Endpoint: The Vexing Question of Cross-Border Commerce

 

If domestic online merchants were to adopt payment alternatives similar to those of their competitors in other countries, they could realize as much as a 60% increase in their business.

 

Rapidly expanding economies overseas represent a rich opportunity for domestic online merchants. Too bad these merchants aren’t equipped with the right payment methods, says Manuel Montero.

 

Manuel Montero is chief executive of Miami Beach, Fla.-based SafetyPay.

 

 

 

Global online retail spending now accounts for hundreds of billions of dollars per year, and that number continues to increase. ComScore data for the fourth quarter of 2010, for example, was up by 11% over the previous year at $43 billion. Not surprisingly, U.S. retailers are evaluating how they can capitalize on this international sales opportunity.

 

What they are discovering, however, is that there is a whole set of challenges that must first be overcome in regard to cross-border transactions. Those who believe they can follow the same business strategy that has worked for them in selling to U.S. consumers will likely not succeed. There are some notable reasons why.

 

Local Payment Habits

 

It is important for American retailers to fully understand that there are distinct differences between domestic online consumers and those abroad. For most consumers on the planet, credit cards are not the preferred method of payment online, even if they are in the U.S. In fact, they account for less than half of all purchases globally. This is true in both the developing markets as well as established economies. Only 24% of Germans, for example, even carry credit cards.

 

Most international consumers prefer instead to pay in accordance with their local habits, primarily through banks, cash transfers, and other forms. This applies to online commerce as well. This presents a significant challenge for many U.S. retailers that have designed their online checkouts around credit card-based transactions only.

 

Those that support the preferences of international consumers as well as domestic ones and implement ways to enable them to purchase goods and services online with their own currency, and in accordance with their own customs, stand to benefit the most from an as yet largely untapped marketplace.

 

As a real-world example, let’s look at the current darling of international emerging market economists, Brazil. It boasts the seventh-largest economy in the world (ahead of countries like Great Britain and France), based on a 2010 gross domestic product of $3.6 trillion. Brazil is just one part of a larger market (Latin America), but its economic growth is set to outpace Europe, Japan, and the United States through the next two years.

 

The Latin American social network Portada recently reported that “in the first two months of 2011, Brazilians spent $2 billion overseas—a 33% increase from the previous year—and the country’s e-commerce numbers are no less impressive. Brazil represents more than half of the region’s retail e-commerce with only 34% of the total Internet users. If all of the above isn’t enough to entice U.S. retailers to jump into the Brazilian e-commerce extravaganza, in March 2011, the local government increased the tax on what Brazilians purchase abroad to almost 7%, which becomes ‘zero percent’ when they purchase products overseas but pay in their local currency from within their own country.”

 

There can be little doubt Brazil represents an ideal market for U.S. online retailers. But Brazilians are representative of many international consumers in that they prefer to make online purchases with their own currency instead of credit cards. Today, millions of Brazilian consumers are purchasing goods online with their own currency through capabilities provided by their own banks. When consumers make online purchases directly from their trusted financial institution, they not only greatly reduce the likelihood of fraud, but also circumvent hefty fees that accompany credit card transactions.

 

Just as U.S. financial institutions have established relationships with individual billers as part of their bill-pay offerings for account holders, international banks have done the same with online retailers. The result is that those banks’ online-banking customers have the ability to securely make online payments directly from their own accounts.

 

To make this happen, online retailers have registered to accept cash payments from their partner banks and then pay a transaction fee for each completed payment. The retailers benefit because they receive their money more quickly and avoid the larger transaction fees associated with traditional credit card payment processing. Banks, in turn, also benefit because they receive a share of that fee and have found a way of effectively monetizing their online-banking platforms.

 

Shut out

 

This model, which is being repeated in country after country around the world, also addresses additional challenges to U.S. merchants.

 

Many domestic online merchants are unable to serve the needs of international consumers who actually do carry credit cards (and card-carrying Americans abroad who wish to purchase online from familiar, U.S.-based retailers) because of a number of roadblocks that inhibit international online commerce.

 

For example, fraud filters put in place by many U.S. merchants actually prohibit online transactions tied to any overseas billing address. While this may stop some instances of online fraud, it has the unwanted effect of turning away legitimate online consumers.

 

The threat of fraud also impacts consumers’ behavior in that they may have a desire to purchase goods online, and have the resources to do so, but are hesitant to disclose personal information to an overseas merchant or third-party payment facilitator. As a result, these consumers are effectively cut out of the international online marketplace as well.

 

If domestic online merchants were to adopt payment alternatives similar to those of their competitors in other countries, they could realize as much as a 60% increase in their business by opening up the marketplace to international consumers. As the domestic economy continues to limp along, the only question is how much longer U.S. merchants can afford to ignore the opportunities abroad.