International e-commerce is booming these days and so too are the opportunities—and challenges—for payments players.
Within the past decade or so, a growing number of payments platforms has targeted international e-commerce transactions, and with good reason. Research firm Forrester predicts that cross-border e-commerce will outpace domestic growth, with a compound annual growth rate of 17 percent between 2017 and 2022, compared with 12 percent for overall B2C ecommerce.
Today, many payments providers that focus on international e-commerce are trying to do more than simply process transactions. They are focusing on solving the various pain points for merchants that make international e-commerce especially difficult. These include significant decline rates for cross-border credit card transactions, a high occurrence of fraud and increasingly burdensome tax requirements. At the same time, payments providers are also running up against an increasing number of challenges, including slews of complex local regulations and the need to build appropriate scale.
To compete effectively, many payments providers are adding ancillary services beyond just processing. These include regulatory compliance, tax compliance, shopper support, chargeback and refund management and fraud detection analysis, payments professionals say.
“I think most processors and payments providers are looking for ways to add value to merchants outside of just payments,” said Erich Litch, chief revenue officer at 2Checkout, a global e-commerce and payment platform that allows companies to accept online and mobile payments from buyers worldwide, with localized payment options. “Anything processors can do to do that is going to be a very important area,” he said.
Global pain points
Fraud prevention is one area some payments providers are focusing on to deepen relationships with international e-commerce merchants, according to Ralph Dangelmaier, chief executive of BlueSnap, an online payment platform.
Having stellar fraud protection is particularly pertinent to international e-commerce, given that the fraud rate for international orders is around 1.5 times higher than domestic purchases, according to a 2016 report from CyberSource, a unit of Visa.
“There’s plenty of opportunity for others to get into this,” said Dangelmaier, who contracts with a third-party provider for the company’s fraud detection services.
One sticking point for would-be entrants is that while a payments provider may be well-versed at fighting fraud in the U.S., replicating those services in other countries isn't so easy. For instance, in certain countries the tools available to ensure people are who they claim to be may not be as sophisticated, Dangelmaier said.
Another problem payments providers are increasingly trying to solve is the difficulty merchants have with approval rates for international credit card transactions, according to Igal Rotem, chief executive of Credorax, a full-service acquiring bank specializing in e-commerce payments and services.
Many banks—issuers or acquirers—will decline cross-border transactions for fear of fraud. So while an e-commerce merchant in the U.S. who solely does business domestically might expect that around 98 percent of the transactions are approved, Rotem estimates that about 30 percent to 35 percent of cross-border transactions are denied at the first attempt; denial rates are even higher in less developed areas of the world.
“This is a very, very big number,” said Rotem, whose company was founded to help merchants improve their approval rates. “This is where the pain is and this is where the opportunity is."
Tax management is another area where payments providers are increasingly seeking to help merchants. Traditionally, payments processors didn’t get involved at all in taxes. That’s because in the past, most online transactions weren’t taxed. But little by little, countries realized they were missing out on sales revenue, and they are starting to crack down.
Argentina, for instance, recently instituted a local tax on e-commerce transactions and other countries are weighing the possibility, said Eric Christensen, group vice president of commerce business infrastructure at Digital River, a global provider of e-commerce solutions and the merchant of record for major online brands.
If efforts in countries that tax international e-commerce are successful, more countries are likely to develop tax schemes of their own, Christensen said. “The local governments want their share of those cross-border transactions,” he said.
This trend signals a growth opportunity for payments providers. As a result of various new regulations, there more of a need to for payments companies to help merchants with tax-related issues such as proper withholding and reporting in accordance with a particular region’s rules, said Litch of 2Checkout. “Anything that processors can do to simplify the transactions for merchants is an interesting area,” he said.
The consultative approach
Some payments companies, like Ingenico, consult with merchants to help them find the best approach for their business. For some this might mean setting up a legal entity within the region where they want to expand.
This offers advantages for payment cost acceptance, but there are additional costs and complexities as well. The rules and regulations are different for each type of payment, said Joe Leija, general manager for North America at Ingenico ePayments, the online and mobile commerce unit of Paris-based terminal manufacturer Ingenico Group.
A merchant can’t just put up a website and expect to sell all over the world. “It takes more knowledge and expertise now to expand globally,” he said.
Certainly, payments providers that do work in various markets around the world need to have a local expertise and understanding of the requirements in each region. For example, there’s PSD2 and GDPR in Europe; and in many markets, payments providers have to have a physical presence to do business.
“Regulations can vary quite widely from one market to the next,” and it’s important for payments providers to get these things right, said Casey Bullock, general manager of global enterprise e-commerce for North America at Worldpay. “The fines that are tied to these things can be massive.”
It’s also not always easy for a payments processor to start doing business in another country. For example, it took Worldpay five years to get its credit card acquiring license in Japan in a long and complicated process. “Markets aren’t cookie cutter,” he said.
One region at a time
Because of all the complexities, it’s not feasible for payments companies to specialize in every country. Instead, payments companies should seek to be strong in a few markets and not try to be all things to all people. "Specialization is key,” said Leija of Ingenico.
