The days when international wire transfers were actually made over telegraph lines seem like ancient history in light of today’s sophisticated global financial networks. Our ability to move and exchange vast sums of dollars, yuan, and dozens of other currencies in minutes has become essential to our super-powered system of e-commerce.
Despite how freely money flows, however, merchants can face daunting barriers to enter into the international payments system. It’s a big reason why less than 1 percent of American businesses sell their wares overseas. To help make sense of the current state of the ever-changing global payments ecosystem, we’ve partnered with Braintree to highlight the obstacles and innovations companies should consider as they look to take business beyond their borders.
Doing Your Homework, Part I: One Payment Approach Fits Some, Not All
One major hurdle for merchants entering the exports game is the lack of a universal standard for cross-border payments. If a U.S.-based seller seeking to expand into Kenya can only process credit cards, she’ll be in for an unpleasant surprise upon finding that 70 percent of the country makes payments through a mobile text-messaging service.
A shifting latticework of regional systems also places a burden on banks and card networks, as described in a recent ModusLink report, as they attempt to ensure that financial information doesn’t fall through the cracks. That extra work doesn’t come cheap.
“When I think about trying to [make payments] cross-border, it comes down to risk,” Brendan Miller of Forrester Research says. “Transactions are expensive and more complicated because of differing regulations, currencies, and messaging formats between banks and different countries.”
Working with third-party payment service providers (PSPs) like PayPal and China’s Alipay can help to smooth the kinks in this process for sellers and buyers alike. “The ability to basically just turn on a new currency at the flip of a switch and start operating there — things like that are hugely important,” says Aunkur Arya, SVP of Mobile at Braintree.
Doing Your Homework, Part II: Taxes And Regulations
After a merchant determines the proper currency and mode of payment, there are also taxes to consider. In the 28-member-state EU, for example, sellers of certain digital goods such as media, software, and Web hosting must pay the VAT of the country where the consumer lives. There’s no minimum sales threshold, so this additional administration expense disproportionately affects small businesses, dissuading some from selling in Europe at all.
Byzantine regulatory frameworks can be just as much of a hassle for exporting merchants. Depending on where in the world their products are landing, they may have to pay close attention to what captures headlines in the local papers. For instance, Russia was recently spurred by privacy concerns to implement a new law requiring companies that process the personal data of its citizens to store this information on local Russian servers.
For a time, the only way to tackle this issue would have been to hire local experts to guide a seller through the regulatory quirks of her chosen marketplace. But, increasingly, businesses are innovating digital solutions. For sellers hoping to break into the U.S. market, third-party platforms like TaxJar calculate sales tax by state, seamlessly integrating with shopping cart software. Similar products will soon crop up in other global export markets.
Extra Credit: The Market-Disrupting Potential Of The Blockchain
In the face of these challenges, help may be coming from an unlikely source: the controversial bitcoin. Or rather, the technology behind the cryptocurrency.
Insiders like Miller believe the blockchain could solve one of the biggest problems inherent in the sprawling architecture of international banking: risk. The need to place one’s faith in many different operators is what leads to high fees and time-consuming checks that can gum up the process of moving money.
Trust is a real issue, which is why alleged bitcoin creator Satoshi Nakamoto sought to solve the problem simply by requiring none at all.
A fraudster can cheat an online payments system by engaging in a kind of counterfeit 2.0 known as double spending. Since electronic files are easily copied, she can buy Product A (let’s say a chicken), then immediately reuse the digital funds to purchase Product B (let’s say an egg) before either transaction can be authenticated.
But the blockchain protects against this scenario, requiring the computers in a network to collectively order each transaction through proof-of-work — put another way, the system as a whole has to agree on which came first, the chicken or the egg. The end result is a distributed public ledger in which every transaction made is essentially set in digital stone.
The blockchain’s potential to eliminate costly points of failure in a payments infrastructure has sparked a scramble to innovate on the technology. And while no one has quite cracked the code yet, Miller says, the advantages for international online sellers could be big: reduced cross-border transaction fees, as well as a greater ability to offer customers attractive purchasing solutions like gift cards, which normally might be too fraud-prone for smaller businesses to use.
Together with payment service providers and virtual regulatory consultants, this technology could round out an online merchant’s arsenal, enabling her to effortlessly reach customers in every corner of the globe.
At Braintree, security is of paramount importance. The global online payment processor provides a secure environment that goes above and beyond industry security standards and guidelines. For more information, click here.