A World To Conquer

Despite obstacles, payment processors and fintechs increasingly are looking at cross-border e-commerce for high-growth opportunities.

Go global. That’s the credo an increasing number of payment processors and financial-technology firms subscribe to as technology transforms cross-border commerce from yesterday’s luxury into an attainable option for consumers today.

Researcher Talie Baker, a senior analyst at Boston-based Aite Group LLC, remembers as a child taking a family vacation to Mexico. Her parents bought some furniture there and had it shipped back home to the U.S. They paid for the furniture in Mexico, but to their dismay also had to pay collect on delivery when it arrived.

Such a situation is unthinkable today. Certainly technology has played a huge role in spurring cross-border commerce, but along the way, something else has changed—people’s confidence that an international sale will go through without a hitch.

“People have more … ‘trust’ is the word,” says Baker. “If I order something from another country, I’m actually going to get it.”

Cross-border commerce is one of the fastest-growing niches in electronic payments. In a report released last December, Aite pegged the value of cross-border e-commerce in the U.S., Canada, and three small jurisdictions off North America at $53.6 billion. With a compound annual growth rate in the 18% range, Aite predicts what it calls Northern America cross-border e-commerce will hit $122.6 billion in 2020.

Visa Inc. and Mastercard Inc. are seeing respectable increases in cross-border volumes, too. The value of their cross-border payments in the past several years rose about 8% annually when adjusted for currency fluctuations. In the quarter ended June 30, Visa said its cross-border volume, converted into U.S. dollars and including its 2016 acquisition of Visa Europe, increased 11% over the year-earlier period. Mastercard said its equivalent volume grew 10%.

‘Democratizing Access’

The core reason for this boom is the Internet, a natively borderless communications network. In the 1990s, the Internet gave rise to online retailers such as Amazon.com Inc., now within striking distance for challenging Wal-Mart Stores Inc. as the world’s largest retailer.

More recently, the maturing Internet spawned cloud-based technology and related systems that enable merchants to off-load expensive in-house payment and data-storage systems as well as engage in worldwide commerce.

“The growth of digital commerce … ends up kind of democratizing access and reducing friction and barriers,” says Scott Galit, chief executive of Payoneer Inc., a New York City-based international payment-services provider. “The traditional constraints around commerce start to fall.”

Electronic communications, however, are not the only fuel powering the cross-border e-commerce boom. An essential element is the massive drop in transportation costs made possible by containerization.

Invented in 1956, containers are much more efficient and faster to load and unload from ships, trains, and trucks than mixed-sized crates and loose cargo.

As chronicled by Marc Levinson in his seminal 2006 book “The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger,” it took decades for containers to become standardized and adopted globally. But they eventually made it possible for distant countries with low labor costs, such as China, to become major suppliers of consumer goods to the U.S. Today, the newest container ships can carry as many as 18,000 20-foot-equivalent-unit (TEU) containers.

“Logistics are making it possible now,” says Aite’s Baker.

Another important element lifting cross-border e-commerce is rising world incomes, though that growth admittedly is highly uneven across countries.

“Prosperity is going up,” says Pete Ellis, senior vice president, Americas, for Long Beach, N.Y.-based multi-currency processor Planet Payment Inc., which works with such big acquirers and processors as China’s UnionPay International, U.S.-based Global Payments, Canada’s Moneris, and Cielo in Brazil. “You’re going to see more people traveling and seeing more of the world.”

Political Wrangling

The cross-border e-commerce picture is by no means entirely rosy. The clearest and most present danger is fraud. The latest True Cost of Fraud study from LexisNexis Risk Solutions, an Alpharetta, Ga.-based data-analytics and risk-management firm, found that total fraud-related costs faced by some international merchants are 2.6 times those suffered by merchants selling only domestically.

Overall, the 2017 study found that fraud as a percentage of the revenues reported by the 653 retailer risk-control executives surveyed was 1.58%, up from 1.47% in 2016. As recently as 2013, fraud was only 0.51% of revenues.

The study, first done in 2009, is unique in that it estimates total fraud-related costs beyond straight fraud losses, including expenses for replacing fraudulently-obtained goods or services, and other customer-related costs. This so-called fraud multiplier increased to $2.77 this year for every dollar of actual fraud loss, up from $2.40 in 2016 and $2.23 in 2015.

