By Dickson Chu, Paypal

For eCommerce, the world is indeed “flat.” The Internet has enabled many wonderful — and weird — changes to the way we communicate with each other: the way we find information, the way we enjoy music and books, and the way we socialize and interact with our “community” through Facebook or MySpace. (When was the last time you sent a fax or mailed a letter?) But the most significant change to the payments industry has been the rapid growth of global eCommerce and the cross-border payment opportunities that have emerged.

In the United States, eCommerce has reached its first stage of maturity as growth rates continue to slow with consumers and merchant adoption passing critical mass. However, there is a bigger and more exciting stage of growth ahead of us. The winners of this new era will include the companies that recognize and embrace the fact that, to paraphrase Thomas Friedman of the New York Times, the global eCommerce world is flat; nowhere are the notions of globalization more pronounced than with eCommerce.

Pondering the complexities of global eCommerce — currency exchange, customs and tax laws, and even cultural differences in buying habits among countries — is certainly enough to give the most seasoned retailer a headache.

But the companies that can normalize payments across the globe, excel at online fraud management, efficiently manage currency conversion (including localized settlement in multiple countries), and all the while weave through the complex and ever-changing world of local and international regulations will enjoy enormous rewards.

The Global Marketplace is Growing

As the U.S. eCommerce market reaches maturity, as shown by annual growth rates now in the single digits and greater than 70 percent online penetration of households, it’s easy to forget that other markets around the world, like some of those described in Figure 1, have yet to reach maturity and are still in the hyper-growth mode of “young” markets.

But don’t assume that these young markets are small. Forrester Research’s 2009 European Online Retail and Travel Forecast Model shows that Europeans spent €104 billion shopping online in 2008, a figure that’s expected to jump by 11 percent to more than €116 billion in 2009. The consensus among analysts and research firms is that by 2012 the size of the eCommerce markets in the European Union (EU) and Asia Pacific will be larger than the U.S. online market.

It is also easy to forget that 95 percent of the world’s consumers live outside the United States with both the desire and the economic means to shop online — if only merchants and the payment systems made it a bit easier to purchase goods and services across borders.

In Germany — as is the case in much of the EU — millions of consumers have trouble buying on the Internet from non-domestic merchants because of low consumer credit card penetration.

In China, 298 million consumers have access to the Internet — more than in the United States and Canada combined. (Interestingly, that number is only 22.6 percent of China’s total 1.33 billion residents.1) There are estimated to be more than 60 million middle class Chinese who have the financial means to buy goods from U.S. merchants if the option is available, but merchants often don’t provide the payment mechanisms
or business processes that allow potential overseas customers to buy their products online.

So, what does this all point to? It shows just how big the opportunity for cross-border eCommerce can be for U.S. merchants. It also demonstrates the challenges that businesses considering cross-border eCommerce have to solve and that they must be committed to addressing those issues if they wish to take full advantage of the opportunity.

More than anything else, it shows that any size business looking for ways to drive revenue growth and boost profitability should start thinking beyond domestic sales — and that means setting up business for global online trade.

Crossing the Lines: The Challenge of International Business

So why don’t U.S. businesses export more through online channels? A 2007 report by the Organization for Economic Co-operation and Development found consistent reasons retailers don’t export — everything from fear of fraud, concerns over logistics and payments, import laws and language barriers. Indeed, discussions about doing business globally and accepting international payments online sometimes conjure images of nightmarish complications — increased risk of fraudulent transactions, complex political or regulatory issues, and customs or taxation problems.

Retailers are concerned for good reason. New data from CyberSource Corporation shows that 52 percent of U.S. eCommerce merchants accept orders from abroad and that fraud rates are high and climbing. Merchants surveyed said 4 percent of international orders turn out to be fraudulent — 3.6 times the domestic rate of 1.1 percent — and the international fraud rate has ratcheted up 67 percent since 2005.

Given the risks with overseas orders, it’s no surprise that many merchants reject orders from outside the United States more frequently than those coming from home. In fact, rejection of international orders for suspected fraud is almost four times that of orders originating in the United States and Canada. In 2008, U.S. merchants
rejected 2.9 percent of orders coming from Canada and nearly 11 percent of orders from the rest of the world.

Doug Schwegman, CyberSource Director of Market and Customer Intelligence, sums up the paradox perfectly: “International eCommerce represents great opportunity and challenge — simultaneously.”

