International Payment

and Implications for Merchants Expanding to Foreign Markets

By now, few people are strangers to on-line shopping. The quick convenience, ease of price comparisons, and variety of merchandise has largely overcome consumers’ initial fears about the security of shopping over the Internet. A 2005 AC Nielsen survey found that 85% of those surveyed in Europe and North America had used the Internet to shop, and more than half of those shoppers had made a purchase online within the previous month. In some countries, such as Germany, France, Austria, and South Korea, over 90% of respondents had made on-line purchases before.

Among its many advantages, on-line shopping offers consumers considerable flexibility in choosing how to pay for their purchases. These payment options vary from country to country, depending on the country’s traditions and consumers’ comfort level with the different payment methods. With e-commerce such an active and growing segment of the market, it is worthwhile for merchants to explore these differences to offer their customers payment options with which they will be comfortable.

Perhaps unsurprisingly, credit cards account for the lion’s share of online payments. Credit cards are a ubiquitous method of payment in most developed countries, and consumers have grown to trust and depend upon them. Collectively, credit cards account for 59% of on-line purchases. In some countries, such as Ireland, more than 90% of on-line purchases are paid for by credit card.

While credit cards do account for a significant portion of on-line purchases worldwide, by no means are they the most popular option in every country. One notable exception is Germany, where bank transfers have long been a staple method of payment. There, online shoppers prefer bank transfers to credit cards at a rate of roughly 3 to 1. This stands in contrast to other markets like the US, where 64% of online shoppers used credit cards and only 4% used bank transfers.

Cash-on-delivery or COD is the third most popular payment form overall, but it accounts for a significant share of the market in a number of large economies, such as China (34%), India (29%) and Japan (25%). While popular in some European countries, such as Portugal, Greece, Italy and Spain, COD is virtually unheard of in much of the Western world, accounting for less than 2% of transactions in the US, UK, Australia, and New Zealand.

Japan and Taiwan offer consumers the option to pay for their online purchases at local convenience stores. In fact, paying through convenience stores is the second most popular way to pay for online purchases in Taiwan and the third most popular in Japan. It is, however, not even an option in most other countries.
Online payment services such as PayPal are popular in North America, Brazil, and the UK, but have yet to gather a large following in many other countries. Though South Korea and Japan have above-average rates of online shopping, PayPal failed to account for even a single percent of the payments made there.

These wide variations in payment preferences can pose a significant barrier to online merchants trying to promote their products in foreign markets. A US merchant marketing in Germany might be surprised by the reluctance of German consumers to use a credit card for their on-line purchases. Similarly, a British or Canadian merchant might be used to accepting payments exclusively over PayPal, but in selling to Japan or South Korea she will have a difficult time finding consumers with PayPal accounts. As merchants branch out into foreign markets it is crucial that they familiarize themselves with the payment cultures in their target markets, or risk alienating potential customers.

Currencies can also be a hurdle for merchants branching out to foreign markets. EU companies have an advantage in that they can post their prices in Euros and consumers in other Euro Zone states will understand how much they will eventually be charged. Unfortunately, a UK shopper making a purchase from the same merchant may not have that same opportunity. If, for example, a UK shopper uses his credit card to make a Euro purchase, he may conduct the entire purchase without seeing what amount, in pounds sterling, he will ultimately be charged. Daily fluctuations in exchange rates only make matters more complicated.
One solution to this problem is known as “dynamic currency conversion.” Offered by some payment processing companies, such as PacNet Services, dynamic currency conversion gives merchants the ability to display prices on their web sites in the consumer’s preferred currency. The same UK shopper making a purchase from a Euro Zone web site with dynamic currency conversion would be able to view his item’s purchase price in pounds, and not be surprised by the amount ultimately charged to him.

As more and more consumers become comfortable shopping over the Internet, and more and more people in emerging economies gain access to the Internet, e-commerce is likely to grow even more popular in the future. Companies that develop their presence on-line with an eye toward making consumers’ experiences as comfortable as possible should be well-positioned to increase their business in foreign markets. International banks and payment processing companies such as PacNet which facilitate international e-commerce can also probably look forward to growth as globalization spreads and international commerce becomes more and more important.

All in all, the biggest winners are consumers. As e-commerce proliferates, consumers can look forward to a wider and wider variety of products and markets, and a growing number of payment options.