Optimizing payments to grow across borders

By Chris Abele, VP & General Manager, Global & Emerging Payments, Fiserv

Globalizing commerce presents an enormous revenue opportunity. Credit Suisse says cross-border commerce accounts for roughly $900 billion in payments volume globally. Yet, as enticing as it may be for businesses to expand into new markets to grow sales, there is a fundamental challenge companies must consider to be successful – managing costs.

According to our research, businesses that sell across borders pay $30-45 billion annually in incremental transaction costs when they try to enter new markets. This substantial cost stems from brands not effectively optimizing their payments model to sell to consumers internationally. Several nuances in how a business sells can lead a brand to pay anywhere from 4% to 6% per transaction across borders, whereas similar transactions may only cost 1% to 2% when selling domestically. These increases to a business’ cost structure cut into margins and often deter them from moving into new regions.

That said, savvy businesses are working to optimize their cost structure by taking a localized approach to commerce and thinking strategically about how foreign currency is managed. Here are a few cross-border strategies we see businesses put into play:

Create a localized buying experience

Experiences have become the secret sauce to payments, especially when selling across borders and currencies. Research indicates that 92% of international customers prefer to make purchases using their local currency, and 33% of customers abandon an online shopping cart if the business doesn’t list a price in a familiar local currency.

Businesses can extend this concept by enabling local payment methods in the regions they sell in. Local Payment Methods (LPMs) – such as Alipay in China or Giropay in Germany – have become popular in many markets as a digital form of payment not connected to a card network or bank account. The additional advantage of LPMs for businesses is that they are also less costly because they avoid many fees associated with global payment rails. Carat from Fiserv can enable more than 70 LPMs for global clients.

So, by localizing checkout experiences with strategies that present familiar currencies and payment methods to customers, businesses create a better consumer experience and take a bite out of cross-border costs.

Optimizing operations in local markets

Understanding local markets is fundamental to optimizing global commerce and critical to keeping the cost of acquiring a cross-border transaction from slicing into profit margins. Take, for example, a US software company paying 5% in transactional costs when accepting a cross-border payment from a customer overseas. Localized adjustments to the merchant’s operating model can optimize its cost structure, significantly reducing the cost of selling in the region.

Two simple examples include:

1. Registering the business with local tax authorities, where appropriate, will allow the business to operate as a locally registered company, leading local governments to reduce assessed fees.
2. Connecting payment models to alternate networks, like UnionPay or EFTPOS in Australia, will similarly reduce transactional costs to leveraging LPMs.

Structuring businesses to sell efficiently across borders will help reduce costs in some markets by more than 3% to 4% per transaction in some markets.

Analyze and manage foreign exchange (FX) risk

Companies that expand into new markets must manage inflows and outflows of multiple currencies. This presents risk to the business because exchange rates fluctuate, presenting volatility, and can also be a detriment to the customer experience if not managed thoughtfully.

Take, for example, a business based in the US selling goods in India. An item may sell for $49.99 in the US, which would directly convert to 3,832.67 rupees for a shopper in India. This exchange rate presents two issues:

• Listing a price at 3,832.67 is not a familiar experience to the customer, which may add friction before the checkout is complete.
• As discussed, global exchange rates change daily, which adds risk to the business due to floating exchange rates. These fluctuations can add anywhere from .5% to 1% to the final cost of the transaction.

To address currency concerns, a business should look for opportunities to dynamically price the sale at an amount familiar to the customer, creating a better experience and improving margins. For our Indian example, pricing the sale at 3,999 rupees creates a better experience for the buyer while adding an incremental margin for the business to offset potential currency volatility.

Optimize cross-border payments to grow

With access to capital becoming tighter and supply chains straining business operations, businesses must remain keenly focused on cost structures as they invest in growth opportunities. By creating local buying experiences, understanding how to operate locally, and managing ever-changing FX risks, businesses can open the door to growing global commerce markets in a manner that positions them to succeed long term.

About the Author   

Chris Abele is Vice President and General Manager, Global and Emerging Payments at Fiserv, a leading global provider of payments and financial services technology solutions.  He previously served as Director, Corporate Strategy, First Data Corp, as well as Manager, Consulting Services, KPMG and Manager, Strategic Initiatives at Elavon.

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