According to eMarketer (Jan 2014), emerging markets around the globe are driving a significant amount of growth for digital businesses. In 2014, consumers in Asia-Pacific, led by China spent more on e-commerce purchases than those in North America, for the very first time. As broadband connectivity and connected devices have become readily available in these countries, there is a significant opportunity for global digital monetization. According to eMarketer, global B2C e-commerce is forecasted to reach $1.7T in 2015 driven by growth in emerging markets including Asia-Pacific, Latin America and India.
This growth in emerging markets presents a significant opportunity for digital merchants in underserved markets, but seizing the opportunity is a highly complex undertaking. There are a number of pain points in the international payments market, and currency is just the tip of the iceberg. The process of calculating, collecting and remitting VAT, sales tax and withholding tax can be extraordinarily complex. Laws and compliance at both the local and national level, in addition to risk of fraud, make accepting payments troublesome in many regions.
We began supporting global payments initially for the online games – an industry that was the catalyst for digital payments on the scale we see today. Since 2007 we’ve learnt a great deal about the complexities of managing global payments, initially for the online games industry and now for a host of digital merchants such as Samsung and Yahoo! If you’re a growing company looking to take advantage of the opportunity in emerging markets, but are worried about the hurdles involved, we can provide some insights on the steps you will need to take.
Integration complexity with multiple payment providers
While some payment providers are international, many are often local providers and relatively small. To do business with these payment providers – and we contract with more than seventy-five providers globally – you’ll need to negotiate rates, sign contracts, figure out a remittance process, integrate code, address security concerns, analyze fraud patterns, optimize user interfaces and test everything end-to-end. Something as simple as running a live test transaction can turn out to be difficult – you might need a bank account in that country or a working phone number to process a live transaction.
Integration with payments providers can come in a variety of ‘flavors’. Some may allow you to host payment forms and pass information to them via their API, some provide forms that can be embedded into your paywall, while in other cases you have to redirect to their site for the customer to enter information. Of course, this can create great challenges in user experience design, and most importantly conversion rate. We spend a lot of time working on building and optimizing each integration.
Once the payment method is live, you need to ensure that updates are monitored, as well as managing fraud and handling customer service inquiries. It’s critical to have a risk mitigation team who knows how to configure fraud rules based on the expected price points and local fraud patterns for each method and each territory. For example, prepaid cards usually have very little fraud, and mobile SMS methods can have very high levels of friendly fraud.
The final challenge is collecting the correct amount of money from each provider, in the right currencies. Local bank accounts will likely need to be established with local entities to receive funds. Managing this can also be challenging as some integrations have API’s that can be called to do a reconciliation, while others post files nightly, or send us reports via email.
Local regulation and customs compliance
To collect money you usually need to have local business entities or bank accounts. There can be other regulations as well. Some types of goods are banned in certain countries; U.S. companies must comply with OFAC regulations, which makes it illegal to do business with certain countries, organizations and/or individuals. Europe has strict privacy rules. Japan requires you to keep a bank account with a balance to cover any stored value in your system.
Alongside laws, local customs is a large consideration. In most countries VAT tax is shown as included in the price of the goods, but this is generally not a legal requirement, just like sales tax can be included in the price in the U.S., but it is usually added on. In addition, there are certain ‘emotionally safe’ price points. In the U.S., it is common to sell a $50 item for $49.99. In Japan, consumers would rather see a price for 50,000 Yen than one for 49,999 Yen. These are local customs, and displaying prices that do not match consumer expectations reduces conversion rate.
If you’re a U.S. company looking to do business in India and Indonesia for example, you may begin by accepting global credit cards like Visa. However, many of your customers don’t have credit cards, so your sales will be limited. To accept local payment methods you need to establish a local business entity and pay taxes. It’s of course a lot of work but also opens up a potentially lucrative market by allowing you to accept the popular payment methods.
