The Simplicity of Complex Transactions
How third-party facilitators help to create seamless, international shopping experiences
By Ed McKinley
The late folksinger Pete Seeger was quoted as saying that “any darn fool can make something complex; it takes a genius to make something simple.” His words of wisdom could apply equally well to cross-border payments. It takes an army of third-party facilitators, gateways, and processors to help merchants, acquirers, processors, and developers navigate the technical and cultural complications of international e-commerce and m-commerce transactions.
Those third parties are dealing with country-to-country transactions spawned by the internet, which has made shopping a global experience. These days, it’s easy for consumers to conduct online research on a product and decide to buy it—only to find they’re on a site maintained by a retailer that isn’t located across town or even across the country, but instead, is half a world away. That’s OK with most consumers—as long as the purchase doesn’t become a hassle.
But it’s not so easy for merchants and their payments providers to hold up their end of the bargain by making it easy to buy internationally on their sites. To get an idea of how complicated it is, think of the amorphous mass of differing payment methods, currency exchange rates, laws, rules, regulations, and local customs within a single region—such as Asia-Pacific—and then multiply that by the number of regions in the world, urges consultant Rick Oglesby, president of AZ Payments Group LLC and a partner in Double Diamond Group LLC.
In fact, accepting e-commerce or m-commerce payments from absolutely anyone in the world would require merchants and their service providers to deal with about 220 different ways of paying, says Caroline Hometh, managing director of RocketPay Group LLC, a Boston-based international payments consultancy. Global payment methods range from the card brands familiar in the United States to bank drafts, e-invoices, prepaid cards, and e-wallets, says Hometh. Methods that seem exotic to Americans can dominate transactions elsewhere, observers agree. Scandinavians might prefer Klarna; the Chinese have Alipay and UnionPay; Germans have their own versions of PayPal-like transactions; Israelis, Argentinians, and Brazilians favor installment payments; and Canadians use iDeal, a type of bank draft.
“Visa and MasterCard are very dominant in the United States, but they’re not as strong in other countries,” says Oglesby. It’s important to accept funds in the way customers want to pay, he maintains. In Germany, for example, consumers pay for less than 10 percent of their online purchases with credit cards, explains Neeraj Gupta, senior product manager for Vantiv, a processor that strives to assist with international payments. Instead, Germans prefer SEPA, a way of pulling funds directly from bank accounts, and SOFORT and Giropay, which push funds from bank accounts, he says.
That diversity of payment methods gives rise to a need for merchants and acquirers to find third-party facilitators, observers agree. Facilitators can match retailers with the right service providers in a process that, according to Oglesby, looks “more like a quilt than a blanket.”
One Motive, Many Methods
Retailers who find their customers concentrated in just a few parts of the world can avail themselves of facilitators that specialize in those regions or with a services provider that knows how to handle transactions almost anywhere. Whatever their scope, facilitators should know what payment methods consumers prefer in the parts of the world they cover regularly, and they should have the technical means to accept those methods.
Besides handling different payments methods, facilitators also deal with a welter of changeable foreign exchange rates. The United Nations recognizes 180 currencies, and retailers should be able to accept all of the types commonly used in the areas where they’re doing business. Settlement also can occur in multiple currencies, so transaction-processing platforms have to allow for that complexity too. Once again, facilitators can come to the rescue if they have or can get access to the hardware that can handle the complexities.
Making the process even more complex is the fact that taxes and tariffs also vary from country to country, notes Thad Peterson, a senior analyst at Aite Group. He attributes the rapid growth in the number of third-party facilitators to the man-made and machine-made complications retailers and acquirers face in cross-border payments.
Among the machine-oriented challenges is the fact that the hardware and software used to convey electronic transactions don’t always mesh as well as they might with whatever systems exist on the other side of the border, Oglesby says. Deals that enable one entity to process on behalf of another can help facilitators smooth the way, he maintains.
Facilitators also operate or have access to servers located in various countries, says Chester Ritchie, executive vice president and head of U.S. operations for Zooz, an Israeli-based tech company with offices in San Francisco. Server location matters because some countries stipulate where they must be positioned to keep personally identifiable information (PII) safe, he says.
The State of Things
Cultural differences also cast a shadow over cross-border payments. Some variations come down to differing societal values, such as the tendency of Europeans to safeguard consumers’ privacy more aggressively than Americans. That gap can affect what information changes hands during cross-border transactions, and facilitators keep that in mind as they monitor the European Union’s progress as it contemplates changes in its rules.
