6. Genuine cross-border “foreign” transactions get easily declined
Cross-border payments expose many of the challenges with how banks talk to each other.
Firstly, cross-border transactions will have longer payment chains which increases the chance of error due to different messaging standards and decline.
Remember, banks need to hold “correspondent accounts” with each other to transfer money between them. This takes money or “liquidity” to maintain (so you can payout to accounts when requests to settle come), so banks will only maintain correspondent accounts where they have enough volume of transactions to exchange between them.
Increasing regulations after the 2008 crisis have driven the trend in banking towards consolidation. This is particularly true with international payments - it’s hard enough to meet new standards and regulations in your own country, let alone hundreds of others.
This paper by the Bank for International Settlements shows that whilst cross-border transaction volume is booming, correspondent banking relationships and even country-to-country connections are on the decline across the SWIFT network (mentioned before).
If you look at this on a country level, the picture looks grim - particularly in North America and Europe which dominate B2B SaaS volumes.
This means payments get routed through middlemen - larger banks with more liquidity that can hold correspondent accounts with banks across the world.
Each of these middlemen banks adds fees (what you’ll see as “cross-border fees” or “international payments” in most payment processors) as well as the chance for errors in data and transactions being flagged for fraud.
Secondly, foreign banks are unlikely to have existing relationships . With many correspondent banks in between, it’s much less likely that international acquiring banks have relationships with your customer’s bank for your company (or “merchant ID”) and category.
From the fraud lens, it becomes much more challenging for the issuing bank to determine whether a transaction is genuine without definitely depending on.
A merchant bank in middle America is unlikely to hold relationships with an issuing bank in Brazil, the UK, or China. Instead, they would have to route through acquiring banks like Bank of America (US), Barclaycard (UK), or Cielo (Brazil).
There’s also simply the connectivity issue - American Express highlights this well given their unique model. American Express operates as both a card scheme (like Visa & MasterCard) but also an issuing bank (AMEX issue their own card accounts to customers). It’s on them to build up “merchant acceptance” and acquiring networks.
In their 2019 investor’s report , American Express shared their “parity merchant acceptance” in the US with 99% merchant coverage, but also their progress with international acceptance.
“We also made good progress increasing merchant coverage in international markets where our Card Members live, work and travel to the most, adding more than 2 million merchant locations in 2019. This remains a focus for us in 2020.”
For comparison, Visa have over 46 million merchant locations worldwide .
At Paddle, we operate to only resell software and at very high volumes - just this past week we’ve sold across 228 countries across hundreds of thousands of transactions. We’ve a far higher likelihood of engaging with different banks around the world on a regular basis.
Finally, there’s genuine fraud risk with foreign transactions. We’ve already discussed high-value, “card not present” trials in the software category being a risk - foreign transactions adds more intermediaries, remove trusted correspondent relationships, and increase that risk that the issuing bank doesn’t get paid out.
There are also more chances for fraud signals to look fishy. Let’s look at different types of country data:
- Issuing bank’s country - also the country of the customer’s card
- IP address of the checkout (which should match the customer’s card)
- Email address of the checkout should match the countries card
- Country of the merchant
- Acquiring bank’s country
Imagine a $200 software purchase on an Irish-issued card (and customer) to an Australian merchant via a US acquiring bank from a Canadian IP address. To the Irish issuing bank assessing that request, does this all line up as a legit transaction? 🤔
This is very easy to spot. For instance, the first numbers on your credit card are designed to identify the bank and country that issued it - try it out in this interactive tool (don’t worry, it only asks for the first bit!)
👀 What can you do about it?
Selling internationally is all about banking locally.
The single most effective strategy is using local acquiring banks. These are the banks working for you that request funds via the card scheme from the issuing banks.
Remember, it’s not about card schemes (their terms say “honor all cards”) but the relationships between banks.
Local acquirers are far more likely to have relationships with issuing banks in the same country - they may even be the same bank! ChasePaymentech is one of the largest acquiring banks & merchant services, whilst Chase is also the largest issuing bank in the US.
To route payments to local acquirers, you need to connect your payment switch (routing logic), payment processor (for the transaction), and acquiring bank together.
When we A/B tested local acquiring in the US at Paddle, we saw a 20% increase in checkout payment completions, and a 3% increase in subscription payments completions (that 3% improvement that can compound each month).
This is just for the United States - a well-connected economy with established banking.
This isn't just a Paddle fluke - it really works.
Few case studies truly exist around authorization rates and payment acceptance through local acquiring, although you can find some - Wix moved from 30% to 85% payment acceptance in Brazil with local acquiring relationships. 📈
“The results were amazing! An 85% success rate on initial purchases (everyone told us not to expect more than 70%-75%), and the second country (after the U.S) in the number of premium plans sold. But remember - this process took us nearly a year to accomplish.”
👀 How do you set up local acquirers?
In most countries, banks will require you to have a local business entity before opening any account with them.
For software companies, setting up business entities all over the world typically isn’t a priority until later stage or if establishing field offices. This burdens the business with admin, tax, employment, and financial red tape.
The red tape continues with establishing the relationship with each acquiring bank - companies who have done this report it taking almost a year to get set up for processing payments (including refunds, chargebacks, and any local regulations), and then several months with volumes before payment acceptance started to rise whilst the banks are still “getting to know you”.
Then you need to repeat this for every geographic market you wish to optimize. 😰
Building this all yourself is not the only option.
Similar to how many remote or global software companies start with contractors or agencies acting as the “employer of record” (so they can just “turn on” talent and be compliant without getting tangled in the regulations themselves) you can go-to-market globally through a reseller under a “merchant of record” model that manages and optimizes payments on your behalf.
Paddle operates under this model so thousands of software sellers can leverage our platform, infrastructure, tax compliance, and historical relationships to optimize for faster growth in local markets.