Overcoming the challenges of cross-border trade

Matthias Setzer, Chief Commercial Officer at PayU

Cross-border trade represents one of the biggest business opportunities available to merchants from around the globe. Recent estimates have the cross-border market growing from $401 billion in 2016 to $994 billion in 2020. Nearly two-thirds of cross-border business will come from high growth markets such as Asia and Latin America.

Yet, with this opportunity comes challenges. Ambitious merchants are being held back by cumbersome cross-border payment infrastructure and processes which make it harder for them to reach potential customers. Only by combining local market knowledge and new technology can such barriers be overcome and cross-border trade truly succeed.

The impact of customer demand

The demand for cross-border trade is growing, fuelled in large part by the global rise in smartphones. Indeed, in a recent survey by Payvision almost a quarter of respondents said that m-commerce would be the ‘biggest game-changer’ for cross-border e-commerce.

Tech-savvy consumers are increasingly demanding the one-click convenience they’ve grown used to. They know frictionless payments are technically possible and they fully expect the market to cater to their demands. In short; the better the experience on offer, the quicker consumer uptake will be. Unfortunately, cross-border trade has not yet caught up to this customer expectation. Despite a recent survey finding that China is the top cross-border online shopping destination, just over one quarter of its top retailers sell internationally.

Local payments preferences

The payments ecosystem, historically burdened by complicated infrastructure and out-of-date processes, is one the biggest challenges of cross-border e-commerce. The ability to offer a frictionless payments experience to customers, particularly ones located in high growth markets remains operationally challenging and cost intensive to many businesses.

Attempts to offer a seamless cross-border experience is made no simpler by the knowledge that, in high growth markets, alternative payment methods – which refer to payments made using something other than a credit card like cash, coupons, bank transfers, prepaid cards etc. – still represent as many as two-thirds of all payments. In more established markets, local payments preferences are still evident and prevalent. For example, in Poland the most popular payment method, used by 62 percent of Polish e-consumers, are real-time bank transfers called ‘pay-by-links’.

Interoperability and open platforms are critical to help break down the barriers that exist for the fintech companies, financial institutions and businesses that are trying to reach a wider audience and increasingly operate internationally. We’re already seeing European regulators attempting to tackle these issues with the scheduled implementation of the Payment Services Directive 2 (PSD2) in 2018. At PayU we are also trying to do our part to make cross-border trade easier for merchants and consumers alike.

Earlier this year we launched our PayU Hub platform. PayU Hub aims to use technology to solve the cross-border commerce challenges by using a single API integration to access to 2.3 billion potential new customers in the major high growth markets across Asia, Central and Eastern Europe, Middle-East, India, Africa and Latin America.

PayU Hub’s hyper-local direct connections to acquirers and alternative payment methods allows merchants to see increased card approval rates and reach entire markets through alternative payment methods. This also ensures that local consumers in high growth markets can pay for their purchases using their preferred payment method.

Consumer credit

Another issue faced by many cross-border merchants is a reliance on traditional methods of credit authorisations. Understandably, many merchants from mature markets are hesitant to lower their risk threshold by relying on non-traditional payment verification models. Yet, this means that it can be incredibly difficult for businesses and customers to connect with each other.

Fortunately, another consequence of the rise in smartphones is that it brings with it a corresponding rise in data about a customers spending and earning habits. As the amount of data increases, new techniques are being used to build credit intelligence and more accurately understand an individual’s credit rating. For example, AI and machine learning are being incorporated into credit models, enabling underwriting which uses thousands of variables all changing in real time.

At PayU we are developing and supporting these new techniques and their potential to unlock credit and financial services for underserved populations. Our record €110 million investment in Kreditech means that we have a joint partnership to create credit ratings and provide finance to people who may not otherwise have traditional credit histories.

As companies like PayU enable more consumers in high growth markets to keep using their preferred payments methods and to access credit, some of the bigger cross-border challenges will be overcome and more opportunities seized. In my opinion it’s this that makes the cross-border market all the more exciting – and one to watch.

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