Other cultural challenges don’t necessarily arise from varying views of how society should work; instead, they simply result from decisions someone made ages ago. The lack of street numbers in some countries, for example, can require big changes in evaluating potential transactions. In place of an address, a home or business might have a colorful description of where it’s located, notes Hometh. U.S. gasoline pumps may ask for a numeric U.S. zip code, only to face an alphanumeric Canadian postal code that just won’t compute, Oglesby maintains.
That doesn’t even begin to take into account the need to comply with all sorts of local standards that vary from place to place. What’s more, additional challenges are rooted in coordinating logistics when the parties involved don’t share a common language and are operating to circadian rhythms determined by their widely differing time zones. “Don’t have an American mindset,” Hometh advises. “I manage my business within their cultural rules—not mine.”
Those cultural differences certainly don’t indicate fraudulent intentions, but malfeasance does figure large in cross-border payments. Some regions, particularly Eastern Europe and parts of Africa, have become infamous for harboring large numbers of criminals bent upon defrauding merchants and their customers. But wherever they’re based, fraudsters often target international transactions.
So the cyber tools designed to ferret out fraudulent payments have become finely tuned to detect cross-border transactions. Such tools often tend to decline some transactions simply because they’re “foreign” or because of where they originate. The higher risk of cross-border transactions also results in higher transaction fees. “It’s harder to catch the bad guy if he’s in a different part of the world,” says Deana Rich, a consultant who specializes in risk and underwriting.
With enough transactions in a particular country, retailers can benefit from having an acquirer or banking relationship to bring fees down to domestic levels and eliminate needlessly declined transactions. Facilitators often make that happen for retailers by giving them the equivalent of a local merchant ID, observers say. “That’s how you get those approval rates higher,” notes Oglesby. “A Canadian card being used in the United States is going to get declined more often than a Canadian card used in Canada.”
Sometimes the card brands bill the higher fees for cross-border transactions to the cardholders, says Ritchie. Someone who buys something for $15 sees that charge on his bill and then sees another charge for $4 that substantially increases the cost of the merchandise and often creates confusion, Ritchie says. That’s another reason Zooz connects with 45 acquirers around the world to gain local advantage for its merchants, he maintains.
The amount of help retailers receive from facilitators can determine their place in one of three categories of cross-border payments optimization, according to Gupta. At the lowest level, retailers can simply require customers to pay in dollars. Merchants at this level operate without much optimization; thus, they have higher fees and the largest number of declines.
At the next level, facilitators can help retailers set up their e-commerce store to accept other currencies but reconcile in dollars. Here, transaction fees are reduced by at least one full percentage point, and approvals increase by about 10 percent because the facilitator helps the merchant operate more like a local company.
At the highest level, merchants set up offices or stores outside their home country to establish a “presence” elsewhere and obtain the advantages of a locally based entity. At this level, the merchant achieves local settlement, meaning, for example, that customers pay in euros and the transaction is settled in euros, Gupta says.
To test which level works best—middle or highest—merchants might consider setting up websites that cater to 10 countries in their currencies and languages, Gupta suggests. Where demand is greatest among those 10 countries, the merchant might want to establish a physical presence, he says.
Seamless Shopping for All
Wherever merchants choose to operate, facilitators also can help create a seamless omni-channel experience for shoppers when merchants have stores in more than one country, Hometh says. If a consumer buys merchandise online that’s shipped from Country A but wants to return the purchase at a bricks-and-mortar store in Country B, adding inventory management technology to the payments platform can expedite the whole transaction, she notes.
In fact, Hometh views international omni-channel retailing as the latest aspect of cross-border electronic commerce, which began about 16 years ago. She expects omni-channel across borders to grow strongly in the next few years but advises service providers that it’s not too late to enter the field.
Meanwhile, social media is creating worldwide marketing platforms that are helping smaller and smaller merchants sell internationally, says Oglesby. “It used to be just the big leagues that would even consider selling stuff in an international market,” he notes, “but now anybody can generate a marketing presence around the world, and it often happens without even trying.”
Facilitators say they find themselves working with ISOs, usually super ISOs, that want to develop the capacity to handle cross-border transactions or at least find the right partners for doing so. Smaller ISOs often are taken aback at the expense of starting such projects and the complexity of continuing to pursue them, observers contend. Processors should have plenty of approaches to international commerce “on the shelf” to supply ISOs that want to offer such services to their merchant clients.
