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As technologists, we are asked to make software purchases based on "business requirements." Often, those "requirements" are vaguely communicated and easily misinterpreted. This is especially true for payment gateways, which, despite being ubiquitous in online businesses, are one of the most misunderstood systems you can buy.
I have spent the last 20 years engineering payment and banking technology. For the most part, I focus on how to build modern, scalable, developer-friendly systems. I want my peers to integrate the technology with ease and trust that it will serve the business well. While those are certainly "business requirements," there is another dimension to payment technology that technical folks rarely discuss.
That other side is the backend of international payments. The opaque rules of cross border payments are such that companies often find themselves paying exorbitant fees or suffering from declined transactions. These are business challenges, but they stem from the backend functionality of payment gateways.
Now is a good time to discuss these "business requirements" because COVID-19 and the global recession have forced companies to cut costs and double down on ecommerce efforts. I hope that these three considerations can help you get more mileage out of your fintech stack in tough times.
1. Businesses can get slammed with cross border interchange fees when they expand abroad
Whenever your company accepts a credit card transaction, it pays a processing fee. On average, your company will pay an additional 1% on each transaction if those transactions are considered "cross border," meaning that the customer used a card issued in a different country or region from where the payment is processed. That extra fee is called the cross border interchange fee, and the "borders" are defined by credit card networks.
Let's say your business is based in the US and sells $100 worth of goods to a Spanish shopper who uses a credit card issued in Spain. If a US bank processes the transaction, an additional cross border interchange fee will be applied. Thus, your company will pay on average up to 1%, or $1 in this case, in addition to standard processing fees.
If that same Spanish shopper uses the same credit card to buy the same goods at a French ecommerce site, the French merchant will not pay the cross border interchange fee. It is not considered a cross border transaction according to the card networks.
Most payment gateways are configured to route their transactions to a bank in one card region. That works fine for a US company that only sells to US shoppers. However, those gateways become a competitive disadvantage if that company expands internationally — because of the cross border interchange fee I described above. Unsurprisingly, financial technologists try to eliminate that extra fee while still following the card network rules.
The key is to localize the payment by processing card transactions in the region where the shopper's card was issued. It sounds simple, but it's not. First, the gateway has to build relationships and backend connections with banks in multiple card network regions. Then, the gateway must develop a way to automatically identify a card's region of origin and route it to a bank in that region.
Given those challenges, it's common for companies to cobble together five or more gateways to localize payments in multiple regions. But that arrangement is far from optimal. From a technical standpoint, there are more integrations to complete and maintain, more security vulnerabilities, more potential failure points, and more subscriptions to pay. The optimal payment gateway is going to localize in all the regions where a company sells while still offering competitive processing rates.
2. Foreign exchange fees are different from cross border interchange fees
It's common for cross border interchange fees and foreign exchange (FX) fees to be mixed up. The latter depend on the currencies used, not the card network borders.
To run with the example, if the Spanish shopper buys from your company in US dollars but uses a credit card issued in Spain, then the shopper will pay roughly a 1% FX fee to convert from euros to dollars. Obviously, that's a deterrent to shopping at your website. Suppose you allow that Spanish shopper to pay in euros instead of dollars. Then, your company swallows the foreign exchange fee unless you reflect it in the price.
As a technologist, look for a gateway that handles all FX fees and multi-currency computation at a competitive price. It should also pay you out in the currencies your business desires. If not, you will find yourself spending on infrastructure to handle FX rates, multi-currency reporting, and settlement.
3. Alternate Payment Types
To sell globally, you need to localize the checkout and payment experience, otherwise you risk losing substantial sales. Localization is not just a matter of using the local currency and language. It's also about supporting popular payment types in each country or region.
For example, in China, AliPay is a very common payment type, so if you plan to sell in China, supporting AliPay is a must. Similarly in Brazil, Boleto Bancário is a very common payment method.
The list of payment types grows as you expand globally: ACH in the US, SEPA in the EU, Direct Debit in the UK, etc. For a global merchant to compete in these regions, supporting the common alternate payment types is a business requirement. Look for a gateway that provides these payment types out of the box. Otherwise, you will find yourself integrating with multiple payment providers to successfully compete.
Rethinking Business Requirements
International ecommerce can get awfully expensive even if, technically, a gateway does what the business expects. Imagine you have $100 million in cross border sales and take whatever currency the shoppers wish to pay in. First, your company will pay a up to 1% fee for the cross border interchange fee. Then you may pay another 1% for foreign exchange (and maybe again if you run a marketplace model). Not only that, a percentage of these transactions will be declined because banks are more likely to suspect fraud when a foreign card is routed to them.
In other words, your company might suffer $2 million a year in costs and lose a significant number of purchases. However, when foreign transactions are processed by local banks, there tends to be a 3% to 6% increase in authorization rates. So, technically, a gateway might process your cross border transactions at a 2% premium and erode sales by a few percentage points as well. And let's not forget the transactions that simply will never happen because you don't offer local payment methods. Does that gateway meet your "business requirements?" I say not.
The point is, business requirements should weigh the geography of a customer base against a payment gateway's technological approach to cross border transactions, local payments types, and foreign exchange. It's not enough to just choose a gateway based on APIs, compliance certificates, customer service, and security offerings, although those are extremely important factors.
Developers need not become international finance experts to choose a payment gateway successfully. But a basic awareness of cross border payments can help you assess gateways more diligently and pick a platform that truly increases your revenues and lowers your cost.