Don’t Shy Away From European E-Commerce Customers, Partner Smartly Instead
As the U.S. continues to fight through a slow economy, Europe and the U.K. have naturally grown into quite attractive marketplaces for domestic e-commerce companies to tap into. From fashion to travel, many U.S. online retailers are starting to see between 10 percent to 20 percent of their traffic coming from European-issued payment card products. Since setting up physical branches in local EU countries is rather expensive, online retailers tend to opt for conducting their business remotely from within the U.S.
If you ask 100 online retailers what obstacles they face daily when conducting e-commerce business in each local EU country, you can pretty much be guaranteed they will unanimously cite the following: language, culture, legal, regulations and shipment/fulfillment. Yet one obstacle that tends to not make this "Top 5 List" is the problems surrounding processing foreign card payments from European and U.K. consumers.
Fraud and Costs Are On Everyone's ‘Payment Processing’ Mind
In light of the recent Target data breach, "fraud" has once again turned into the word du jour in the e-commerce arena. Now more than ever, U.S. players across the e-commerce payments chain — especially retailers and card issuers — are extremely wary to accept online card payments originating from foreign countries. Since a cure-all hasn't yet been created to completely nullify the global online fraud epidemic, Europe (and the rest of the world) isn't immune to fraudulent activity.
As such, most U.S. online retailers and card-issuing banks have put into place preventative measurements to try to reduce the amount of European-based fraudulent activity that affects their online customers. In fact, many banks will automatically decline card authorizations from certain countries.
The upside? Obviously these measures are helping to reduce online card payment fraud. The downside? By not allowing any online payments to originate from European cardholders, everyone across the online payments chain will lose out on expanding their brand/product to an extremely profitable consumer buying market.
In addition, U.S. online retailers are hesitant to accept European online card payments because of the high international exchange fees associated with processing foreign cards.
European vs. Domestic: Acquiring Bank Partnerships is Your Golden Key
Should U.S. retailers stay away from accepting European online payments because of the fear of fraud and high international fees? Absolutely not, as the benefits of this untapped market is priceless. For example, in the U.K. alone, $950 million worth of goods is exported annually from U.S. retailers. However, retailers need to be smart and figure out solutions to overcome this obstacle. One of the most effective solutions is to partner with European vs. American acquiring banks that have both the legal and regulatory rights to process online payments within the EU.
An acquiring bank is a bank or financial institution that has the power to process credit or debit card (e.g., MasterCard or Visa) payments for products and/or services for a merchant.
In the majority of cases, U.S. online merchants’ acquiring banks will typically be one of the many national banks across the country. However, in order to legally conduct e-commerce business within Europe and the U.K., an acquiring bank must have a European license from the Payment Services Directive (PSD) created by the European Commission. Most domestic acquiring banks don't have this license. A recent study shows that over 44 percent of surveyed merchants don't know whether the independent sales organization who handles their payments is affiliated with their acquiring bank in the foreign countries they service. This is especially true for U.S. merchants.
A European bank acquirer that has the jurisdiction to process within the EU will automatically be able to treat that particular transaction as domestic (within a country) or regional (between EU countries) rather than international (between Europe and the U.S.). The benefit for the merchant is that the card processing fees for both domestic and regional are significantly lower than international fees. In addition, with a European bank acquirer, the merchant won't have to pay dynamic currency conversion costs that are required when conducting business within the U.S.
European bank acquirers acting on behalf of U.S online merchants process online European cardholder payments locally within each country as opposed to "passing" them through to be processed in the U.S. Due to strict anti-fraud rules, the majority of these card payments would be blocked and therefore automatically declined if these payments were processed locally with a U.S. bank acquirer.
With a European bank acquirer, these payments are treated as local payments and therefore legitimate payments are automatically approved and not stopped because of their European-based IP addresses. This in turn leads to merchants being able to accept a higher amount of card payments from European-issued card payment products/consumers.
In addition, by selecting the right partners, retailers will not only increase card approval rates, but even more importantly, the right bank acquirer in a particular EU country will also ensure that proper risk management measurements are put into place to significantly reduce the amount of fraud activity coming from that particular country.
In the U.K. alone, IMRG is predicting that over £100 billion will be spent by consumers online in 2014. Imagine that record-breaking number coupled with predictions for other top European buying countries such as Germany and France — the market potential is clearly extraordinary for U.S. online retailers.
To shy away from such an opportunity would be a shame. U.S. merchants need to be smart and find the right payment partners in Europe that will help them overcome barriers to entry. When it comes to accepting European credit cards online, merchants need to partner with the right EU bank acquirers.
Rod Katzfey is the vice president of business development, North America, at Credorax, a provider of online payment processing and acquiring bank services.