Unlocking a world of value: cross-border payments for online marketplaces

Online marketplaces are an incredible driver of economic growth. As intermediary platforms that focus on facilitating trade between buyers and sellers, marketplaces like eBay (Figure 1) extend participation in the global economy at unprecedented levels. While marketplaces can carry similar inventory to ecommerce retailers, their open nature also brings to market unique goods that would otherwise stagnate, like collectibles, specialty products, and other hard-to-find items. In particular, online marketplaces are a great platform for small businesses and entrepreneurs to participate in global trade by eliminating barriers to entry, thus expanding the reach and supporting growth for businesses that would otherwise be systematically undercut by large retailers that can leverage economies of scale.

Figure 1 – eBay by the Numbers

In order to fully deliver on their promise though, online marketplaces need to foster a network of buyers and sellers that can generate a massive flywheel of listings and purchases. Scale is essential to marketplace economics, both to drive sales and to spread out fixed costs. Scale, however, hits a natural cap when marketplaces constrain their users to domestic confines.

Larger markets, like the US or China, have been able to sustain phenomenal growth so far, but even in those cases, growth is slowing relative to ecommerce overall.

The only possible way to drive continued growth is to create a truly global marketplace that knows no physical boundaries – an online venue in which buyers and sellers can participate independently of where they live and where they want to sell. This is easier said than done though, as at a minimum it hinges on three pre-requisites:

• localised shopping experiences and relevant listings;

• international shipping and customs management;

• cross-border payments enablement.

Arguably, enabling cross-border payments is the most complex pre-requisite of the three. Marketplace payments are already more intricate than standard retail sales, as they are comprised of multiple legs: funds-in from a buyer, funds-out to a seller, refunds from sellers to buyers, and fees from sellers and/or buyers. On top of this, cross-border payments need to solve for the added complexity of operating in a space that is at once highly fragmented and highly regulated: as soon as marketplaces exit domestic boundaries, they have to deal with disparate sets of regulations, higher operating costs, and different currencies – and every cross-border corridor added increases this complexity exponentially.

There are three key challenges that marketplaces need to address in order to effectively enable cross-border payments on a global scale (Figure 2):

1. Regulatory compliance: Every country (or group of countries in cases like the European Union) has its own set of licensing and compliance requirements that marketplaces need to address, so every cross-border payment needs to be fully compliant with two sets of regulations instead of just one. If a marketplace decides to scale in a specific country, they will have to establish relations with local regulatory bodies, decide which licenses to apply for, and set up and maintain a legal entity in-country.

2. Operating costs: While a tidal wave of regulations has drastically lowered the cost of accepting payments domestically (for example, the US, the EU, and Australia all have imposed interchange fee caps over the past few years), cross-border payments remain largely unregulated. Every individual cross-border transaction could cost up to 2-3 percentage points more than a domestic transaction to process. Additionally, cross-border transactions are inherently riskier and can increase losses that impact the bottom line.

3. Currency management: There are 180 currencies in the world – it is unthinkable for any marketplace, no matter the size, to manage buyer and seller payments in all of them. Marketplaces need to focus on managing the currencies that have the most pervasiveness and viability for international trade, and build both internal financial infrastructure and customer-facing services to optimise currency conversion and FX risk. While this is not easy, the good news is that customers often recognise the value of currency management services and are willing to pay for them (at a fair price).

Figure 2. Challenges of Cross-Border Payments

These challenges, while not easy to address, can all be solved with the right amount of focus and resources. And if done correctly, opening up cross-border corridors can exponentially accelerate the growth of an online marketplace by scaling the flywheel of buying and selling globally. At eBay, we are committed to enabling ecommerce without borders and generating opportunity for all – as such, we are continuously developing our capabilities to enable cross-border payments effectively for the benefit of our customers. 

This editorial was first published in our Cross-Border Payments and Commerce Report 2019 – 2020, which provides a comprehensive overview of the major trends driving growth in cross-border payments, cross-border commerce, and marketplaces.