Tax collecting and remittance
Now we all know that dealing with taxes each year in the U.S. is painful enough. When you begin working in multiple countries and markets, understanding tax collection and remittance is critical. Not only in the country that you operate out of, but often in other countries as well. As mentioned, you may need to do this to get the local processors to work with you (they are subject to their government’s laws, even if you aren’t). Some processors are required to collect and remit tax on your behalf. You need to know which ones, though, or else you can either over or under pay your tax obligation.
In the U.S., taxes can vary by state or even city, so optimizing your tax nexus is important. Until 2015 you could optimize your EU VAT by having a business entity in Luxembourg, though that changed in 2015 and now VAT must be calculated based on the location of the buyer. In some countries taxes are only charged when the customer earns over a certain amount, and often tax rates vary depending on what type of goods or services you are selling.
Optimization of currency conversion and flow of funds
When you are moving money between countries, there is usually a currency conversion required. Banks involved will generally select a rate based on an agreed upon index. If a company can maintain balances in local currencies, then they can chose to convert into their desired currency when exchange rates are optimal. Conversions are often complicated and can cause a discrepancy between the amount the consumer paid and the amount that you receive. A charge can go through more than one conversion before it reaches your bank account, increasing forex risk.
It is possible to reach agreements guaranteeing certain FX rates, so that the conversions into/out of local currency match. This pushes the forex risk to the payment method provider, so they will not always agree to that, or they may charge an additional fee. Finding a good balance is key. You may decide to simply charge in USD, or ask your bank to do these conversions for you. That pushes the forex to either the payment method provider or your bank, both of which will generally charge a fee for this, as well as guarantee that the conversions work in their favor.
Unified financial reporting
If you’re a global business, accepting 50+ local payment methods in various countries, and getting individual remittance from each one – this can bring with it a host of financial reports. Some are excel, PDF, or XML downloaded from their site. The terminology and details contained in the reports are all different, and the rates and fees are based on different criteria.
Without unified financial reporting it can be very difficult to understand how good or bad your business is doing. We’d recommend having a treasury specialist to looks after this as it can be very complex, yet critical for sound business operations. We have built a reporting tool that tells customers how many transactions they have done, how much money they earned, and which transactions they have been paid for. You can also dig into some additional metrics, such as how many returns and chargebacks took place, how much tax is being paid, or what methods or countries are most popular.
Understanding and managing fraud at a global level
At an individual level, fraud is annoying, causes a temporary deficit in your funds and takes up a lot of your time to reconcile. Within business operations, fraud can also be a regular occurrence but when you are working across multiple countries, there are even more complexities. Fraud comes in many forms – stolen card numbers, children using their parents’ accounts without permission, people trying to get their money back after using a service.
Fraud patterns can also vary by region. In Brazil local laws make it virtually impossible for a merchant to win a representment on a ‘card not present’ transaction, so there is a higher than average rate of chargebacks, often after a customer has made many purchases. Criminals have begun to use online purchases as a way to test stolen card numbers before going to brick-and-mortar stores to purchase physical goods. In some countries, sophisticated rings of fraudsters use proxies to hide their identity while they attempt to commit fraudulent activity. In some south-east Asian countries where prepaid cards are popular, hacker rings will try repeatedly to make purchases using made up card numbers, hoping to stumble across a legitimate one.
The impact of fraud can be lost revenue, upset customers, incur penalties from card associations or even losing your ability to process certain payment methods. Fraud specialists need to be constantly vigilant and must recognize patterns of fraudulent behavior before it gets out of hand, without blocking legitimate transactions. They must work with payment providers when exploits are discovered, to ensure they cannot be repeated. And they must be prepared to investigate chargebacks and dispute (where possible) attempts at ‘friendly fraud’, or buyer’s remorse.
The opportunity in emerging markets is huge and the opportunity in frontier markets may be even greater. According to a recent Forbes article, if you are savvy enough to invest in the right frontier market, before it becomes an emerging market, you can expect 10 percent growth rates as well as low entry valuations. After taking the plunge on a new market, the real challenge is getting the end-to-end process to work smoothly. If you don’t have in-house experts that can take this on for you, it is worth looking at external specialists who have the necessary knowledge, network and scale to guide you through these and other potential issues. This can mean the difference between success and eternal frustration.