With projected growth in the U.S. economy expected to continue at a modest pace, rising consumer activity elsewhere has prompted merchant acquirers to seek new frontiers for portfolio expansion. In this first article of a two-part series on international acquiring, The Green Sheet delves into the markets of Canada and Europe, popular entry points for payment companies that venture beyond U.S. territories. Part two will examine the rewards and travails of doing business in the growth-market BRIC nations of Brazil, Russia, India and China.
Nearly everyone interviewed for this series agreed that entry into the international arena revolves around two precepts: merchant demand for commerce without boundaries and the extraordinary opportunity to deliver integrated payments to millions in burgeoning markets.
According to global payments expert Caroline Hometh, Managing Director of RocketPay Group, payment service providers have traditionally negotiated to rent bank identification numbers (BINs) outside the United States. But the resource allocation necessary to build such programs requires considerable expertise and payment volume that far exceeds the scope of many.
"If they're a smaller ISO, they're better off to partner with an organization that has done so," Hometh said. "In the United States there are maybe a dozen or so companies available who have gone across the globe and negotiated acquiring relationships in Canada, Europe, Asia-Pacific, Latin America and other regions."
For larger, well-funded ISOs, firms like RocketPay can help chart a navigable course. "They have to be willing to become incorporated outside the United States and, in many cases, even have personnel and bank accounts outside the United States," Hometh said. "They have to be willing to make the investment of at least six to nine months before they see any real revenue." Organizations must also factor in ongoing travel expenses, which can add up quickly.
While having a physical presence in another region may not be critical for acquirers with e-commerce merchants that can be managed remotely through partnerships, anyone boarding brick-and-mortar merchants outside the United States will need local representatives to service those accounts. "If you're really focused on point-of-sale, let's say you want to begin calling on POS merchants in the U.K., yes, you're going to have to have an office there," Hometh said.
Over the past decade a number of U.S.-based acquirers entered the Canadian market because of its close proximity and language compatibility. What many quickly discovered was our northern neighbor has a distinct culture and business climate that a U.S. company must thoroughly understand in order to thrive there.
With a population in excess of 35 million, Canada is home to approximately 1.5 million businesses with two or more employees. "Most of them are small businesses," said Michael Gokturk, Chief Executive Officer of Vancouver-based Payfirma Corp. "About 37 percent of our total payments space is small business customers, which is the exact target market for Payfirma and other acquirers."
To provide a better understanding of this market's scope, the total value of transactions cleared through Canadian Payments Association systems in 2013 averaged $173.4 billion per business day. Also worth noting: the Interac Association, a national, nonprofit debit network owned by the banks in Canada, competes on par with Visa Inc. and MasterCard Worldwide for a share of the country's total debit payment volume.
Overall the Canadian payments landscape can best be described as an oligopoly dominated by a small number of banks. Thus, it is less fragmented than the U.S. market. Research indicates that of the bank-backed merchant acquirers operating in Canada, Moneris Corp. dominates with about 40 percent market share, followed by TD Merchant Services, Chase Paymentech, Global Payments Inc. and a cadre of other established payment providers.
On a business-etiquette level Canadians respond to different decision-making influences than their U.S. counterparts. "Merchants in Canada will typically buy through an association or a bank referral," Gokturk said. "They're not really open to telemarketing calls, which is the traditional sales channel, and the sales process is actually twice as long. We have a lot of U.S. partners who go through Payfirma for their Canadian acquiring, and that's because we know the sales process."
Another reason U.S.-based acquirers like to partner with Canadian firms is merchants there trust Canadian brands. "They want to be able to call a Canadian number and speak to a Canadian person," Gokturk said, adding that merchants often quiz phone reps to be certain they're local. He also stated the cost of merchant acquisition in Canada is about half that of the U.S. market, and Canadian merchants tend to be extremely loyal, often remaining with their service providers for seven to 10 years.
With trust so highly prized, it is not surprising that the Canadian Department of Finance established a formal code of conduct several years ago that credit and debit card industry entities are expected to voluntarily adhere to - and most do. Also, when developing a web presence or communicating directly in Canada, it is important to keep in mind that Canada is officially a bi-lingual country, recognizing both French and English. In certain provinces both languages are commonly spoken.
When entering Canada or any other market, there is a natural learning curve U.S. companies should not rush. Joe Kaplan, Chief Executive Officer of Total Merchant Services, said TMS recently had success entering the Canadian market and plans to expand into other markets in the future. "The complexities for us were just building the back-end systems, the front-end systems, the reporting systems, everything that allows us to support a sales partner and merchant," he said. "We had to work with a processor. We had to talk to banks. We had to understand how to get there to build the infrastructure." All of this preceded hiring an on-site sales force.
Prior to building their Canadian infrastructure, TMS representatives met with merchants in different provinces to learn about the marketplace and discuss the challenges they were facing. Taking into account information gleaned in the field and combining that with extensive outside market research, TMS was then prepared to advance.