Those numbers are for the study group as a whole. Some merchant segments had much worse multipliers. Large merchants—those with $50 million or more in annual revenues—that sell both digital and physical goods internationally had a multiplier of $3.66, Kimberly Sutherland, senior director of fraud and identity strategy at LexisNexis Risk Solutions, said in May at the CNP Expo conference in Orlando, Fla.

By comparison, large merchants that sell digital and physical goods just in the U.S. had a multiplier of only $1.39.

Losses sustained by big international retailers jumped substantially in the past year in part due to so-called bot attacks, in which hackers assemble armies of computers for fraudulent purposes, and “a lot of concerns around digital gift cards,” said Sutherland. Gift cards are popular items for criminals to buy with stolen credit or debit card credentials because they can be easily converted to cash.

But if merchants go too far in trying to stamp out fraud, they run the risk of not authorizing legitimate transactions.

“Right now too many merchants are declining a disproportionate amount of international transactions, or not selling internationally at all, because they don’t know how to manage the risk,” security analyst Julie Conroy, research director at Aite Group, says by email. “Better understanding of the customer’s digital identity and better analytics are required to optimize the growing cross-border e-commerce opportunity.”

Yet another risk is regulation. Regulators’ increasingly stringent enforcement of know-your-customer and related rules meant to crimp terrorist financing and the illegal drug trade have reduced correspondent banking, thereby cutting remittance options in some countries. But payments providers aren’t complaining much, at least not yet, about impediments to cross-border payments for goods and services.

A third, somewhat amorphous threat is the increasing skepticism among politicians and the public in some Western countries about the benefits of world trade, as evidenced by the 2016 election of Donald Trump, with his “America First” agenda, as president, and the United Kingdom’s pending withdrawal from the European Union.

But treaty negotiations and political wrangling over trade take considerable time, so whether the protectionist threat is major or minor danger to payments players is as yet unknown.

“That’s a good question,” says Baker. “We’re going to have to wait and see how it plays out.”

‘A Ton of Work’

With the flags mostly green, many cross-border payments providers are pursuing small and mid-size businesses (SMBs) that until recently found the barriers to international trade too high.

One of those providers is online payments leader PayPal Holdings Inc., which in July brought its Global Sellers program to the U.S. after trying it out for a year in the United Kingdom and Germany.

Global Sellers enables PayPal merchants to convert their online storefronts into the languages of international customers and for customers to see items priced in their local currency. The conversion services come from France-based Webinterpret S.A.S. The program works on the Shopify, Magento, WooCommerce, and BigCommerce e-commerce platforms.

U.S. merchants don’t have to worry about international shipping, which is paid for by buyers. All they have to do is send items to a domestic warehouse managed by Webinterpret, which takes over shipping, including customs procedures, from there, according to Melissa O’Malley, director, global initiatives, at San Jose, Calif.-based PayPal.

“That’s a ton of work, taking that piece out of it makes it a lot easier,” O’Malley says.

Webinterpret updates merchants’ sites in real time, so if a merchant moves inventory quickly, the site changes along with the turnover, according to O’Malley.

PayPal, which has 17 million merchants worldwide, says 106 million of its active consumer accounts made at least one cross-border transaction in 2016. According to O’Malley, PayPal’s cross-border trade volume is up 41% in the past two years.

The company won’t disclose how many merchants have signed up for Global Sellers since it came to the U.S., but O’Malley is hopeful. She adds that large merchants, not just SMBs, can use it.

“I’m really looking forward to see how it scales,” she says. “It’s incremental revenue for the merchant, and incremental revenues for us.”

Also seeking more cross-border action is Atlanta-based First Data Corp., the biggest third-party payment processor. First Data already has a sizable overseas business. Its international merchant transaction volume grew 21% year-over-year in 2016 to $8.25 billion, while North American volume grew 7% to $46.4 billion.

In June, First Data announced its Local Payments service, which through a single interface will give online merchants and their customers access to 195 local payment options when fully implemented.

First Data expects the expanded options will spur transaction volume. The company supported about 25 payment types before Local Payments’ launch, “but the experience wasn’t really as joined up optimally as it could have been,” says Shane Fitzpatrick, global head of e-commerce.

