Localizing payments is a key to business success when entering new markets. We’ve spoken previously about this on the front end, explaining why merchants must tailor the checkout experience to align with local behavioral norms, payment preferences and currencies. And of equal importance is routing payments locally on the back end.
Local card acquiring — where merchants process their payments with acquiring banks in the same market as the cardholder — can provide merchants with a competitive advantage in their key global markets. I could cite many merchants whose acceptance rates have jumped by double-digit numbers by leveraging our local acquiring footprint, unlocking a significant amount of additional revenue for their business.
And, in some instances, it’s nearly impossible to succeed without it. In markets like France and the United States, issuers are hyper-vigilant to the risk of cross-border payment fraud. They will automatically decline card authorizations from countries they consider a high-risk, potentially leaving a merchant unable to service customers in that country.
Despite these facts, most merchants aren’t leveraging local acquiring as part of their global payment strategy. Our research, conducted in partnership with Oxford Economics, finds that only 20% of companies have direct access to a local acquirer in their key global markets.
This article will detail why merchants operating cross-border should consider using local acquiring and how working with the right global payment service provider will allow you to unlock the benefits easily. Delight your customers and get more value from every transaction worldwide with our local expertise.
Local acquiring uncovered
As you know, there are two banks involved in any card transaction. When a transaction occurs, the acquiring bank contacts the issuing bank — via the card network — for permission to take the payment. When the acquiring bank and issuing bank are in the same country or jurisdiction, that is a relatively straightforward exercise.
Two banks in the UK, for example, are likely familiar with each other and work together to process millions of transactions a week. And they’ll be working under the same regulatory umbrella and country risk rating. All these factors combined give the best chance of the issuer approving the transactions.
When the acquiring bank and issuing bank are in different countries, it becomes more complicated.
Let’s say a German consumer is purchasing a widget directly from an online retailer in Hong Kong. This retailer doesn’t have a local acquiring footprint in Germany and instead uses a domestic bank in Hong Kong to process the payment. It’s likely the German issuing bank will be unfamiliar with the Hong Kong acquirer seeking approval in this situation. And while this doesn’t mean the German issuer will automatically refuse the transaction, it will put it under greater scrutiny.
A lack of familiarity between issuer and acquirer isn’t the only issue. Issuers treat authorizations from other countries differently, based on that country’s global risk ratings, irrespective of the bank or merchant. So if German issuers have experienced high volumes of fraud stemming from Hong Kong recently, they may have a policy in place to automatically reject any authorization requests.
How local acquiring drives cost savings, improved cash flow and customer experience
The headline story with local acquiring is that it’ll have a positive impact on authorization rates. But the benefits don’t stop there. Local acquiring also allows you to reduce the price you and your customers pay for payments and provides you with greater control over your cash flow.
Avoid cross-border charges
Interchange, scheme and processing fees are often all higher when a card transaction is cross-border. These fees can often see merchants charged 1% — and sometimes more — for a cross-border payment compared to one processed domestically.
Reduce foreign exchange costs
As we’ve previously explained, it’s best practice to allow customers to pay in their local currencies when selling overseas. But when the transaction is cross-border, there are foreign exchange fees that you must pay or pass on to your customers.
Settlement will also happen in local currency. That’ll provide you with much greater control over how you manage FX, allowing you to deploy strategies that are cost-effective and minimize risk.
Take control of your cash flow
Due to the complexity of cross-border payments, settlement often takes up to five working days. Whereas with domestic payments, settlement can happen on the same day. This gives you predictably and control of your cash flow and can be of great benefit when cash flow is tight, as it may remove the need to turn to expensive short-term funding solutions to plug any gaps.
Improve the customer experience
Some issuers charge their customers whenever they use their card abroad or have their payments routed through acquirers based overseas. This is known as a foreign transaction fee (FTF), and it usually costs consumers between 1% to 3% of the transaction value. For unsavvy shoppers, this charge can come as a surprise, possibly leading them to initiate a chargeback or perhaps avoid using your online store in the future. But you can remove that risk by using local acquiring and ensuring they pay and experience the same as they would shopping with a domestic merchant.
Blockers to local acquiring
So the solution is clear. Make sure you work with a local acquiring bank in every country you sell in. But, like other aspects of payment localization, that’s easier said than done.
The biggest blocker is that you’ll need to set up a legal entity in each country to access its banking services. And that might not be something your business is ready for just yet. But without that local entity, you cannot benefit from local acquiring.
“Localization in payments is a very attractive opportunity, but it’s also an area that contains a lot of unknown unknowns and a lot of variables that you don’t control.”
Logan Vander Linden, Head of Payments, Scribd
Then there is the challenge of replication and scale. A domestic payment environment is hard to configure and operate effectively. Repeat that for every market you operate in — a separate acquiring partner in every country, with individual contracts to negotiate, service level agreements to manage, and software and processes to integrate — and the strategy soon becomes unworkable. And relying on your domestic acquiring bank for all your global transactions, even with the flaws and additional costs involved, begins to seem preferable.
Local acquiring, wherever you grow
So how do you reconcile the opportunity of local acquiring with the complexity of executing it? You get someone else to do it for you, a global payment partner with local acquiring licenses — or the capability to get them — in all the markets you sell into and want to expand into.
This scenario provides you with the upside of local acquiring wherever you grow — improved authorization rates, lower transaction costs and faster settlement — with the simplicity of working with one partner.
Select the right partner, and other benefits of scale emerge. You’ll be able to offer the perfect mix of payment methods for each region — from local cards and local payment methods to international cards and digital wallets. You’ll be able to gather insights in one place, allowing you to easily compare all your payment KPIs, spot risks and opportunities, and take immediate actions.
Most importantly, you’ll be able to use payments as a catalyst for your global business growth.