Modir says Actfit.com wanted a conduct transaction in US dollars for its primarily American clientele, but found that Canadian credit card companies would not allow US dollars deposits. Although the company had the option of listing prices in US dollars and settling transactions in Canadian dollars, they did not want to subject clients to a fluctuating exchange rate and a currency exchange fee on their credit card bill.

But when Actfit.com approached US payment system companies, “no one knew how to deal with a Canadian company,” says Modir. “Basically, we kept getting the runaround. They would say they could find a solution, but two weeks alter, they still didn’t know how to do it.”

After two months, the company found Planet Payment a New York City-based payment system company with operating subsidiaries in Bermuda, the British Virgin Islands and Ireland. Planet Payment has an agreement with the Bank of Bermuda that allows Planet Payment clients to choose transaction settlement in US and/or Canadian dollars. “The benefit of Planet Payment’s service is that the customer pays his currency, while the merchant gets paid in his currency of choice,” says Thomas DeLuca, the company’s vice president. In the coming months, Planet Payment will offer transaction settlement in Hong Kong dollars, pounds sterling and euros.

Actfit.com is not the only Internet business to encounter such obstacles in getting an online business started. DeLuca says he began hearing about merchants’ difficulties a few years ago as a lawyer with New York based Beck and Arad, an international law firm specializing in Internet business. He says the main problem is that credit card companies only allow merchant banks to do business with merchants incorporated in their jurisdiction. This means that a Canadian Internet business that wants to settle payment in US dollars would have to incorporate in the US, which would then expose them to US taxes.

Susan MacKeown, director of new product development at Visa Canada, confirms that Internet commerce is challenging Visa’s traditional rules for merchants and merchant accounts. Visa generally requires merchants to have an account with a bank in the country in which their business conducted, which usually limits them to that country’s currency. The purpose of the policy is to avoid what Visa calls “cross-border acquiring” in order to protect local banks.

Due to the existence of cross-border mail order business, some Canadian banks make an exception for US currency, allowing merchant accounts in Canadian US dollars. Even if the bank is capable of settling transactions in the two currencies, it may reject an Internet merchant’s request if the volume of US dollar transactions is not financially viable for the bank.

Given the example of a start-up Canadian Internet company that wants to open a US dollar account, without established American clientele, MacKeown says the chances of getting such an account would be slim.

At the moment, some e-commerce Web sites offer a currency converter that allows consumers to find out prices in their home currency, based on the exchange rate at the time. But the settlement is still done in the currency listed on the Web site, incurring a fee for currency conversion, which is not necessarily done at the rate the consumer based their purchase on.

A handful of companies like Planet Payment have emerged in response to Internet merchants outside the US who want to accept credit card payment. The firm’s agreement with Bank of Bermuda, allows merchants incorporated elsewhere to get multi-currency accounts in Bermuda. David Lema, vice president of electronic banking at the Bank of Bermuda, says the bank spent a year trying to find a third party processor that could deal with multi-currency settlement before concluding that it would develop its own system in conjunction with Toronto-based Oasis Technologies. “Merchants can’t call themselves international if they are only in one currency,” says Lema. “We’re creating the environment to attract a wider customer base.”

Payment processors in the Latin American/Caribbean region that meet certain Visa requirements are also now able to provide US dollar settlement services to Internet businesses located elsewhere.

“Let’s face it-the US dollar is the currency of the Internet, at least for now, so any merchant wanting to compete on the Web needs to offer their goods and services for sale in US dollars,” says Andrea Wilson, senior vice president of First Atlantic Commerce Ltd., a Bermuda-based multi-currency payment system provider.

Wilson, a Canadian, also says their solution is useful for Internet merchants in countries like South Africa, where currency controls make foreign currency difficult to obtain. Establishing their merchant account offshore makes it possible for them to access US dollars and other currencies conveniently. As of February, Wilson says First Atlantic Commerce will be accepting credit cards in over 25 currencies, settling transactions initially in US dollars, and soon after settling in euros, Hong Kong dollars, Canadian dollars and pounds sterling.

Depending on how the Internet business is structured, it may also be able to take advantage of doing business in a low- or no-tax jurisdiction. Although Planet Payment and First Atlantic Commerce offer the ability of settling transactions offshore without being incorporated offshore, such a company structure does not necessarily offer tax advantages. “The tax advantage comes into play when the company is domiciled outside of North America and has their settlement to a bank in a tax-free or tax-neutral jurisdiction,” says Wilson. For example, a Canadian merchant with both a Bermudian and Barbadian corporation can settle transactions through the Bermuda merchant account, then move the funds to Barbados, which has a tax treaty with Canada for subsidiaries of Canadian business. The company legitimately repatriates the funds back to Canada via the tax treaty and enjoys a lower tax rate. Wilson says this is a great answer for Canandian merchants who want an offshore solution.

