Cross-Border Ecommerce Trade and the Foreign Exchange Challenge

At some point ecommerce in African countries will only grow and expand if it can sell across national borders. This point obviously differs between countries – the national ecommerce marketplace in Botswana is going to be much smaller than in the RSA, for example, requiring Botswanan e-shops to look for foreign markets long before SA’s e-shops have to. Apart from logistics and customs issues, one common issue in Africa is a foreign exchange (FX or Forex). In the developed world, ecommerce has broken down national and regional borders, bringing consumers and merchants to one international marketplace, existing entirely in the digital space. Even there foreign exchange or currency conversion is the lynchpin underlying international trade, but many cross-border online sellers lack the necessary level of expertise in this area, ultimately leading to lost sales and disgruntled customers.

Here are 5 things every cross-border seller needs to know when it comes to FX:

Offer Payment Acceptance in Local Currency

Research has shown that 25% of shoppers will leave a website if their local currency is not offered. That is a huge drop-off for cross-border sellers – a quarter of sales lost in the first few seconds.

External Currency Converters Lose Sales

Another reason for customer drop off is a currency conversion. Once the consumer arrives at checkout and sees a final sum in a foreign currency, they will immediately go to a currency converter website and check the amount in their national currency. Not only does this redirect them away from the seller’s site right at the critical point of sale, but there is also sure to be a discrepancy in currency conversion. External converters typically use the mid-market interbank rate, not the inferior retail rate that consumers would actually be required to pay, causing dissatisfaction when the true cost appears on their card statement.

Currency Conversion Rates Are High

Many consumers are not aware that banks charge 3%-5% for currency conversion. On top of that, banks also charge a fee of around 3-5% for purchases made in a foreign currency, which is not revealed by the currency converter. As a result, customers are often shocked to discover their purchase ended up costing significantly more and they will be less likely to shop with that e-shop again.

Unhappy Customers Always Blame the Merchant

Imagine you go online to purchase an item, but at checkout, your transaction gets declined. You know you have more than enough funds available so you try again. It still gets declined. As a customer, you do not know what the problem is, so you naturally assume it is the website and go to a competitor to buy the item. However, it is often not the merchant’s fault but the bank’s. If the transaction is requested in a foreign currency, the bank may see this as a fraud attempt and block the transaction. Not only are the seller’s sales impacted, but not many consumers would return to that e-shop after the negative experience. Customer dissatisfaction and reputation damage as a result of foreign exchange happen all the time, but it does not have to.

Exchange Rates Fluctuate

Another issue that cross-border sellers face when offering foreign exchange on their websites is the timeliness of conversions. Normally, treasury departments will accumulate funds and execute periodic transactions on an incremental basis, usually quarterly. However, exchange rates fluctuate and if the e-shop waits too long to convert it runs the risk of the exchange rate dropping and potentially losing a significant portion of total profit.

Foreign Exchange Value for Consumers and Merchants

There are additional ways that merchants can leverage Forex to their own benefit. For example, when a European customer buys an item in dollars, their card-issuing bank will use an inflated Forex rate in order to collect euros. As discussed previously, the typical spread can be upwards of 3%.

By offering consumers the option to pay in their national currency, while creating a competitive local price, e-merchants can increase revenue and eliminate confusion around the all-in cost. The customer is happy because they will not find any surprises on their credit card bill, and the e-shop has just managed to create an incremental revenue stream rather than giving it to the banks.

To wade through the tricky waters of foreign exchange, cross-border sellers need to analyze their situation and find someone to help them implement a foreign exchange strategy that suits their business needs.  Solutions include only using PayPal or credit card operators. (source Michael Bilotta, Ingenio’s Head of Foreign Exchange North America and LATAM)