Domestic Acquiring: What Online Retailers Need to Know
Domestic acquiring for eCommerce is a thing of mystery for many retailers. Often, a retailer knows they need it in their cross-border strategy, but isn't sure what it is or how it affects payments. Yet, domestic acquiring is one of the most important parts of global eCommerce, and cannot be ignored or misunderstood by retailers. After all, their international sales depend on it.
Let's look at some common questions we're often asking by retailers about domestic acquiring:
What is domestic acquiring?
Domestic acquiring takes the cross-border element out of a transaction by acquiring payment in the same market as the shopper making the payment. For example, a US retailer can use a Mexican acquirer to process Mexican card transactions, without involving their own US acquirer, who may have potentially flagged the transaction as fraudulent.
Domestic acquiring reduces the processing cost of a transaction as retailers are not paying interchange fees. It also improves payment acceptance rates, and perhaps most importantly: enables local card schemes that may not be available for cross-border acquirers and gives access to alternative payment methods such as invoice, online bank transfer and local e-wallets.
It really is all about providing a localized payment solution to the shopper.
What is the difference between an acquiring bank and issuing bank?
An acquiring bank (or acquirer) is a bank or financial institution that processes credit or debit card payments on behalf of a retailer. The acquirer and retailer have a contract whereby the acquirer enables retailers to process transactions from card-issuing banks, then makes contact with those issuing banks to receive payment.
An issuing bank, also known as issuer, is a bank or financial institution that gives payment cards to shoppers on behalf of the card networks, such as Visa or Mastercard etc. The issuing bank extends a line of credit to the card-holder and is responsible for funding for transactions made with the card. The issuing bank assumes responsibility for shopper repayment of the debt of the transaction.
What are the advantages of domestic acquiring?
The benefit of using a foreign bank acquirer within a shopper's country is that retailers' transactions will automatically be treated as domestic rather than international. The benefit for the retailers is that the card processing fees for domestic transactions are significantly lower than international fees.
With a domestic bank acquirer, payments are treated as domestic payments and therefore legitimate payments are automatically approved and not stopped by a retailer's fraud detection because of foreign IP addresses. This is a great benefit for shoppers as it will reduces barriers in the checkout and increase repeat purchase.
Another major advantage of domestic acquiring for the shopper is that it opens up more local card schemes, i.e. using a domestic acquirer in Russia would mean the retailer could offer Mir in their Russian checkout - a card scheme used by over 14 million Russians. Without these local payment methods that are enabled by using a domestic acquirer, retailers could be missing out on a significant amount of sales in a market.
What is the domestic acquiring process?
- Cross-border shopper purchase
- Routing and processing - the customer’s credit card information is captured and encrypted by the payment gateway. The gateway sends an authorization request along with the transaction information to an local acquiring bank. The acquiring bank in the market speaking to another bank (give higher acceptance) then sends the request to the issuing bank (the shopper’s bank) to request approval to process the transaction.
- Approval - the shopper's bank either approves or denies the transaction. For cross-border payments, approval is more likely if the payment is routed to local banks in the shopper's country.
- Authorization - confirmation from issuing bank
- Order fulfillment
- Settlement - the issuing bank (shopper's bank) sends the funds to the local acquiring bank, which then passes the funds on to the retailer's bank.
Is domestic acquiring necessary for my retail business?
Domestic acquiring is typically recommended for online retailers that see a substantial volume of sales in emerging markets such as the Middle East, Russia, Latin America, Southeast Asia and Africa. If a retailer is seeing a high basket value in an emerging market, this would warrant the need for domestic acquiring. However if there are only low value orders coming from an emerging market it may not be in a retailer's best interest to invest time and money into domestic acquiring - cross-border acquiring may be sufficient.
Another consideration for retailers should be around understanding the market, order value and which payment methods target shoppers use. If the target (emerging) market has a high basket value but the vast majority of shoppers only use the major card schemes such as Visa or Mastercard, then domestic acquiring also may not be worthwhile as the main advantage for shoppers would be opening up additional card schemes and alternative payment methods. Conversely, if there is a high volume of business from an established market, such as Australia, domestic acquiring could ensure higher payment acceptance and open up more alternative payment methods such as POLi, a popular form of online payment in the country.
There is an enormous global eCommerce opportunity waiting to be tapped into by retailers who are ready for the challenge. In order to maximize international sales and overcome barriers to entry in emerging markets, retailers should consider domestic acquiring and select the right partner to provide the solution. By doing so, retailers will not only increase approval rates of legitimate foreign transactions, but will minimize fraud risk by working with domestic acquirers with proper risk management measurements in the market.