Earlier this year, Singapore’s leading news publication reported that local consumers were irked to discover foreign transaction fee charges on their credit cards every time they used the ride-sharing service Uber. Since Uber processes credit card payments in the Netherlands (and doesn’t accept cash), many riders paying with their local cards were charged roughly 1 percent for each transaction. These charges would come through on the consumer’s credit card statement rather than the Uber receipt, taking up to a month to come through.
Addressing the concerns, Uber’s spokesperson explained that these fees are charged by banks, not by their company. In return, Singapore’s banks replied that the fees were not coming from them, but from the credit card companies. Credit card companies then responded that fee structures were determined by individual banks. In short, while there was no shortage of blame or confusion, the result was the same – Uber’s customers in Singapore were charged cross-border transaction fees every time they used a seemingly local service.
{mosads}Let’s take a step back and look beyond Uber, which is just one example of a wider problem. Most modern businesses that sell to consumers rely on the credit card infrastructure. If you live anywhere in the world and have a Visa or MasterCard, for example, you can make a purchase from any store that accepts credit cards. While this infrastructure allows you to transact globally, it doesn’t allow you to really act locally everywhere. A company might be able to accept payments in a local currency, but they may not have a local bank in the region, so when the consumer’s local bank charges their card, the transaction is flagged as “cross-border”, and a fee is often charged. The merchant may or may not be aware of this.
Simply put, the way the credit card infrastructure works is not really built for the modern day business, which increasingly operates in a borderless, digital world. As these new business models are layered on top of this old infrastructure, technological gaps are created, complexity is added, and transparency becomes nearly impossible for the average consumer.
This problem is even worse in the B2B world, where the traditional method of international payment is cross-border wires. A business can send a certain amount of money via wire, but once it’s sent, they lose visibility of the process. It’s unclear how many banks the payment will go through, if the final bank will convert the currency, and what fees or rates the payee will receive. At the end of the day, this is a very complex, old infrastructure that was built for a different time. The nuances and unintended consequences of using this system with global business models make complete transparency nearly impossible. Just as an unexpected fee on a taxi ride is frustrating for consumers, imagine the frustration of buyers and sellers not knowing what amount will be paid, when, and how many unanticipated fees will be charged. This is on top of the inability to typically reconcile the payments with the invoices. For a fledgling startup in an emerging economy, this level of uncertainty and complexity can make the global market highly frustrating and complicated.
Not surprisingly, consumers are not the only ones insisting on more transparency and information. Businesses are also demanding more data, comparing services, and better understanding the shortcomings of the existing system. In response, fintech companies are stepping in to bridge the gap between modern business needs and legacy infrastructure capabilities. Payment service providers are building a layer of technology over the existing system, separating the end users from its complexities and overcoming their weaknesses. In addition, because these fintech companies partner with banks to consolidate payment requests from small businesses, they are often able to give users better rates than they would be able to get on their own. What this means is that businesses that switch to modern cross-border payment processing are able to lower costs, reduce risks and build a level of predictability and transparency into their payments that was otherwise unattainable.
This trend is really leveling the playing field. As new solutions become less dependent on the old system, businesses gain more control. Suddenly, a company in, say, Bangladesh is able to compete in the market based on the quality of their product or service, and not on their access to effective payment infrastructure. For consumers, this means more suppliers and more choice. For suppliers, as global competition increases, it’s critical to have access to effective payment infrastructure that makes it easy for buyers to pay, and that can operate and scale efficiently, or they risk being uncompetitive in the global market. The world becomes flatter; geographical barriers come down. Those who can break away from archaic systems and properly leverage new digital tools will be better able to acquire and engage consumers, and create real value for everyone in the chain.
Galit is CEO of Payoneer, a global B2B online payment services company.