Cross-border e-commerce: three challenges

It is no secret that e-commerce has been one of the few winners in the COVID-19 pandemic. In addition, cross-border purchases have enjoyed a similar surge. Cross-border e-commerce sales grew 21% in 2020 compared to 2019. Furthermore, last year 55% of online shoppers made a cross-border purchase, according to Forbes. From luxuries to everyday basics, consumers are increasingly buying online and from abroad – and for merchants and payment processors alike. This has increased the need for seamless, reliable systems to support cross-border payments.

This is by no means a short-term issue. The majority of shoppers who shifted online amid the COVID-19 outbreak are expected to stay even after normality returns. This makes e-commerce increasingly likely to become the dominant form of purchase type for many products. Moreover, a growing percentage of that will be cross-border. 

No one-size-fits all

When it comes to cross-border e-commerce solutions, there is no one-size-fits all. Different companies have entirely different solutions for different countries and markets. While these variations may seem unremarkable, they can have profound implications for customer satisfaction, retention and purchase price. With e-commerce becoming ever-more dominant, and cross-border purchases set to become a more commonplace part of consumers’ lives, these are challenges that merchants will need to tackle if they are to thrive over the next decade.

Cross-border taxation

Foreign exchanges taxes are by no means a new phenomenon. However, it is worth noting that the economic uncertainty of the pandemic has prompted an uptick in the number of countries taxing foreign exchange payments.  According to Forbes' research at FXC Intelligence, prior to 2020, eight countries applied such taxes, this has risen to 11. It has also been relatively common for countries with such taxes in place to raise them, such as Argentina, which in September 2020 increased its PAIS tax from 30% to 35%. Such taxes are particularly common in emerging economies, who suffered severe drops in exchange rates in the months following the COVID-19 outbreak. 

Ultimately, however, it is the consumer that bears this additional cost. Often without being provided any clarity on what they will actually pay. And in some cases when the bank statement arrives, this can result in a significant shock, with taxes and other FX transaction costs together being as much as 40% of the purchase price. Thus, for card issuers it is important to provide a breakdown of charges on statements. For merchants it is also important to provide clarity and transparency to cross-border shoppers about the taxes they may be charged. 

Hidden costs for consumers

Taxes may only impact consumers in some corridors, but almost all cross-border e-commerce purchases face the risk of other forms of hidden costs. When a shopper makes a cross-border purchase, it is not just their bank and the merchant’s bank involved in the transaction. Instead a varying selection of other players are also involved. Often including a payment processor, card network, issuing bank and acquiring bank. Depending on how the shopper pays they may face different FX margins, which will ultimately increase their overall purchase price. 

Depending on where a shopper is in the world, and where they are buying from, the amount they are likely to pay in additional costs can vary dramatically. And while it is usually cheaper to pay in their home currency, this may not always be the case.

For merchants there is big opportunity to increase conversions and revenue. Consumers are more likely to abandon their cart if they cannot make a transaction in their local currency. However, by handling the currency conversion themselves, merchants can also potentially capture more of the fees. Rather than passing these to a card issuer. 

Cross-border transactions

It is perhaps no surprise that there is significant differentiation in how major merchants around the world handle cross-border transactions. It depends on whether the priority is simplicity, consumer choice or additional profit for the merchant. Different companies tackle the issue of what currency to use at very different points in the process – with potential dramatic variations for consumers.

In some cases, the merchant decides the currency for the consumer. Either by defaulting to the marketplace currency or picking a currency based on where the customer is located. This is currently the most common approach. In addition, it is most widespread in mobility and delivery services, education and freelancing and in the technology industry. However, around a third of merchants instead enable the buyer to choose which currency they want to shop in early in the process. And they often include a conversion fee in the stated price.

Finally, some companies adopt a solution known as last-step conversion. This sees shoppers decide what currency they want to pay in near the end of the checkout process. This approach has the benefit of marrying choice with simplicity. However, it can see companies pushing an option that while more profitable for the merchant, results in higher costs for the consumer. No matter which option a merchant chooses it is vital to be transparent and open with the shopper. 

Ensuring good checkout experience and no surprises is vital to customer attraction and retention. And as more and more customers make more purchases online, it can be the different between a market leader and a company playing catch-up.