Such payment system companies are some of the first to tackle the cross-border issues associated with Internet business. Although the Internet provides companies the opportunity to market globally, e-commerce has so far been led by US merchants and consumers. But Internet consumers are becoming more international; research firm Jupiter Communications expects Europeans to make up 43%, or almost half of the online population by 2003. “The Internet has been driven by the US and they don’t see other currencies as being that important,” says Jon Allen, finance director at PDMS Advanced Systems, an isle of Man-based multi-currency payment processor. “But it won’t be long before people in Spain want to pay in pesetas and people in France want to pay in francs. Web sites will be multilingual and display prices in multiple currencies.”

DeLuca says Internet merchants have to “think global and act local,” by selling globally, but making consumers feel as comfortable as they would in their neighborhood store. Allowing consumers to compare prices and buy in their home currency is one step towards streamlining the payment experience. Studies done by Jupiter Communications have found that the vast majority of Internet customers say they would buy more on line if they knew the total costs up front. Another Jupiter study found that more than a quarter of potential online buyers abandon their order before payment because of the number of online forms they have to complete. Along with currency issues, international payment system providers deal with other problems international e-merchants may encounter.

Why do Internet merchants need a payment processor?

Internet merchants need a payment processor to transmit and process the financial information from a merchant’s Web site to the merchant’s bank so that the merchant gets paid for their sales.

The payment processor starts the initiation request, carries out several fraud detection tests and then sends an approval or decline to the merchant, who can decide whether to proceed with the transaction.

Merchants have the option of building their own intermediary, says Andrea Wislon, senior vice president of First Atlantic Commerce, but it is very expensive and time-consuming. They can also buy off-the-shelf software “which offers little flexibility, and is usually developed for North American merchants that have compliance rules that do not apply internationally,” she says. Aside from large merchants like Dell, who can afford to build their own payment processing system, most e-merchants opt for payment gateway processor, says Wislon.

Getting approval for a merchant account

Credit cards are the most0used method of payment online consumers, with 70% using Visa, followed by MasterCard, American Express and Discover card, according to a survey of American Internet users by Cyber Dialogue. For merchants to be able to accept credit cards, they have to obtain a merchant account. This may be particularly difficult for merchants incorporated offshore, because the information required by traditional merchant banks-names of beneficial owners, officers and directors-doesn’t necessarily have the same meaning as it does for onshore businesses, says Jon Allen.

Added transaction risk

No matter where the merchant is incorporated, added risk is associated with online credit card, or “card not present” transactions. Online transactions fall into the same category as mail order or telephone sales, because there is less certainty the credit card actually belongs to the person using it. “on the Internet, you can potentially do millions of transaction in minutes, so the opportunity for fraud is much greater,” says Allen.

Credit card holders typically have up to six months to contest or chargeback something on their bill, and the burden of proof is on the merchant. For start-up Internet companies, even a few fraudulent transactions could mean financial ruin. Allen says PDMS works by issuing sub-merchant accounts, so they maintain physical control of the money. “Banks aren’t interested in such active participation,” says Allen.

As well as providing online companies with merchants accounts, payment processors provide fraud and risk detection software. When and Internet purchase is made, the cardholder’s information is verified in several ways for authenticity. One way to make sure the transaction is legitimate is through an address verification system (AVS), which requires the numeric portion of the cardholder’s address and their zip code. But AVS is only available for purchases made by American cardholder’s, because it is based on the US postal code system. International payment processors have devised software that looks for other fraudulent flags and alerts the merchants if transactions appear suspicious; the merchant then has the option of accepting or rejecting the transaction.

Alberto Espana, vice president of merchant relations for Visa in the Latin/American/Caribbean region, says the eventual solution to international credit card verification will be the widespread adoption of a technical standard called SET (Secure Electronic Transactions). Visa, MasterCard and several other companies have been working on this system for the past few years, which will give the cardholder a certificate confirming that they are true cardholder. Visa has already implemented SET in Brazil and Peru. It is also in use in Asia and Europe, but it is not widely used in the US.

Critics question whether the implementation of SET is feasible, because it would require a bank to issue SET compliant credit cards to all their cardholders and give SET certificates to their merchants. Even without this system, Espana says that the chargeback rate for e-commerce is only slightly higher than the 0.1% rate found in traditional commerce.

Given the apparently small number of chargebacks, developing higher security may be more of a building consumer confidence issue than dealing with the risk of fraud. A Deloitte and Touche survey released in December 1999 found that almost three quarters of Canadian Internet users are concerned about online security and privacy protection, and say these fears prevent them from shopping on the Internet. Such uncertainty is a reminder that consumers-the people who really shape e-commerce-are just getting used to this new phenomenon.

Making International e-commerce a reality will take more than just ironing out cross-border payment issues, at least in terms of retail business. If the past holiday shopping season was any indication, customer service and product delivery remain major obstacles. And who knows, as domestic online stores proliferate, consumers may still prefer to buy goods and services from merchants they are familiar with.