September 17th 2021
Think Global, Act Local? The Challenges of International Payments for U.S. Merchants
Some of payments' seemingly perennial truths apply across the globe. For instance, U.S.-based merchants will likely observe rising fees, increasingly complex reconciliation, and growth in alternative payment methods throughout their international estate.
In reality, however, no two payments markets are the same. The nuances of each country – from consumer expectations to regulatory requirements – mean that U.S. merchants may be losing out by failing to localize their global arrangements.
Localizing on a Global Scale
Understandably, many U.S.-based merchants structure their payments strategy around their core market. This often means contracting with a single processor with global capabilities, allowing the merchant to optimize their U.S. arrangements and leverage international volumes in fee negotiations. That single provider can also streamline proceedings by providing a single point of contact and one-stop-shop for payments concerns, as well as removing barriers around language and reconciliation.
Are these merchants doing enough to make the most of their international transactions, though? CMSPI often finds that the answer is no. Huge variation between payments markets means that they could be leaving income on the table by failing to localize or prioritize certain international capabilities in their processor discussions. In this article, we outline five key areas in which local considerations could be game-changing for merchants.
1 | Avoiding Failed Transactions
A merchants’ top priority when assessing the health of their transactions should be their approval rates. That is, ensuring that good customers with sufficient funds are not being turned away, or ‘falsely declined’. According to CMSPI estimates, these false declines constitute 1 in 5 payment declines online. Crucially, that figure can be even higher if a transaction is not processed locally. This is in part due to the importance of relationships with local issuing banks who ultimately authorize each transaction. Ensuring your processor is handling each payment in-country can therefore deliver significant revenue uplift, not to mention reduced fees for transactions classified as ‘domestic’ based on processor location. Analysis of transaction-level approvals data allows merchants to balance these revenue benefits against any cost proposal from their processor, and is the first step in generating a business case for a global payments partner.
2 | Understanding Local Card Networks: More than PIN debit
For many payments-savvy U.S. merchants, optimized debit routing is already a key part of their acceptance strategy. However, the cost savings available from utilizing local card networks are not reserved for U.S. merchants. Think of South Korea, where Visa and Mastercard processed just 2% of card value in 2019, and where the vast majority of the rest was sent via 8 domestic networks that each operate as acquirer, issuer, and network for their transactions (Figure 1). At the other end of the scale is Europe, where many countries benefit from a single domestic network, from Italy’s Pagobancomat to Germany’s Girocard. Each differs in its channel availability, routing choice allocation, and – crucially – processing requirements. Access to France’s Cartes Bancaires network, for example, requires a domestic processor. Given that CB is both a debit and credit network, and responsible for an estimated 83% of French transactions in 2019, doing as the French do could mean huge savings for U.S. merchants (Figure 2).
Figure 1. South Korea Transaction Value by Network (2019)
Figure 2. France Transaction Value by Network (2019)
Source: Euromonitor International (2021)
Merchants’ approach to local networks globally should therefore be no different to the U.S., where many of CMSPI’s partners wouldn’t dream of leaving the benefits of PIN debit optimization on the table. In fact, network capabilities differ all over the world, meaning that merchants who operate predominantly in channels where U.S. PIN debit routing is not yet widely available – such as ecommerce – must look to their global estate to find similar opportunities.
3 | Knowing Where your Alternative Payment Methods Stop Being Alternative
Tailoring your payments strategy to each country’s card market is crucial, but tailoring it to each payments market might mean thinking beyond cards altogether. In the Netherlands, for example, bank transfer option iDeal made up almost 70% of online transactions in 2020 – often at a fraction of the cost of cards for merchants. Even with the same payment type, authentication methods (and therefore terminal requirements) may differ by region, with markets such as China heavily utilising QR codes to authenticate widespread WeChat Pay bank transfers, contrasting with Poland’s Blik transfer system which uses a 6-digit code online.
In these markets, what is ‘alternative’ from a U.S. perspective is many customers’ default option, making acceptance a necessity to avoid losing sales to a competitor. There may even be differences in the way one type of payment is implemented across markets; in the UK, for example, retail financing is on the move in the form of rising ‘Buy Now Pay Later’ giants such as Klarna and Clearpay, whereas in Germany invoice payments have been a staple for decades and may therefore be more likely to be managed in-house by merchants. Although global processors can offer these APMs, merchants may need to consider cutting out the middle-man and contracting directly with each provider, balancing cost benefits with reconciliation on the back-end.
4 | Adapting Your Strategy to Regulation
Ensuring regulatory compliance is, of course, crucial for any multinational business. However, regulation targeted at promoting competition can act as more of an opportunity than a burden in payments. Europe’s PSD2 regulation, for example, catalyzed the development of Open Banking solutions with the potential to disaggregate traditional payments players (and their fees) from the supply chain. The U.S. market is yet to see anything like Europe’s level of Open Banking readiness, meaning a U.S. firms’ Europe-focused competitors may be getting ahead. Across the Atlantic from Europe, in Chile, the competition authority’s recent decision to mandate a four-party card system has removed the monopoly position of processor Transbank, potentially opening the market to alternative providers.
Keeping abreast of these developments is essential to ensure that merchants do not miss out on global innovations. It also allows them to identify potential risks to their payments arrangements. For instance, upcoming interchange regulation from Chile to Ukraine could mean wholesale changes to processors’ systems, which in CMSPI’s experience often translates into misapplied rates that must be audited to guarantee receiving the benefits regulators intended. Taking a global, strategic view of payments regulation therefore allows merchants to maintain a best-in-class offering, by both minimizing cost and taking full advantage of disruptive innovation.
5 | Keeping Costs in Line with Competitors
It’s not just regulation that can make costs hard to reconcile. Whilst U.S. card fees have been increasing in their complexity over the decades, so have the rest of the world’s. In global markets, however, there is an additional layer of intricacy as interchange and scheme fees become increasingly nuanced by country. This phenomenon is exemplified by Europe’s Market Development Funds – network fees which are levied on a specific country’s transactions, with rates often differing by card type, regional classification, and payment channel. Constant updates to these fees – and numerous others – make it easy for millions of dollars in misapplied rates to flow to parties in a merchants’ payments supply chain over time.
Whilst the U.S. payments market offers many complexities of its own – from PIN debit routing to interchange downgrades – optimising these areas is just the beginning for an international merchant. In fact, the largest U.S. merchants are finding that when in Rome, it is best to offer the payment methods Romans use. That can mean contracting directly with APM providers, utilising local processors’ access to domestic networks, or keeping on top of any regulatory developments that could shake up the payments landscape. Merchants able to do just that may find that their international estate holds the key to significant cost savings, all whilst improving the likelihood that good customers make it through the checkout.