Why global merchants need to think local: the top 3 challenges of international payments

In October 2021, merchants across Europe saw dramatic increases to their international payment fees, with CMSPI estimates pointing to additional annual costs of over EUR 168 million. The reason? The re-classification of transactions between the UK and the EU as ‘inter-regional’ following Brexit.

For multinational merchants, the news demonstrated just how important – and costly – cross-border payments can be. But there’s far more to international payments than their fees. In this article, CMSPI breaks down the top 3 challenges of handling international payments, asking how European merchants can make the most of their global volumes.

1. Cross-border costs

Multinational merchants know all too well that payments can become increasingly costly and complex once they start to traverse borders. This is especially so in Europe, where the Interchange Fee Regulation covers both domestic and intra-EEA transactions, but leaves ‘inter-regional’ transactions out of scope. Instead, those payments fall under separate agreements with the global card schemes, which limit interchange fees for online payments to 1.15% and 1.5% for debit and credit cards, respectively.

That’s more than four times the cost of the same payment within the EEA.

These huge fee discrepancies add significant complexity for merchants when calculating their true cost of acceptance. But they’re only the beginning; beyond higher costs, multinational merchants must also contend with FX considerations, alternative products such as Dynamic Currency Conversion, and increasingly difficult reconciliation. Especially as many newly-online retailers get their first taste of international traffic, each additional factor makes it even harder to ensure they’re being charged correctly.

Today, the problem is only getting worse. CMSPI estimates that the October reclassification of the UK as an ‘inter-regional’ market could cost merchants over EUR 168 million in additional card fees every year. The changes didn’t just affect interchange, either. 

There were also reported increases to scheme fees, as well as the removal of returned interchange on some refunded transactions between the UK and the EEA. Understandably, the decision received widespread press attention, but it was only possible because of pre-existing complexities in the fees that multinational merchants pay every day.

2. Local vs multinational acquiring: a balancing act

Although important, fees are only one element of the cross-border payments equation. They must fit into a broader payments optimisation strategy – one which brings a merchant’s whole international acquiring estate into scope.

Historically, many multinational merchants have opted for a single acquiring partner, allowing them a host of benefits from consolidated reporting to greater volumes with which to negotiate. For others, driving the greatest value means contracting with multiple acquirers in different markets. These complex arrangements can bring value by lowering costs with domestic issuer-acquirers or supporting local teams with language expertise in key markets.

Local acquiring can have unseen benefits in getting good customers through the checkout, too. In fact, CMSPI often finds that merchants see higher transaction approval rates when payments are processed locally due to stronger connections with domestic issuing banks. The ultimate decision is a balancing act, but it’s one that merchants need to navigate strategically, utilising expertise in their core markets to ensure that they are not losing out relative to their domestic counterparts. 

3. Payment method localisation 

Although processing is important, transaction success can start even before the consumer has chosen to pay. That’s because customers in different markets expect different payment methods at the checkout, and many will turn away in the absence of their preferred option. 

Even within Europe, the variation is stark. In the Netherlands, for example, bank transfers were reported to make up around 60% of ecommerce payments in 2020, owing largely to the prominence of the domestic iDEAL scheme. In the same year, Sweden – home of Klarna – saw 23% of ecommerce payments through Buy Now, Pay Later (BNPL), making it by far the most popular method in the market. 

Keeping up with these diverse consumer bases is about more than integrating the payment methods locals expect. It also means building a strategy for direct negotiation with domestic solution providers, as well as accessing crucial infrastructure such as domestic card schemes, which have the potential to drive significant cost savings. Many of these local payment methods are inaccessible without a domestic acquirer, and merchants need to ensure they are choosing the best route – be that direct or otherwise – to build these relationships.

Reaping the benefits of cross-border payments 

For any merchant handling cross-border payments, the first step is ensuring they’re being charged correctly. Regularly auditing your rates – particularly in the face of dramatic changes such as those in October 2021 – is crucial as costs grow increasingly nuanced by the market. 

But optimising international payments isn’t all about fearing the latest fee reclassification. In fact, there are huge gains to be made by global merchants with the expertise to think locally. These range from driving competition through domestic card schemes, to taking advantage of one country’s local payment methods and boosting customer conversion. Only those able to do both will be able to compete at the domestic level, offering the solutions their customers expect without compromise.

This editorial was first published in our Cross-Border Payments and Ecommerce Report 2021–2022, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally. 

About Martha Southall

An Economist at CMSPI as part of its ‘Insights’ team, Martha’s focus is tracking payments market trends, as well as reporting on emerging payments issues and regulatory changes.

About CMSPI

At CMSPI, our payments experts provide advisory services and powerful analytics. Our ultimate goal? Supporting a more innovative and productive payments ecosystem. For hundreds of clients across the globe, our insights help improve performance and create positive change.