He adds that on the back end, “we have developed a single settlement experience” as well as a reporting portal for merchants.

Consumers and merchants, says Fitzpatrick, are becoming increasingly interested in digital payments and less interested in cash. “There’s an appetite around the world for that,” he says.

‘Cross Border for Banks’

The falling barriers to cross-border payments are producing new opportunities not just for big, established payments players such as PayPal and First Data, but also for a host of newer specialty firms and fintechs.

One such company is Toronto-based nanopay Corp., purveyor of the MintChip digital-wallet system that it is testing in Canada and India. Nanopay acquired the original MintChip technology early last year from the Royal Canadian Mint, which developed it as a digital substitute for fiat currency.

MintChip bears some similarities to cryptocurrencies such as Bitcoin, including real-time settlements and low expenses, but with important differences. Unlike many of the new currencies that celebrate their decentralized, unregulated natures, nanopay, which enables consumers to pay through their smart phones, isn’t looking to bypass key players in the existing financial system.

“It is bank-friendly, regulator-friendly, and central-bank-friendly, which really differentiates us,” says nanopay founder and chief executive Laurence Cooke. “Our solution is ‘cross border for banks’… it’s designed to de-risk the transaction.”

In the payment-system improvement project that it launched several years ago, the U.S. Federal Reserve recognized the unexploited opportunities in cross-border e-commerce. Cross-border service, including systems based on variants of the new distributed-ledger technology, was an element in some of the 16 proposals companies submitted to the Fed’s Faster Payments Task Force, a major effort of the improvement project.

Assessors from consulting firm McKinsey & Co., which the Fed hired to rate the proposals on 36 criteria, gave nanopay an “effective” for cross-border utility, and nanopay tied for third among the 16 proposers for overall effectiveness (“The Sweet 16,” September), according to a ranking worked out by Digital Transactions. Another proposal, from Ripple Labs Inc., garnered a “very effective” from the reviewers for cross-border utility. Ripple, however, came in 14th in overall effectiveness.

In April, the big Spanish bank BBVA announced that it had completed what it says is the first commercial money transfer across borders using blockchain technology. The transfer, which relied on newly developed distributed-ledger technology from San Francisco-based Ripple, took place between Mexico and Spain using what the bank called “BBVA infrastructure.”

The blockchain, which serves as the backbone of Bitcoin and other cryptocurrencies, is a digital ledger that allows users to record and track transactions in real time. The cross-border remittance involved what BBVA called “real money” and cleared in a matter of seconds, compared to what the bank said is the typical clearing time of up to four days for international transactions.

BBVA said Ripple’s technology will offer benefits beyond swifter clearing times. It will also allow clients to get a clearer view of transaction costs and track payment status. “The application, developed with support from Ripple’s solution, is a clear indicator of how BBVA’s international payments service could evolve in the future,” BBVA said in a press release.

‘More And More Activity’

Business-to-business cross-border payments, including those relying on distributed-ledger technology, could be big winners as faster-payment systems emerge, according to consultant George Warfel, general manager of fintech and payments at Haddon Hill Group in Oakland, Calif. Warfel, also a Digital Transactions columnist and a member of the Fed’s Faster Payments Task Force, points to letters of credit, which can take hours if not days to settle, and are used in such transactions as shipments by ocean freighter.

“Applying technology to speed up letters of credit has a very strong business case,” Warfel says by email. “Simply the harboring fees charged while a ship awaits clearance of the goods in transport vs. the letter of credit’s documentation of what the payment is being made for could recoup the necessary investment several-fold.”

One fintech pursuing cross-border B2B payments is Payoneer, which works with large and midsize firms that pay suppliers. These suppliers, which CEO Galit says number in the millions, include photographers working on behalf Getty Images, or freelance software developers, graphic artists, finance professionals and others seeking work through such sites as freelancer.com and toptal.com.

“We connect a whole bunch of ways for a payer to pay and a whole bunch of ways for a seller to get paid,” says Galit. “We’re connected into over a hundred local clearing systems around the world.”

Indeed, it is the increasing number of connections by consumers into the international economy that is fueling the rise of cross-border payments, a trend that seems likely to continue despite occasional economic and political jolts.

“There’s more and more activity coming from more and more places,” says Galit.