Local Acquiring vs Cross-Border

Local Acquiring vs Cross-Border

When your organization is selling products or services to global customers, you have one of two options when it comes to processing transactions; local or cross-border. 

But before we go into the benefits of local vs. cross-border, we need to start at the basics; what is acquiring?

An acquirer is a bank that acts on behalf of a business by processing credit and debit card payments. An acquirer sends purchase authorization requests to your customer's bank through card networks, such as Visa and Mastercard. It then either sends you the money or tells you why the request has been declined. 

In order to process payments, your business must contract and work with an acquiring bank to accept and process credit card payments. 

An acquirer is a regulated business and must have the proper license in order to contract and process on behalf of your business. These licenses are issued country by country. For example, if an acquirer wants to contract and process credit cards for a US-based business, they must have a US license. If the acquirer wants to contract and process credit cards for a UK-based business, they must have a UK license. 

The banking regulations only allow acquirers to contract with companies based on where they are licensed. For example, a US licensed acquiring bank can only contract and process for a US-based business. A UK licensed acquirer cannot contract with a US-based business and vice versa - a US license acquired cannot contract with a UK-based business. 

This setup works great when a US-based business only has US-based customers, or a UK-based company only has UK-based customers. But, it starts to break down when you add shoppers outside the business’s domestic market. 

The difference between cross-border processing and local acquiring is best demonstrated through this scenario:

You’re a US-based business, and a UK-based shopper is attempting to buy something from your ecommerce site. They enter their information at checkout and hit ‘pay’.

What happens to cross-border transactions: 

Your US-based acquirer approaches the customer’s bank in the UK and requests the authorization of the transaction. 

Simple, right? Not necessarily. There’s a catch.

The UK bank may not be familiar with the US acquirer, so the authorization request message may contain data that the UK bank does not recognize. On top of that, issuing banks see cross-border sales as higher risk, so they err on the side of caution and the request is refused.

Of course, this is not to say that every cross-border transaction would be declined. But cross-border transactions will be declined at a higher rate due to the reasons stated above. And if the transaction does go through, the end customer may be charged Foreign Transaction Fee on top of the amount paid because of the additional risk and complexities the issuing bank is taking on by approving the transaction.

What happens to local transactions: 

In this case, when your UK shopper hits ‘pay’, your local UK acquirer approaches the UK bank with an authorization request. The request is seen as local and it is perfectly formatted to meet the UK bank’s specific requirements. The bank allows the payment to proceed, which releases the funds from the acquirer and then your sale goes through.

Benefits of processing local: 

The key benefits to processing locally vs. cross-border are:

  • Higher success rates
  • Lower processing cost (up to 50% lower)
  • Eliminate customers getting hit with foreign transaction fees

So why doesn't everyone process locally? 

In order to process locally, there are hard requirements that your business must have such as local operations, a bank account, and a legal entity. 

In the example above, for a US-based business to process the UK customer’s transaction locally, they must have a fully operating subsidiary in the UK. (Remember, an UK licensed acquirer only has the capability of contracting with a UK-based company). The cost and complexity of setting up a foreign subsidiary is typically too large for most companies to overcome. 

So… what should my next step be?

By leveraging Reach’s Merchant of Record model, your organization can unlock the power or local processing and allow Reach to handle the costs, compliance, taxes, and complexities associated with global expansion. 

Book a demo to get started.