The past few years have seen a rapid acceleration in connecting with other parts of the world. Due to a mix of technological innovation and the COVID-19 pandemic, e-commerce business has soared. Companies have realized the immense opportunity that comes with expanding to new regions and have worked to introduce their offerings to potential customers in new geographies.
To meet the rising demand for e-commerce and grow as a global business, companies need to properly navigate the regulations and interworking of cross-border payments. One of the most common challenges of operating a global business are the high fees associated with processing international transactions. We’ve seen this come up recently in the news with Mastercard and Visa hoping to increase the interchange fees for U.K. merchants post-Brexit. When someone buys using a card based in another country, they’re charged a processing fee of up to an additional 1 percent on top of regular interchange fees.
When looking at how this impacts a business’ operations, let’s consider a company based in the United States with an online retail presence that sells $100 million worth of product. If 25 percent of sales come from customers outside the U.S., this would mean $25 million of that revenue is subject to cross-border interchange fees. In this case, the company would pay 1 percent in cross-border fees, or $500,000. Without optimizing its payments, the business leaves $500,000 on the table, money that could easily be reinvested into other sectors of the business or turned into pure profits.
How Merchants Can Avoid This
In order to avoid the interchange fees associated with cross-border payments, businesses must process card transactions as if they were local and have the issuing and acquiring banks for the transaction be within the same region. The simplest way to do this is to establish a relationship with banks in the regions you sell in. Local acquiring, or the processing of payments as if they’re local, has a number of benefits. Local acquiring increases the number of approved foreign transactions, avoids cross-border fees, and increases sales conversions. By partnering with a payment processor that has the necessary relationships with a network of global banks, it also increase the likelihood of cross-border payments being authorized as it circumvents the possibility of having them flagged as foreign, and therefore riskier, transactions.
We’ve found that, on average, global businesses use five different payment gateways to route cross-border transactions to local banks, using up a great deal of resources that businesses may not have. To help cut down on resources, businesses should look to partner with payment processors that have the necessary relationships with global banks that make separate payment gateways redundant, and let international transactions route through one gateway.
This same notion extends to foreign exchange rates with international purchases. Even if you avoid cross-border interchange fees by working with local banks, online businesses may also see foreign exchange fees when customers pay in one currency but then the bank pays you out in another. By accepting multiple shopper currencies or working with a payment processor that settles foreign currencies, retailers can keep money in their business, allowing it to continue to grow.
The Bottom Line
It’s no surprise that there are hurdles, both physically and financially, to running a business with a global footprint. While many may expect potential issues with supply chain demand or language barriers, the often-overlooked fees associated with processing transactions across borders don’t have to be a loss for your company. It’s important to set your business up for the highest degree of success. By finding solutions that remove cross-border fees, like working with an alternative payment processor or investing in local acquiring, you can mitigate costs and optimize revenue, making the decision to expand to a new region worth the investment.
Ralph Dangelmaier is the CEO of BlueSnap, an online payment solution for e-commerce, B-to-B, and SaaS companies, specializing in global payment processing and payment gateway solutions.