"While you're creating the infrastructure, you're also starting to simultaneously build out what you think you can add to the edge competitively, where you can create some sort of durable advantage or solve some big need, which will allow you to be more successful," Kaplan said.
Part of the durable advantage in Canada will likely stem from technology, which is well ingrained in the culture there. "Canadians as a whole are extremely technology literate, and they embrace and adopt technology very quickly," Gokturk said. "We're one of the most connected nations in the world. When Square came to Canada, there was a run on Square because it was an early technology tool, and people wanted to use and embrace it to create value for themselves."
When international acquirer Elavon Inc., a wholly owned subsidiary of U.S. Bancorp, opened a contact center in Warsaw, Poland, one of three such facilities it operates in Europe, customer experience was priority one. That's because in the European Union, where the European Commission has officially recognized 24 languages, poor communication due to language barriers can quickly escalate into disgruntled customers.
To illustrate Elavon's level of commitment to customer service at this facility, payments industry consultant Linda Perry recalled that during a guided tour she encountered college-educated customer service representatives each of whom was fluent in three to four languages, so all local languages in Europe were represented.
"The phone would route callers to whoever was a local speaker, so people would feel comfortable," Perry said. "They knew if you were calling from Spain, you would get a Spanish speaking person on the phone. That's not easy to do with a call center. I think it was the gold standard of customer service and support in the multicurrency, multilanguage market that is Europe."
Today 34 countries, 523 million people, over 20 million businesses and more than 3,900 payment service providers are united under the Single Euro Payments Area, a pan-European payments zone. "As you go eastward, Poland is a very high-growth market, growing well into the double-digit level, whereas there are some clearly small territories that are not growing so large, but Europe on a combined scale is in its entirety significantly larger than North America," said Darren Wilson, President - International for EVO Payments International LLC.
Wilson noted that Western Europe is significantly behind the United States in terms of integrated solutions. "It's growing," he said. "The Tier 1 merchants are certainly there, either doing it themselves or outsourcing." He believes the global integration layer affords tremendous opportunity for international players like EVO, which has leveraged bank partnerships in Germany, Spain and Poland to build a stable presence through white-label branding.
But at this point, volume of card acceptance and type of cards accepted are still factors. "Here in the U.S., 55 percent of small businesses claim to not accept credit cards, and there are nearly 3.5 payment cards per person," said Pradeep Moudgal, Director, Emerging Technologies Advisory Service at Mercator Advisory Group. "In the European Union there are half as many cards per capita. On average it's about 1.8 cards per person."
Moudgal estimated that roughly 60 to 65 percent of small merchants in Europe do not accept card payments; cash payments dominate. However, European merchants equipped with Europay/MasterCard/Visa-enabled mobile card readers are required to pay for equipment unlike their U.S. counterparts, which has translated into high activation rates among that user segment.
For Santa Ana, Calif.-based Meritus Payment Solutions, taking a pragmatic approach to establishing a presence in Europe was critical. After launching multicurrency processing as a service, Meritus then sought a European partner to facilitate international expansion for its mostly U.S.-based, card-not-present e-commerce clients.
Criteria for the search included companies with similar technical capabilities, credit policies, organizational size and target markets. "Some acquirers we met with had very limited systems and reporting, which is important to us because many times we take liability when we process, and we want to provide reporting comparable to what we do in the U.S. to make sure our customers' experience is seamless," said Alan Kleinman, Chief Executive Officer at Meritus.
Kleinman noted that outside of the United States, alternative payment methods are more often the norm than the exception, depending on geography. "There is much more complexity when it comes to the alternative forms of payment that are available," Kleinman said. "You have to be cognizant of that in every single country that you're in, even those that are within the European Union or Europe as a whole."
In the Netherlands, for example, iDeal, the online payment system introduced by the country's banks in 2005, processed 142.5 million transactions which reportedly accounted for 80 percent of the online transaction volume in that region during 2013.
"When you go to a payment page of a merchant in the Netherlands, you see the iDeal logo," said Michael Doron, Managing Director of Pay.ON America Inc. "You would click on it and you get redirected to your bank, or one of the 10 banks in that country. You log in and then push funds from your bank account directly to the merchant."
Also worth mentioning is that in Europe the merchant underwriting process generally takes longer. "Here in the U.S. you can have a merchant account approved the same day," Kleinman said. "That doesn't normally happen in Europe. An individual MID [merchant identification number] might take three to four weeks to get approved, and it's much more laborious in the documentation that's required."
On a final note to installment one of this series, the European Commission is expected to finalize a plan to regulate domestic interchange fees that places a cap of 0.3 percent on credit and 0.2 percent for debit card transactions by 2017. "So consequently with that prospect and the fact that multinational customers in e-commerce are becoming borderless, the need for us to trade or accept payments truly locally has never been more relevant," EVO's Wilson said.
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