Designing Successful Cross-Border Payment Programs
By David Wilford, WaveCrest General Counsel and Chief Compliance Officer
Electronic commerce has made our world closer than ever. Sites like Etsy allow us to buy products from artisans around the world, Elance provides access to freelance consultants from all corners of the earth, and the tools to track work product and provide payments across borders have become almost seamless.
This provides more consumer choice and business efficiencies, but there are real issues associated with doing business across borders in a compliant, affordable and efficient manner. This is particularly true when it comes to making payments to vendors, consultants, contractors and partners. The practical, cultural, and regulatory issues that businesses must navigate when making payments across borders are extensive, but the following three considerations top the list.
1. Regulations and compliance standards abound; and may be far more stringent in other countries
Regardless of what country a business calls home, paying suppliers, employees and others becomes more complex the instant that business begins to transact in other countries, and doing so requires careful legal analysis. For example, if an American company pays employees who are located in the European Union (EU), it must review and understand the regulatory directives for the EU, as implemented by each member state, as well as any additional, more protective regulatory requirements for that country. Businesses must recognize how these factors apply to citizens vs. residents and identify options for compliance, including possible partnerships, agent/distributor relationships, or obtaining their own licenses.
Any company doing business in and across EU countries must navigate at least two layers of regulatory control:
– Regulations and requirements outlined by its own “home state” regulator; and
– Three EU Directives in particular – both in concept and as interpreted and applied by each EU member state in which the company does business:
– Payment Services Directive (PSD): Provides the legal foundation for the creation of an EU-wide single market for payments. The PSD aims at establishing a modern and comprehensive set of rules applicable to all payment services in the EU.
– E-Money Directive (EMD) aims to enable new, innovative and secure electronic money services, provide market access to new companies, and foster real and effective competition between all market participants.
– Money Laundering Directive (MLD) aims to combat money laundering and terrorist financing and imposes, among other things, “know your customer,” transactional monitoring, and reporting obligations on providers.
Businesses must research each country and determine how it implements the Directives and any applicable state-specific regulations, which might include notification and registration requirements or even setting up a physical presence in that country.
In the case of an e-money license, businesses can “passport” that license from one European Economic Area (EEA) member state to all other member states (subject to certain country-specific requirements). Contrast this with the state-based money service business (MSB) license rules in the United States where no such regime exists.
Any multi-country payments program should be configured to account for different jurisdictions, properly apply Know Your Customer (KYC) and Anti Money Laundering standards across the board. In addition, it should address cross-border issuing and “area of use” licenses as needed.
2. Tax and Accounting Considerations Can Make or Break Your Business Model
The manner in which payments products are named and structured may be significantly influenced by tax considerations. This may involve intercompany agreements between your company’s various global operating subsidiaries, as well as ensuring that the business or its payments partner has the proper issuer licenses in each country.
A full-service global payments provider can help businesses be aware of the potential issues and opportunities that can impact program compliance and profitability, so they can secure the proper third-party expertise on tax and accounting topics.
3. The Devil is in the Details: Practical and Cultural Considerations
Regulatory, legal and accounting considerations clearly make launching and managing international payment programs complex, but it’s often the day-to-day operational factors that make success elusive. One of the reasons that prepaid debit cards are so popular as an international form of payment is that they have become universally accepted and understood, market-by-market.
Cards can be customized by country, currency and by cardholder audience, helping businesses create a brand that resonates with customers, suppliers and employees in each market. This is no small task when people have minimal “real” face time. Organizations must find the right cultural and financial balance between the value of personal connections and hard costs, such as international travel. They must schedule and manage operations across dozens of time zones and customize their communication to resonate with various cultures and target audiences.
Electronic payments can help to bridge this gap by replacing archaic processes like manual transactions, paper check processing, and mail delays with timely, secure and seamless payments that build trust and improve operations. Businesses can transfer funds to cards around the world in one seamless process.
Market customization is perhaps one of biggest challenges for US companies entering the global market place. While a consistent regulatory and financial strategy might be effective across the EU for example, each individual country – and the customer segments within that country – must be managed individually. Each host country has its own priorities and manner of expressing national perspective, which, if not addressed, adds challenges in inter-country transactions.