Processing transactions from other countries can be a struggle for international businesses. Foreign merchants often run into a variety of obstacles when trying to accept payments from American consumers, and vice versa. Here, we explore some of those challenges, and the three most common strategies for overcoming them.
Common Obstacles for International Payment Processing
Foreign businesses have a ton of hurdles to overcome when trying to accept overseas payments. These issues can cause major heartache as businesses try to expand while remaining profitable. Whether the merchant is overseas trying to accept American payments, or the other way around, it can be a challenge.
Here are some of the most common payment processing troubles for foreign businesses.
- Finding a merchant account – This is the first thing you need to do when trying to setup credit card processing for your business. You can’t accept payments without it. However, if you’re trying to accept payments in another country, you may need a completely new merchant account and processing company. This can be a major hurdle because many merchant account providers (banking institutions) won’t grant accounts to foreign entities.
2. Settling for offshore solutions – As a result of issue #1, many foreign merchants settle for options in the United States, instead of their home country. These solutions almost always come with higher fees and more hoops to jump through. In most cases, the only option is an aggregated or sponsored merchant account that provides minimal service and unreliable payouts. These complications can deter small businesses from attempting to expand.
3. High banking costs – As previously mentioned, most US banks will charge much higher fees to offshore merchants than to local businesses. The processing fees, monthly account fees, and international exchange fees all contribute to a higher cost of business for the merchant. Depending on the type of business, this could make the process financially prohibitive.
4. High wire fees – Sometimes merchants will try to process transactions via bank wire, instead of credit cards. This is an effort to decrease the banking costs associated with foreign credit card processing. However, this often results in high wire transfers that can be equal to the amount they would pay by processing card payments.
5. Holds placed on revenues – Regardless of the type of account established, there are generally some holds placed on transactions. These holds can last anywhere from 3 business days to several weeks. This time is typically used to verify the transaction and protect against fraudulent activity, but they are still inconvenient. This poses another difficulty for businesses because they cannot plan on their revenue hitting their account in a timely manner.
6. Inability to secure a US bank account – Foreign merchants often experience difficulty in securing a bank account in the United States. If they choose to setup an American account, they typically have to do a lot more than that before a US bank will grant it to them. They often find themselves in need of a local signer or local entity to secure these accounts.
7. Higher risk of chargebacks – As a foreign merchant, it can be difficult to offer great customer service to people in the US. Products often get delayed during the delivery process, or communication barriers may exist between the customer and the merchant. As a result, many consumers will ask their bank to process chargebacks. There is already a high risk of chargebacks when processing card payments. Being a foreign merchant selling to customers in the US can make that process even more painful.
This may sound like a huge list of problems, but it’s obviously not impossible to do business internationally. Many companies achieve this with no issues whatsoever. But how do they do it?
Most Common Strategies for Foreign Payment Processing
Foreign merchants who are successful in the United States have found a way to manage the system and make it work for them. Here are the three most common strategies that businesses use to overcome these obstacles.
Strategy #1: Like-for-Like Processing
Some merchants opt to secure a US entity that allows them to get a merchant account. When they do this, the entity can sign banking documents as an American entity and secure banking services such as:
- Merchant accounts
- Payment gateways
- Wire transfers
- Local credit and debit cards
In addition to securing these services, the foreign merchant will also conduct business in USD. This allows them to avoid foreign exchange fees and other high costs associated with doing business internationally. The main drawback to this strategy is that it can be expensive to setup an entity in a foreign country. It can also be difficult to integrate technology and other systems when dealing in another country.
Strategy #2: Multi-Currency Processing Account
In this model, a foreign merchant can setup an account that allows them to do business in multiple currencies. For example, they may be able to charge consumers in USD, while accepting the money in their own local currency. This is easy to setup if the current payment processor offers this type of account. If they don’t, the merchant may have to find a new provider who does.
Some of the drawbacks to this model include higher fees. The merchant will be required to pay the foreign exchange fees and cross-border fees for each transaction. This can be a deterrent for many small businesses.
Strategy #3: Setup a Local Account and Accept Only Local Currency
This is the easiest thing to do, but also the most expensive for the customer. If a foreign merchant decides to simply deal in their own currency and with their own bank, their customers will be expected
to pay much higher fees. Consumers in the United States will be able to process card transactions online through the merchant’s gateway, but they will be expected to pay all the foreign exchange fees and cross-border fees. As a result of this, many customers will simply abandon their cart because they don’t want to pay the fees.
Additionally, foreign merchants will experience a higher rate of declines. US banks are more likely to decline international transactions as part of their fraud protection system.
It’s not impossible for foreign merchants to accept payments from American consumers, but it can be more complicated. The strategies listed above are the most commonly used, but they aren’t the only ones out there. International businesses should conduct their due diligence before selecting a strategy for expanding into the US market.