The purpose of this article is to familiarize merchants and other merchant services industry players with the key issues of accepting credit card payments in different currencies.
With the growth of online business and the advance of the general process of globalization, there are more and more businesses that are servicing customers worldwide. Particularly, as online stores expand, they run into various currency-related issues at two levels:
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- When a payment is made by a customer from a different country
- When they have a supplier from a different country
Example
While the easiest way for the bookstore would be to accept all payments in US dollars, the approach has several disadvantages:
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- When customers from outside the US visit the online store, they don’t know the exact price of any item in their local currency, because all the books are priced in US dollars. Conversion rate is going to depend on the bank of the customer, so the customer can never really know what the final price is going to be. On top of that, some banks use the practice of surcharging additional fees on foreign purchases.
- Once the store collects all the payments and they are funded into the US bank account, the store has to pay its suppliers (publishing houses, etc). If suppliers are located in different currency zone, the bookstore has to do currency conversion. This results in certain problems, as currencies tend to fluctuate (and causes significant fluctuations in profit margin).
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There are two solutions that are generally utilized to solve the abovementioned problems.
The first solution is to do authorization in the local currency (for instance, British pounds) and do settlement in the primary currency (US dollars in the abovementioned example).
The advantage of this solution is that the business can price its items in the local currency. A book can cost 10 US dollars in the USA, 10 Canadian dollars in Canada and 8 pounds in Britain. Under this approach a customer can know the exact price and not pay any additional banking fees, because the transaction is going to take place in the local currency of the customer.
The disadvantages of this solution are as follows.
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- In such cases transactions of this type are going to involve additional costs for the merchant because of various cross-border assessments charged by card associations.
- The approach does not solve the problem with the suppliers. While paying its suppliers (a bookstore is a retail business, purchasing products from suppliers on a regular basis) the company still has to do currency conversion.
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The second solution involves doing authorization and settlement within the local currency (both authorization and settlement in pounds).
Handling card-present transactions in several countries is an extremely difficult task. Handling card-not-present transactions in several countries is less problematic, but it is still a challenge.
Under any scenario (card-present or CNP), the only way to do transaction settlement in the local currency is to have a bank account in this currency. In many cases local regulations require companies to open this bank account within a local bank, so a multi-currency account might nod be an option. For example, a UK merchant service provider (MSP) might not be willing to use a Canadian-issued bank account even if it is in pounds. Consequently, the company might be required to have either a local bank account and\or a business presence (tax ID) in the country.
The immediate challenge resulting from these requirements is the need to manage and reconcile multiple accounts. Another challenge is that, due to the structure of the market, the company might be required to deal with different merchant service providers. While there are merchant service providers available, that could handle multiple countries on the same system, they are likely to charge additional premiums for their service. For example, a business can use Stripe or PayPal, but these MSPs charge around 3% plus $0.25 a transaction, making the process very expensive (especially on large volumes of transactions, or in Europe where most cards are EMV-type cards and standard interchange is generally under 1%).
Due to complexity of transaction settlement in multiple currencies, small and medium-size businesses might be better off doing authorization in specific local currency, and settlement – in a unified currency. In those cases when they need to pay suppliers (say, once a month), they can utilize special services, such as Currency Cloud, XE, XOOM, Amex FX, and others. These services allow businesses to do wires (bank transfers) involving currency conversion without having to pay international wire fees, as well as “lock” exchange rates or at least reduce the impact of currency fluctuations.
Such services are usually offered by large companies with business presence in many countries, so that the funds are transferred within one organization (such as Amex), which charges only a fixed interchange rate established at the market for a current day (say, about 1.5-2%). Under such an arrangement wire fees are either not charged or significantly reduced, depending on transaction volume.
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