SOME THINGS NEVER CHANGE. In the eighteen years I have been involved in the credit card business the one constant has been that merchants, acquirers and processors with growth aspirations want to "go cross-border." That in itself is not odd, but what is odd is that the merchants, acquirers and processors usually want to go cross-border because it sounds sexy, not because of substantive business reasons.
Please do not misinterpret my last statement; there are substantive business reasons to consider cross-bordering transactions. Before I cover those reasons, it would be a good idea to start with some basic definitions so everyone has a frame of reference for the remainder of this article. You should also understand that this article and these definitions are from the perspective of Visa, a payments association, and the realities of our worldwide membership:
A Member that signs a merchant or disburses currency to a cardholder in a cash disbursement, and directly or indirectly clears the resulting transaction receipt.
A Visa-approved non-Member acting as the agent of a Member that provides authorization, clearing and/or settlement services for merchants and Members.
The exchange of settlement records between Members.
Taking a merchant's transactions from one country and clearing them through another country.
Taking a merchant's transactions from Country A and clearing them through Country B using a registered acquirer's access into clearing from Country A. In other words you can process the transaction anywhere as long as a Member from the merchant's transaction country clears the transaction.
Acquirer/processors able to process multiple currencies coming in from merchants but settling in the acquirer/processor's indigenous currency.
Acquirer/processors able to process multiple currencies coming in from merchants and settling in multiple currencies back to the merchant.
Now that we have some basic terms defined, lets review what you can and cannot do in terms of cross-border activity.
Cross-Border Dos and Don'ts
As a global payment system, Visa is organized into six regions; which are the EU, USA, CEMEA (Central Europe, Middle East & Africa), Latin America and Caribbean, Asia/Pacific and Canada. Each region has its own president, board and imperatives that allow them to focus on the needs of their individual markets. We also have a central organization that ensures, among other things the global interoperability of Visa products.
All this leads to our rules about cross-border acquiring. Our rules state three situations under which cross-border acquiring is allowed (cross-border acquiring is not allowed under any other circumstances):
1. If you are an airline participating in our International Airline Program.
2. If you are a merchant in the EU, any EU acquirer registered in their Cross-Border Acquiring program can acquire your transactions.
3. A Bilateral agreement between the US and Canada for mail order/telephone order transactions. A US acquirer/processor can acquire a Canadian merchant's US dollar sales to a US cardholder, or a Canadian acquirer/processor can acquire a US merchant's Canadian dollar sales to a Canadian cardholder.
Our Operating Regulations do allow cross-border processing for any merchant, in any country - meaning, if you cross-border process merchant activity, you must clear the transactions through an acquirer licensed to operate in the merchant's country of operation (where the transactions take place).
From my experience, merchant's needs relative to cross-border fall into three categories:
- Operating efficiencies
- Multi-currency needs
Let's look at each of these more closely to understand how acquirers and processors can fill these needs.
As merchants become global entities with increasing volumes it follows that they want lower costs by taking advantage of economies of scale - shifting as much of their business as possible to a small number of preferred vendors. They demand this from their suppliers and they see no reason why card associations should be any different. However, the complex global nature of credit card economics and banking regulations make the transfer of processing and acquiring across borders a complex and difficult issue.
Perhaps it will help to understand how complex a subject this is by describing the makeup of our Membership. Visa has over 21,400 Members in 180+ countries and six geographically diverse regions. The complex economic conditions in those 180+ countries make a unified cost structure impractical until such time as we have a unified global economy (something I believe is unlikely in my lifetime). This means that it would be unwieldy and inefficient to consolidate acquiring across divergent economies.
That being said, merchants can gain cost efficiencies through other types of consolidation, such as back office consolidation.
As merchants expand their businesses into new countries/ markets, they will eventually look to consolidate their back offices to reduce expenses. Once this consolidation happens it may become more efficient to have fewer acquirer/processor interfaces to maintain.
Merchants may consolidate into regional hubs or to a single, global back-office (although this is rare). Acquirer/ processors are looking to help with consolidation and the most common way is by entering into alliances with acquirer/ processors in certain key markets.
These alliances take advantage of the ability to cross-border process transactions on a global basis. For example, a US acquirer/processor could statistically have access to more than 70% of the worldwide volume by making key alliances with a EU, Canadian and Mexican acquirer/processor.
Acquirer/processor alliances bring efficiencies and cost savings to merchants inasmuch as the merchants are able to efficiently run their back offices by linking into fewer or even a single acquirer/processor.
Transaction currency and cross-border processing are not necessarily tied together. Merchants and cardholders are free to conduct business in any of the 180+ transaction currencies Visa currently processes.1
Furthermore, merchants may sell around the world from a single facility located in any country. In doing this, a merchant may wish to offer their products for sale in currencies from key markets, i.e., if they market to customers in France, UK, Germany and the US they may sell in French francs, pounds sterling, German marks and US dollars.
An example of this would be a merchant based in the US selling clocks over the Internet. This merchant could have a home page with a choice of language and currency for each of the four countries mentioned. This would give their customers a more natural setting in which to conduct business.
Under this scenario, the merchant would make their sales in local currency to each of their four markets. They could then choose to have all of those currencies settled to them in US dollars since they are a US-based merchant, or in the transaction currencies. Of course this would require their acquirer/processor to have multi-currency processing capability to settle in US dollars and multi-currency settlement capability if they settled in the transaction currencies. In all cases the merchant location would be the US in this scenario and that should be accurately reflected in the merchant country code field.
In summary, merchants (and acquirer/processors) are searching for new business and are looking across borders for new markets to fulfill that need. As they expand and continue to consolidate, they are also looking to obtain cost savings by combining back offices as much as possible. In addition to this, the Internet has made it easier for merchants to sell into new markets without going through the expense of developing a brick and mortar presence in that market.
In order to fulfill merchant needs for multi-currency sales, acquirer/processors need to focus on providing multi-currency processing and settlement services. In order to fulfill merchant needs for cost efficiencies, acquirer/processors should focus on engaging in strategic alliances in key growth markets to provide cross-border services that aid in driving down operation costs. These are the main business reasons I believe should drive cross-border initiatives for both merchants and acquirer/processors.
1 CEMEA region currently requires the transaction currency to be the same as the indigenous currency where the transaction takes place.