The current economic outlook for the remainder of 2009, and possibly well into 2010, is challenging. Many economists predict that the global recession will get worse in the latter part of 2009 before it begins to get better in 2010. Correspondingly, we should expect that online fraud will increase as it always does in tough economic times, which will certainly create more pressure on profits.

Despite the challenges, the case to build a strategy for accepting international orders is compelling for everyone from entrepreneurs to large corporations. The current recession will pass, but cross-border eCommerce is here to stay and will only continue to grow. Further, mastering cross-border trade can help:

• Increase sales and boost global market share

• Diversify and insulate businesses from dependence on — and susceptibility to — local market fluctuations

• Stabilize finances during low financial tide in seasonal markets

Accepting Global Payments The Easy Way

Today, serving international buyers is not as complicated as many people believe. Online payment processors like PayPal and others have radically simplified the complexities of cross-border trade by handling a wide variety of payment types.

With these online processors, everything from Visa® and MasterCard® to local and regionally-specific payment types like Switch/Maestro and Solo cards from the UK, JCB in Japan, and private label cards in France are all supported. Even local bank transfers from places like Germany, whether “push” or “pull” transfers, require little to no intervention from the merchant to move quickly and securely through systems like these.

The end result is a “normalization” of payments across multiple types and regulatory jurisdictions. U.S. merchants selling to German consumers will be paid in dollars and the German consumers will continue to use their preferred way of paying — a bank transfer method called ELV.

Another big value-add of these new global payment systems is their advanced anti-fraud capabilities and tools that protect both buyers and sellers. Chicago-based ePal, which specializes in GPS equipment, two-way radios  and other electronic products, has learned how an extra measure of security for customers can help sales.

“Our international customers are much more comfortable dealing with us now, so our business constantly grows by word-of-mouth,” said ePal co-founder Klaus Koch. Of ePal’s customers, 60 percent live in Canada, Australia or Europe, and because it built a strategy for high-volume cross-border business, it has gone from a tiny operation to one that brings in about $250,000 per month. Incredibly, nearly 90 percent of its customers pay electronically.

ePal’s success with cross-border trade mirrors that of much larger S&P 500 companies who are already selling to a global customer base: A large percentage of their customers live and shop outside their home countries.

Competing in an Ever-changing Global Marketplace

So how can businesses take advantage of cross-border trade opportunities? Start with a solid foundation for enabling cross-border trade. Expanding payment options for non-U.S. shoppers is the first step, and using a processor that can provide a single source for foreign credit, debit and bank payments (which are popular outside the United States) is a faster, more secure and easier way to begin.

But cross-border fraud prevention, seamless currency conversion and localized merchant settlements are just table stakes. To be truly successful with online global trade, businesses still have to provide the same solid business practice that made them successful in the United States: delivering high quality customer experience.

Those eCommerce sites that highlight a willingness to accept international orders and list products in local currency show potential buyers a commitment to their needs — and that builds buyer loyalty and confidence. Languages can also be a barrier for international customer service, so speaking to customers in their language with a localized Web site is another effective way to close more business online.

Additionally, being clear about customs, duties and taxes on certain items, and how they might vary by country, is an important part of a complete international customer service experience.

ePal enjoys an enviably high conversion rate of 80 to 90 percent, and Koch explains, “Our customers come to buy. They’re usually after a specific product, our prices are competitive, and we’re set up to help them shop and buy without hassle, no matter where they are.”

Fluctuations in currency exchange rates can give the average overseas consumer more buying power for the same spend, and that helps them reduce their overall purchase price while still getting what they want or need. The opposite can be true for the merchant, so tracking currency exchange rates aligned with pricing is critical.

Few opportunities in today’s challenging economy can match the growth promise of online cross-border trade. Yes, there are problems, but those can be met with commercially available solutions. And, although it might seem like the current economic downturn has made global eCommerce more risky than in financial good times, the truth is that there’s money to be made for the global-savvy U.S. business.

The smartest businesses are the ones sharpening their pencils and pursuing strategies to get there. The upside is too great to ignore.

About the Author

Dickson Chu is vice president of global product and experience for PayPal Inc. In this role, he leads product strategy, development and user experience design for the millions of PayPal consumers and merchant customers around the world. Chu has more than 23 years experience in the financial services industry.