Accordingly, some payments providers are finding success by focusing on one or two international markets for e-commerce, while others are targeting more niche markets around the globe.
dLocal, for example, focuses on emerging markets. The company, whose biggest market is Brazil, is continually broadening its global reach. In mid-August, dLocal announced the expansion of its payments platform to the Middle East and North Africa, starting with Egypt and Morocco. These areas are both considered high growth opportunities based on factors such as regulatory reform, technology advancements and demographics. In Egypt, for example, a population of mostly young shoppers (50 percent under age 30) is driving the transition to online shopping and payments, according to dLocal.
“These nascent markets offer incredible growth opportunities for innovative, trail-blazing companies,” said Sebastian Kanovich, the company’s chief executive, in a press release announcing its expansion.
“While there are market barriers, many cross-border e-commerce opportunities are emerging in both Egypt and Morocco where governments are making efforts to improve financial inclusion through digital banking supported by payments solutions,” he said.
Certainly, payments providers need to acutely understand how customers want to pay in the various markets they are in.
According to 2Checkout’s first quarter 2018 benchmark report on digital commerce trends, Visa and Mastercard continue to dominate among payment methods, accounting for 68 percent of global online sales; followed by PayPal at 19 percent and American Express at 7 percent.
But certain countries show stronger preferences for local payment methods. For example, as a merchant, you can’t operate in the Netherlands and not accept iDEAL, said Jochen Kaempfer, a principal at A.T. Kearney who focuses on banking and payments. To sell in Mexico, you need to accept payments through OXXO, whereas in China, the big payment method is Alipay and in Brazil, people tend to use local credit cards.
For payments companies that are very focused on the U.S., it can be a shock to realize that cards aren’t the primary method of payment in many countries, Kaempfer said.
What about crypto?
One challenge for payments providers is the proliferation of new payment methods. If you want to maximize sales, you have to support those payment methods across the world and you need to support lots of different currencies, said Litch of 2Checkout.
One area to watch is how payments companies will deal with the world of cryptocurrencies for international e-commerce, said Brandon Spear, president of MSTS, a global B2B payment and credit solutions provider that specializes in commercial transaction management. There are some online merchants who accept cryptocurrencies currently, but there hasn’t yet been widespread adoption. “There’s still a little uncertainty about how this is all going to play out,” he says.
For example, it’s still unclear how respective governments will regulate cryptocurrency, whether the underlying technology can keep up with large number of payments and whether there will be enough liquidity to make them a viable payment option for international e-commerce transactions, he said. Even so, Spear predicts cryptocurrency will eventually become a viable option for international e-commerce transactions.
“It’s just a question of time before it ends up happening,” Spear predicts.
The importance of scale
It can be very difficult for start-up payment companies to simply jump into the global e-commerce market.
A lot of companies don’t realize how much scale it takes to work globally, saud Michael Ting, senior vice president of global markets at Hyperwallet, a facilitator of cross-border payments and payouts for sellers on online marketplaces. (PayPal recently inked a deal to buy the company; the transaction is expected to close in the fourth quarter.)
Consider, for instance, the prospect of different tax laws in every region. This could make it even more challenging for new and existing processors to do business in multiple countries, saud Christensen of Digital River. Companies may need to hire local experts in each of the jurisdictions, or outsource to a third party. Either option has to be built into a payment company’s economics.
Other opportunities for payments providers and ISOs
Another trend that is changing the landscape for payments companies is the proliferation of online marketplaces.
The growth of these marketplaces—and the desire for sellers to peddle their wares internationally—also means multiple opportunities for payments companies on both sides of the business—payments collection and the disbursement of mass payments.
Payouts used handled solely by banks, when it was individual buyers and sellers working together directly, but that’s changed as the marketplace business model has evolved, said Hyperwallet’s Ting.
“The fact that there are all these people who are earning really small amounts of money and need to be paid is a new phenomenon. It didn’t exist 20 years ago,” he said. With thousands and thousands of individuals buying and selling, modern marketplace payments require technology and scale, he said. A lot of the banks are now providing more of the infrastructure to move the money, but leaving the details to innovators to handle the user experience, he said.
There are even opportunities for ISOs to win business in the burgeoning space of international e-commerce.
Many startup merchants can bypass ISOs by working with a global payments company that deals with cross-border e-commerce. But there are also brick and mortar merchants that want to sell their wares online to people in other countries. ISOs have an opportunity to forge partnerships to help their merchants do this—and maintain and enhance that merchant relationship in the process, said Conal Cunningham, general manager at Inovio Payments, a global payment gateway provider whose parent company is North American Bancard.
While many merchants are interested in selling their wares online globally, a typical ISO won’t have the connections to allow them to do that. His company partners with several acquirers and ISOs to allow their merchants to sell their good internationally online.
“ISOs don’t have to be out of this race. They can compete, but they have to get out of their comfort zone and find some partners to help them deliver what the marketplace is demanding,” Cunningham said.
