker or payment provider, is free to use their own rates. Mr. Almeida adds: “Typically, players apply a small spread to the official rate to cover any related costs. However, some players use the term “Tourism dollar” to justify an inflated exchange rate”. Such spread can increase the exchange rate up to 7%”, according to a study conducted by Melhores Destinos.
The inflated rate can be illustrated by comparing the exchange rate used on 29 August 2018 by two of the main Brazilian banks, Banco do Brasil and Bradesco, as well as two currency exchange offices, Confidence Câmbio and Cotação, and the “tourism dollar” rate published at the popular portal Economia.uol against the official rate published by the Brazilian Central Bank. The results show that the lowest spread applied was 4.23%, with Confidence Câmbio adding 6.53% to the commercial rate.
Transparency is essential for cross-border merchants to be able maintaining control over all their costs involved with their operations in Brazil. “International businesses tend to focus on the impact that payment processing fees can have on their profit margins. However, when payment service providers fail to inform the spread added to the exchange rate used, they end up creating a hidden fee model that considerably increases the overall costs of payment processing and doesn’t provide transparency and traceability.”, highlights André Almeida.
“Transparency is one of our core pillars at PagBrasil. All our international merchants are informed about the spread we add to the official interbank rate published by the Brazilian Central Bank and we are proud to practice a cost-efficient exchange rate model. In a market where exchange rates can vary significantly from one player to the another, we strongly recommend businesses to consider this element when comparing payment providers. Do not be fooled by hidden fees, as they can end up eating up your profit margins.”, concludes Mr. Almeida.
About PagBrasil
PagBrasil is a leading Brazilian fintech company processing payments in Brazil for multinational ecommerce businesses. With focus on innovation, we created the best infrastructure for the Brazilian market. By providing an outstanding service and innovative products, such as Boleto Flash®, we create unique value for our clients and their customers. Our complete online payments platform is the result of more than 20 years’ experience in the segment and relies on innovative resources, designed specifically for the Brazilian market. Local and international merchants gain access to the most advanced portfolio of products and services, which help them boost their sales immediately.
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