Local card acquiring – Why every company with significant global volume should care.

Local Acquiring

For most companies looking to optimize and advance their international customer acquisition strategies, there are a number of factors that are typically top of mind.  Market size, growth, language, culture, etc.  As strategies become more fleshed out, the details around conversion start becoming more important.  Number of clicks to purchase, fields of personal information to complete, and perhaps even what type of payment type should be offered besides credit cards.  But the one thing that is often the easiest to miss is whether or not local acquiring should be considered.  To be fair, local acquiring is a decision that is most often tackled once a market has been established in another country, but it is worth understanding why local acquiring matters before brushing this factor aside.

What is acquiring?

Before we get into local acquiring, let’s just take a few steps back and make sure we’re all on the same page about card acquiring in general.  At the most basic level, a credit card transaction is a short term loan.  The consumer has a contract with their credit card which is issued by a financial institution or issuing bank that he or she will repay the bank at the end of the month.  The company or merchant who has a product or service to sell to the consumer also has a contract with a financial institution or acquiring bank that they are selling a legitimate product in a legal and financially stable manner.

The way the system works is that the acquiring bank takes the credit card information from the customer and reaches out to the issuing bank to make sure that the consumer is good for the money (for a bit more on the nuts and bolts of what really happens, check out this white paper by the Federal Reserve Bank of Atlanta).  Once the issuing bank gives the okay, the merchant can then feel confident in providing the customer the required services.

Okay, so what is local acquiring? 

Even though the issuing bank gives the okay, there still needs to be a bit of trust between the issuing bank and the acquiring bank.  It’s only the issuing bank that ran the credit checks on the consumer, and it’s only the acquiring bank that ran the risk and underwriting on the merchant.  If either the consumer or the merchant turns out to be different than expected, one or the other financial institution could end up taking on the burden of that short term loan.  So if a Korean consumer is buying a subscription to let’s say Evernote, which happens to be based in the US and for argument’s sake also only has a US bank acquirer, then the US acquiring bank is going to have to talk to the consumer’s Korean issuing bank to make sure that the consumer is good for the money.

As you can probably tell, neither bank is going to be as familiar with each other as they would be if both were Korean or US based, and any merchant’s statistics will show that even legitimate credit card transactions get declined because of the unfamiliarity between the two institutions.  I’m not talking about zero transactions getting through, but rather a smaller percentage, and this really depends on the regions of the acquiring and issuing banks.

Local acquiring really means that the acquiring bank and the issuing bank are in the same region or country.  They have a higher level of trust between each other, and as a result the process is a lot smoother.  In the example above, Evernote may want to consider contracting to Korean acquiring channel through a payments service provider to get access to better local credit card processing for their Korean customers.

The bottom line

In the end, there are a few major items that local acquiring can help with:

  1. Improve your success rate – When both the issuing bank and acquiring bank have enough trust to let good transactions go through, you’re going to have more conversions when consumers are ready to buy.
  2. Eliminate cross border fees for your customer – Since the issuing bank and the acquiring bank are in the same region, there is no FX risk to the issuing bank and thus no cross border fee is assessed to the consumer.
  3. Potentially reduce interchange costs – In the US, we happen to have really high interchange rates (the rates that the banks and card schemes like Visa and MasterCard charge merchants for acquiring). This is mainly because of the affinity cards (Visa Signature, Corporate Cards, Hotel Reward Cards, etc.) that issuers give to consumers in the US. Someone has to pay for all of those rewards, and it’s typically the merchant who ends up footing the bill (often passed back to the consumer as a mark-up on the product, but that’s another story). Since this does not exist in many non-US markets like Europe and Australia, merchants can take advantage of lower interchange by locally acquiring credit cards in those regions.

Whether the time to optimize for local acquiring is today or not, it would be advisable for any merchant to understand the complexities that surround acquiring in general to be ready when the time is right.

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2 Comments

Filed under Local, Payments

  • Vishal

    Robin, quick questions about your 3rd point. Let’s say a Korean customer uses a plain-vanilla Korean-bank-issued Visa card (i.e., not a corporate card, or airlines card, or hotel card, etc) to buy Evernote. In this example, let’s assume that Evernote is working with a US acquirer, not a local Korean acquirer. 2 questions:

    (1) Would the interchange charged to Evernote’s acquirer would be based on the fact that this is a plain-vanilla Visa card, or is there a higher interchange because it is a foreign card?

    (2) For countries where interchange is NOT regulated, does Visa publish country-specific interchange rates or does it default to the US interchange table?

    Thanks!

  • Robin

    Hi Vishal – Assuming that the Visa card is enabled for international transactions, the interchange charged would be higher as it is a foreign card, although lower than if it was a Korean issued card that was not plain vanilla. Since Evernote, in this example, is going through a US acquirer via their US entity, they would be subject to US interchange. To your second point, since interchange is determined by the card schemes (Visa/MasterCard), you could just use the US interchange tables when interchange is not regulated in that country. And again, it only matters if you’re acquiring cards through that regulated region. Hope that helps, and thanks for asking the question.

    Robin