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August 13, 2012

Tourism Traffic Boosts Prepaid Cards

Prepaid cards, at least until 2010, were the fastest growing payment method in the United States, according to the Fed's latest payments study. Their use is also growing in other markets, including Latin America in general and Brazil in particular, especially for funding tourism activities. Brazilian tourists are increasingly choosing rechargeable prepaid travel cards loaded with U.S. currency over cash. Interestingly, U.S. banks are also realizing economic benefits from tourists' move from cash to prepaid cards.

Growing South Florida tourism drives Brazilians to spend more
Brazilians make up the second largest tourist group to Florida, next to Canadians (3.3 million of whom visited the United States in 2011). Last year, approximately 1.5 million Brazilians visited Florida. They spent more than a billion dollars total, with a per-visit amount typically exceeding $5,000. Altogether, the Fed Atlanta's Miami Branch paid out $1.7 billion U.S. dollars to Brazil.

A number of factors are contributing to the rise in Brazilian tourists to Florida, including the high number of available flights, expedited processing for travel visas, significantly lower prices for many designer brands coupled with the absence of Brazilian import tax, and relatively cheaper real estate prices.

Brazilian tax rule, other factors influence credit card spending abroad But why are these tourists increasing choosing to use prepaid cards? In 2011, the Brazilian government imposed a new financial operations tax of 6.38 percent on foreign transactions made with Brazilian-issued credit cards. The tax, called the IOF—short for Imposto sobre Operações Financeiras—makes using credit cards abroad very unattractive for Brazilians.

Prepaid travel cards also offer more favorable exchange rates, and they insulate consumers against rate fluctuations by offering a fixed exchange rate on all purchases.

Banks in Brazil also benefit from prepaid cards used abroad. Transportation and custody expenses make it costly for Brazil's commercial banks to obtain and hold U.S. dollars. As a result, these banks are actively promoting prepaid cards. U.S. commercial banks quickly seized the opportunity to compete with their Brazilian counterparts by rolling out marketing campaigns in Brazil promoting the benefits of prepaid travel cards for U.S. travel.

All these conditions and incentives have combined to create a 50 percent rise in travel card applications by Brazilians shortly after the tax regulation was introduced.

Brazil offers an interesting case study of the growth in the use of prepaid payment cards. Just as U.S. consumers beyond the unbanked are recognizing the ease and convenience of this payment device, so are international consumers.

Paul GrahamBy Paul Graham, assistant vice president and branch operations officer, Miami Branch of the Federal Reserve Bank of Atlanta

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