Cross-Border Acquiring in Europe: One License Explained

Accepting card payments across European markets once meant setting up a payment solution in each country you sold into. Cross-border acquiring removes that requirement for businesses. One acquiring relationship can take your card payments from customers in dozens of European countries, all in their native currencies, without the need for a separate license in each of those countries.

In this article, we'll explain how cross-border card acquiring works for European businesses. Specifically, we'll discuss the licensing requirements for acquiring across European markets, how a card payment changes once it crosses a border, how the use of multiple currencies works with multi-currency acquiring, and the various factors to consider when choosing a card payment acquirer for your business

What Cross-Border Acquiring in Europe Means

Cross-border acquiring means that the company that processes your card payments is in a different country from the customer who presents that card. A company that is based in Estonia, for example, can take a card payment from a customer in Spain as part of one acquiring relationship with an acquiring bank. Such a relationship allows a business that sells its products to many European markets to use one payment setup.

By contrast, local acquiring means that the company that accepts the card payments is in the same country as the individual who used that card to make the purchase. If a company sells to customers in France, its acquiring bank will be based in France. If those customers are from Germany, the acquiring bank will be based in Germany. Each of these countries will require a separate acquiring bank relationship. A cross-border merchant acquirer consolidates these separate acquiring banks into one.

How Card Payments Change Across Borders

When a customer uses their card to purchase goods or services from a company, a card payment is initiated from that customer's card issuer to the company's bank. However, that payment is not the same across borders. The card schemes that are used, such as Mastercard or Visa, look at the country in which the acquiring bank is established and where that customer's card was issued.

If these two countries are the same, then it is known as a domestic payment. However, if those two countries are different, the card networks will reclassify that transaction as a cross-border transaction. Such changes impact the cost of the transaction for the company that is receiving those payments. The interchange fees and the scheme fees that are paid to the different card networks (Visa, Mastercard) are usually higher for cross-border transactions.

Additionally, cross-border transactions usually have a lower rate of authorization of those payments. The authorization rate is the percentage of card payment requests that are approved by the card issuing bank. If the acquiring bank is based in a different country from the customer's card issuer, the issuing bank may decline those cross-border transactions as a means of reducing the number of fraudulent transactions. The result is a higher decline rate the further the acquirer sits from the cardholder.

The third major difference between domestic and cross-border payments is the currency in which the customer pays for the products or services. The customer will pay the company with their native currency. Should the business require payments to be made in a different currency, there will be a foreign exchange conversion between the two currencies, which will cost the company some money according to the exchange rate between the two currencies.

Why One License Can Cover Multiple European Markets

One of the reasons why one acquiring license can cover numerous markets in Europe is due to a process known as EEA passporting. An acquiring company that is licensed in one member state of the European Economic Area can offer its services to the other members of that European bloc. The license effectively moves with the acquiring company that holds it.

This ability to offer cross-border payment acquiring services to the member countries of the European Economic Area is one of the main reasons that a company can establish just one acquiring license that can receive payments from dozens of European countries. The acquiring company will hold just one license, and the business will be able to sell its products to customers everywhere that the acquiring company has licensing rights.

The regulatory framework that supports this license movement is known as PSD2. PSD2 is a directive that was established by the European Union that governs the licensing of all payment service providers in the European Economic Area. A license that is obtained from one member of that European bloc can be used in all others due to this directive.

The other regulation is the SEPA regulation. The SEPA regulation allows for the movement of euros between any number of member states of the European Union. A euro payment made from an individual in one member state to another in another member state is subject to the same regulations as a euro transfer that occurs within a single member state. The EU has also implemented a regulation that establishes caps on interchange fees for consumer transactions.

This Interchange Fee Regulation limits the percentage of the transaction that can be charged to the consumer's issuing bank. For example, the percentage can be limited to a maximum of 0.2% for transactions made with debit cards and 0.3% for those made with credit cards within the European Economic Area. This regulation also applies to cross-border transactions within the European Union.

How to Handle Multiple Currencies on a Cross-Border Acquiring Setup

A multi-currency acquiring setup that allows for the processing of payments made in multiple currencies will allow a company to receive payments from customers that use any of their native currencies. Thus, a customer from Sweden will use their krona, a customer from Denmark will use their krone, and the payments from each of these customers will all go into the same acquiring bank and software.

Offering the ability to pay in a customer's native currency will increase the likelihood that they will successfully complete the purchase from your company.

With the ability to process payments in multiple currencies, a company has various options regarding the currency in which they are paid. Payments can be made into a company in a dozen different currencies. However, the company can also choose to receive its money in just a few of those currencies. For instance, a company can receive all of its payments in euros. Or, they may choose to hold the company's funds in the same number of currencies in which they receive their payments.

Another option for cross-border acquiring is dynamic currency conversion, or DCC. DCC allows the customer who presents their card to the merchant to choose at the time of their purchase to pay for the products or services with their native currency. The customer will see a different price for those products at the time of purchase based on the exchange rate between their currency and the currency of the business. This option will usually provide a less favorable exchange rate for the customer than the one that their bank uses for foreign currency conversions. Thus, it may be unfavorable for them to use DCC to pay for products from your company.

Cross-Border vs Local Acquiring

Using just one acquiring bank and software to receive cross-border payments will be cheaper for your company and easier to manage than if it used acquiring banks that are based in each of the countries from which it receives payments. However, there will be a cost associated with this ease-of-use for your company: the lower rate of authorization of cross-border payments.

As discussed in the topic on how card payments differ across borders, the issuing bank that issued the customer's card is more likely to decline a cross-border transaction than one that is domestic in both the acquiring bank and the customer's card issuer. Thus, one of the costs of using a cross-border acquiring relationship is that a company will experience a higher number of declined payments compared to if they used local acquiring relationships in each of the countries in which they would like to receive payments from customers.

Should a company find that it receives a high volume of sales in just a few of the countries from which it receives payments, it may be worthwhile to use local acquiring relationships with those countries. The benefits of having a higher authorization rate from those acquiring relationships will outweigh the costs of having to establish acquiring relationships in those individual countries.

The Various Acquiring Models for Companies in Europe

Direct Relationship With an Acquiring Bank

The first of the two main acquiring models is the company establishing a direct relationship with an acquiring bank. This acquiring bank will receive all of the sales that are made by the company, and the company will receive all of the profits from those sales. This model is suitable for companies with high sales volumes. Such companies usually have to pay lower fees for each transaction made.

Payment Facilitator (PayFac)

The other main acquiring model is using a payment facilitator, or PayFac. With this model, the PayFac will establish an acquiring relationship with an acquiring bank and then establish the company as a sub-merchant of the PayFac. The benefit of this model is that it is faster to establish an acquiring relationship with a PayFac than it would be with an acquiring bank. It is suitable for platforms that have high numbers of companies that must become merchants online. The trade-off for this model is that the company will have higher fees for each transaction made with this model compared to the direct relationship with an acquiring bank.

What to Look for in a Cross-Border Acquirer

When evaluating cross-border acquiring companies for your European market, ensure that they have the licensing that is required in order to provide these services to numerous European countries. Additionally, they should have the currencies that are required in order to receive payments from customers in their native currencies.

Ensure that the acquiring company pays their sales in the currency of your choosing, and that you have an understanding of how they price foreign exchange. Additionally, make sure that they have a clear fee structure for the transactions that pass through their system. Ensure that their reporting system pulls sales from each market into one report for your company.