The ecstatic hopes of many e-commerce companies ride on the vision of a global marketplace, but the senior executives who lead this effort too often neglect the logistics problems involved in moving money over international borders—a part of transactions that seems to take place everywhere except in cyberspace.
The pressure for capturing international marketshare is strong and is a strategy most e-commerce initiatives can little afford to ignore. GartnerGroup’s Dataquest estimates that the worldwide business-to-consumer e-commerce market will reach more than $380 billion by 2003, and International Data Corporation predicts the current Internet population of 200 million will reach an incredible 1 billion by 2005.
In this article, we’ll examine some of the complicated factors involved in working with multiple currencies over the Internet.
Currency exchange rates
One of the most important sets of factors CIOs must understand before they suggest their companies move into the international market is how extra charges affect foreign transactions.
An international order must account for a variety of international fees to remain profitable. The most obvious of these fees is a current exchange rate. But providing online pricing in a foreign buyer’s currency is not only very difficult, but also sometimes prohibited and perhaps even unwise.
Currency prices constantly fluctuate, so even if an e-commerce payment system provides real-time conversion, the value of a currency can change between the time a customer’s bank authorizes a credit card transaction and funds are deposited. In addition, real-time conversion can make the price of small ticket items like books or CDs seem to fluctuate widely. With these items, an e-commerce system that lets you change currency rates periodically (weekly, monthly, or otherwise) creates a better customer environment. Currently, there is a drive to develop e-commerce systems that provide stable pricing for multiple-currency transactions. We’ve listed some of these systems here:
Each of these systems works toward pricing stability, but provides its best functionality under specific conditions. For example, RateStream and Toccata are good for small merchants that are working with credit card transactions. The status of price stability systems is still being determined, since the laws of some countries seem to prohibit this type of pricing.
Fees beyond currency conversion
In addition to fluctuating currencies, many other factors affect the final cost to the customer. Most international orders also include shipping charges, duties, shipping insurance, tax, value-added tax (VAT), and international fees charged by credit card companies. Bank fees alone can add as much as 4 percent of a foreign currency transaction. Providing this information to the customer at the time of sale is an information delivery nightmare, but it is also essential in order to avoid returns, which will involve return postage.
According to a study by Forrester Research Inc. , more than half of e-commerce companies lose money on each order because they charge a flat rate for shipping (no matter the destination of the package), or because they simply don’t charge for shipping.
One electronics manufacturer in this study summed the problem up for his company, saying, “We don’t ship globally today, and we have no future plans to do so. The taxes and tariffs make it so we can’t give accurate cost data to the customer when ordering goods. So they’re quoted one price for the product, but by the time it would ship to them, there would be several back-end charges the buyer didn’t expect. As a result, customers often return the products.”
Of course, many companies now operating at a loss in their international sales simply hope to build a customer base and then make changes over the next few years in order to start showing profits. In addition, some large companies with global operations avoid many fees by establishing a warehouse or other physical presence in the countries of operation.
The lure of credit cards
There are a variety of payment systems available for Internet transactions, but the most common is credit cards. According to bizrate.com , 93 percent of all online transactions are paid for by credit card.
There are three basic types of credit card services for the Internet: card service providers, payment gateways, and companies that combine these two services. The common limiting factor to these systems is settlement authorities like Paymentech, First Data, and Citibank, which handle the transfer of multiple currency transactions from the purchaser’s bank to the merchant’s bank. Settlement authorities are often limited in the number of currencies they can work with. For example, Paymentech can accept payments in more than 140 currencies but closely restricts the number of currencies available depending on the brand of credit card used.
An additional problem that merchants often encounter with credit cards is high international surcharges. A simple example is American Express International, which covers 110 currencies but charges $10 per transaction on foreign currency wire transfers.
One last problem that looms over credit cards is an international payment system. Even though the clear majority of Internet transactions are currently conducted with a credit card, this is not the world standard. Merchants must remember that the majority of users currently online are U.S. residents—most with credit card access—but the world market that e-commerce companies are pursuing doesn’t have the same level of access.
Guidelines for choosing a payment system
The problems inherent in dealing with multiple currencies are daunting, but not inexorable. Below, we’ve listed a few guidelines that can help CIOs settle on a workable payment system.
workz.com’s Collecting Payment Online
- Most e-commerce companies foresee a more than 750 percent growth in online business over the next 18 months.
- Only 10 percent of participants in a recent Forrester Research study shipped to foreign destinations.
- 65 percent of e-commerce companies ship only within the U.S.
- Forty-three percent of the e-commerce companies surveyed in a Forrester Research study can’t properly calculate online sales because they don’t factor in returns to traditional storefronts.
Bruce Spencer is a freelance technical writer who has been working in the information industry since 1983 and writing about the Internet since 1995.
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