Eric Christensen is senior director of Global Payments at Digital River.
Imagine that you lead a rapidly growing national company, and you are ready to take your products to foreign markets. Your goal is to launch a webstore that will allow you to drive new revenue, acquire local customers, and win market share from competitors. To succeed, you will have to assimilate to local commerce.
This process of globalizing yet localizing—sometimes termed ‘glocalization’—will require your organization to overcome a wide range of commerce challenges. In this article, we present some of the challenges of building an international online payments program by exploring the three stages of a typical expansion.
Culture and Payment Methods
In Japan, 7/11 is not the place to only buy Slurpees. Convenience stores (konbini) are one-stop shops for withdrawing cash, copying and faxing, reserving event and travel tickets, printing digital photos, paying monthly bills, and picking up and delivering packages.
In Brazil, installment credits are available on just about everything. Over 50 percent of all online card transactions in Brazil utilize them. This is true across industries, regardless of the price or type of good.
The craze in Russia is E-money. Yandex.Money, the most well-known provider, found that 27 percent of 18 to 45 years olds in Russia metropolitan areas use E-money for at least one payment per year. Roughly a third of these users are in the highly valuable “professional” consumer group.
These differences in payment methods are deeply rooted in culture, economics and politics, and failure to accommodate these customs could derail your efforts to acquire customers in new markets.
As U.S. companies embark on international expansion, there are typically three key phases to consider from an online payments perspective.
1. Cross-border USD credit card payments;
2. Cross-border local currency credit card payments; and
3. Fully localized alternative payment offerings.
By examining each stage, we’ll understand the full scope of challenges and see why expanding cross border is much harder than it looks.
Phase 1: Accept Credit Card Payments in USD
Let’s say your company is ready to expand into the BRIC countries. Your market research says there is especially high demand for your product in Brazil and Russia, so you set up an online store in each country.
You have no local legal entities, so you accept USD credit card payments. Consumers experience high decline rates and are charged potentially high currency conversion fees by their banks. Your Brazilian customers cannot enjoy the installment payments they are used to.
Given that only 35 percent of metropolitan Russians aged 18 to 35 use bank cards, you’re limited right out of the shoot in the Russian market.
For now, the company hesitates to pour resources into building a local presence. This is a classic Catch-22. Your company wants demonstrated revenue potential before funding localization, but the Brazilian and Russian stores cannot achieve their full potential without it. Some companies falter here and withdraw. Others grow slowly and trust in the market potential.
As a general rule, which can vary based on the volume of sales, when you notice that your authorization rates are 5-10 percent below what you expected, it’s time for additional investments and a move from the first phase to the second one.
Phase 2: Accept Credit Card Payments in Local Currency
Your company decides to accept payments in Brazilian reals (BRL) and Russian rubles (RUB).
In Brazil, credit card decline rates remain high, and you don’t yet offer installment payments. In Russia, you’ve adapted to the lack of credit cards by accepting e-wallet payments like Yandex.Money, WebMoney, WMZ or an expensive cash option. In both countries, your margin takes a hit because you convert BRL and RUB to USD through your domestic bank.
You also struggle to generate repeat customers. Your Brazilian consumers want installment credits and your Russian consumers prefer using their eWallet, but under your current system, neither is available. In addition, Brazilian banks recently started to decline more cross-border transactions that are made in BRL. To avoid higher decline rates, your company may want to invest in local entities and move into the third phase.
Again, sales figures may tamper psychologically with expansion plans. A year into the foreign adventure, your company could still turn back or simply maintain the status quo. But, a company seeing at least 5-10 percent of global sales coming from a specific country will probably decide to create a local entity.
Phase 3: Assimilate and Offer Fully Localized Alternative Payment Options
To be competitive with local businesses, a transnational company must localize its legal, political, cultural, financial and human processes. At this point, your company will establish a local legal entity, focus on culturally appropriate marketing, work with local banks and hire more local team members.
This, however, is where the real problems and potential begin.
First, recognize that starting a business in the United States is far easier than in most countries. Each year, the IFC and World Bank release an Ease of Doing Business Index. The United States is ranked fourth, Russia 112th, and Brazil is 130th out of 185 countries. Remember that you’re stepping into an unfamiliar business climate.
Second, corruption in many countries is culture-specific and can be volatile towards foreign entities. Transparency International’s annual Corruption Perceptions Index 2012 ranked the United States 20th, Brazil 69th and Russia 133rd out of 174 countries. Foreign companies should not assume that they are immune from public sector abuses. Indeed, they may be even more vulnerable to it if they lack an in-country network and experience dealing with such behavior.
If your company navigates these challenges, the upside could be significant. In Brazil, your local entity could begin to offer installment payments, which means your card declines would plunge. Further, invoicing would be local and currency conversion would no longer be an issue. You would have local legal and financial representation and the option to get funding in BRL. However, getting to this stage is roughly a two year and $2 million investment.
Perhaps the investment pays off, or perhaps your executives ask, “Why didn’t we partner with someone and just skip to stage three?”
Fighting the Current
In the near future, the Japanese will continue to redeem vouchers at 7/11, Brazilians will pay installments on low-ticket items, and Russians will insist on digital wallets.
Do not expect anyone to adapt to your country’s preferred payment method without aggravation. Payment methods are deeply ingrained in culture. Your company must adapt to these forms of exchange. The speed of this adaptation will depend on the risk your company is willing to assume, and the amount of success you are able to achieve.