Accepting credit cards in other countries

So the problem is that you are looking to accept credit cards from your customers but your business in not located in the United States. This is a very common issue for small business owners around the world, and unfortunately there is rarely an easy answer that meets the small business’s needs.

I’m briefly going to give a little comparison on how the merchant services industry works in the US compared to other countries. This explains why processing rates are so much lower in the US than other countries.

In America, businesses have several different option for who to accept credit cards with. There are independent merchant service providers (ISO’s and MSP’s), there are standard business banks, and there are sales agents that resell for ISO’s and banks. While each of these groups are associated with each other, and sometimes resell for the same companies, they also compete against each other.

In just about every other country in the world, banks have exclusive control over the credit card processing in that country. For many, it is often a single bank that controls the credit card processing for that entire country. A number of years ago, processing in America operated on a similar system. Banks eventually opened the door to allow independent service providers to exist. This in turn led to more and more competition, and eventually the credit card processing industry in America transformed to price driven instead of the former value driven industry. Coincidentally, Visa and Mastercard make a higher percentage for each transaction from businesses in America than any other country, but businesses in the US pay less to process than businesses in any other country. What outwardly appears to be an industry crammed with middle-men, actually has facilitated lowering the cost to process credit cards by over 50%.

Non-American countries are subject to very high fees for processing credit cards because the banks have a monopoly on the credit card processing. There are no independent companies providing merchant services which results in very little competition, so the banks set their prices at whatever they want. They know that their customers will pay anything they ask to accept credit cards, because the service is so valuable to businesses.

Until banks in other countries allow independent companies to resell merchant services, there is likely to be a continuing high cost to process credit cards. Unfortunately, there hasn’t been any major pushes in other countries to adapt the Bank / ISO relationship that exists in the US. Mexico, Canada, and Australia, are probably the most likely countries to move to a similar system, but no push has been made yet. As far as banks are concerned, there isn’t any reason for them to move to a different system. The banks are making millions of dollars a year in pure profit, they have 100% control over a very strong industry, they have no competition, and they have no reason to give it all up.

What are a business’s options?
Non-American businesses have a few options for processing credit cards. The can go to their local or regional bank to accept credit cards, they can use a 3rd party processor, and they can use an offshore merchant account provider.

Processing with a local bank and an offshore merchant service provider will likely be very similar. The offshore provider will be less restrictive in business type and volume, but both will have a processing fee starting around 5%. This fee will go up based on the size, volume, history, and the type of products that a business sells. If the business type itself could be considered high risk, then the business will definitely want to go with an offshore provider. The biggest drawback with both banks and offshore providers is that there is almost always a substantial setup fee. Depending on the situation, this fee can be in the thousands of dollars. Another major drawback that businesses experience with banks is that the bank will normally require them to use that bank for their business’s bank account. The bank has their own requirements for opening a business bank account, and this often comes with high minimum balances, and additional fees just for using their required services.

3rd party processors are companies like Paypal, 2checkout.com, and worldpay. These companies process credit card for another business in the name of the 3rd party processor. For normal businesses, this practice called factoring, is strictly prohibited by Visa and Mastercard. 3rd party processing companies also draw a lot of negative attention because they undermine a customer’s ability to make a chargeback. There are countless horror stories from consumers unable to get a refund, or even make a chargeback for what turned out to be a scam or a fraudulent company. 3rd party processors are also notorious for holding, and never returning, a business’s money if there is any sign of trouble. However, 3rd party processors are often the only cost effective solution for start-up businesses. Their fees can vary from about 3% up to about 10%, but they normally lack the high start-up cost of offshore providers or banks.

3rd party processors are restricted in the fact that they can normally only be used for online purchases. They lack the ability to integrate with a credit card machine, and do not normally include a virtual terminal. There are also restrictions on what countries can use their services. A lot of African, Eastern European, and South Asian countries are prohibited. In this case, an offshore merchant provider may be the only available service.

For retail businesses, a bank or offshore merchant account provider is probably going to be the only method they can use to accept credit cards.

For a new business, I would recommend trying to find a 3rd party processor online. Check out various discussion forums, and ask around. For existing businesses or businesses that know they need an offshore merchant account, start searching online or call up your local bank. With some research, you should be able to find the best solution for your business. As with any merchant services company, if an offer sounds too good to be true, it probably is.

One last thing…
There are companies out there that will claim to be able to setup an American bank account and forwarding address for your business so that you can get a domestic merchant account. All processing banks in the US require you to have a ‘physical‘ business presence in the US. That combined with the patriot act’s stringent requirements for opening a US bank account make it pretty much impossible to go down this rout. It is probably possible to pull it off, but it is most likely illegal, and definitely expensive. If you get caught processing illegally this way, expect major repercussions from your processor, and possibly the government. Just a warning…