“The ISO needs the expertise to match the products to the merchants,” Oglesby suggests. “The processors may have the solutions, but they don’t convey them to the merchants.” The competitive advantage for ISOs can reside in their knowledge of the processor’s products, he says. Some ISOs develop their own cross-border products to create additional competitive advantage, he notes.
A processor, such as Vantiv, creates some of the technology to facilitate cross-border payments and obtains some of it through third parties, Gupta says. Either way, Vantiv can blend the offerings to present retailers and acquirers “a single throat to choke—even if we have partners behind the scenes,” he says.
A World of Opportunities
Cross-border transactions represent a tremendous opportunity for the payments industry in Oglesby’s view. The requirements for international e-commerce are so complicated that even the biggest retail chains don’t mind seeing their in-house staffs hire outside facilitators, he says. Hometh agrees, noting that most of her clients are among the largest merchants.
Moreover, the planet’s so big and conditions vary so much among countries that “it’s hard to find one service provider that has the world wrapped up in a bow,” Oglesby says. “It takes months or years to set up your infrastructure in a particular region or country.”
Accomplishing that can prove expensive, so most retailers wouldn’t want to take on the entire expense alone, Oglesby says. Facilitators, on the other hand, can obtain commitments from a number of clients and thus spread the cost, he explains.
It’s just another step in seeming like the genius that Peter Seeger mentioned—the one who can make a welter of confusion feel a bit more like simplicity. TT
Ed McKinley is a contributing writer to Transaction Trends. Reach him at [email protected].
Trends in C2C Cross-Border Payments
Consumer-to-consumer (C2C) cross-border payments—often a matter of a worker sending funds to the folks back home through Western Union or one of its competitors—are changing profoundly in the digital era, according to Talie Baker, an Aite Group analyst. It’s happening to a large degree because startups are disrupting the market by using technology to reduce costs and figuring out new ways of helping the world’s billions of underbanked citizens, Baker says.
Take the example of incumbents who find that most of their transactions still occur in person, she says. A sender could walk into an office in the United States and wire funds to an office in Mexico, where the recipient would walk in and collect the money.
But that’s changing. Newcomers are positioning for remote mobile transfers of funds, Baker continues. “Mobile phones are the only access a lot of people have to financial services in the third world, so a lot of remittances are starting to happen digitally—although it’s not the primary method at this time,” she notes.
About 7 percent of remittances are already happening digitally, Baker says. Some corridors are leading the way, with a large numbers of digital transfers taking place between the United States and either India or the Philippines. Meanwhile, transfers from places like the United States to Mexico tend to remain heavily face-to-face, she says.
At the same time, social networks, like Facebook, are facilitating C2C international transactions, Baker says. Western Union, to provide one example, has announced a partnership with WeChat in China that will enable consumers to use the Western Union platform to go into the WeChat messaging app to send funds. “That’s another big trend that’s going on right now,” she says of the social networks.
Simultaneously, Bitcoin and blockchain technology are bringing down the cost of funds transfers and making them happen more quickly, Baker says. Companies are using the technology to make instant transfers, she says, by converting a local currency to Bitcoin, sending it, and then exchanging it for the other local currency. “The consumers may or may not know they are using Bitcoin—it depends upon how savvy they are,” she notes, adding that “there are quite a few companies out there doing that now.”
Mobile money, which is digital currency stored on a cell phone, also is trending, Baker says. It’s big in countries that lack financial services infrastructure, like parts of both Africa and Asia, she notes. Mobile money also includes high-end companies that consumers use to avoid fees when they exchange currencies, like dollars for pounds.
Alternative remittance products, another trend, include a scheme that enables a consumer to place value in an account in a store in another country and grant access to that value to anyone he or she designates, according to Baker. A sender in the United States could, for instance, place $100 in a Walmart in Mexico and make it available to a relative. “The person sending the money is controlling how the money is being used,” Baker suggests.
Bill pay, another growing cross-border phenomenon, facilitates transactions like paying tuition for a student in another country, Baker says. The sender places the funds with the institution instead of with the individual, she notes.
Prepaid cards also are helping to ease cross-border C2C funds transfers, Baker maintains. The sender can purchase a gift card online or in a convenience store and then call a relative abroad and give him or her the PIN. The recipient can go to a designated store and use the PIN to purchase goods.