When a company decides to sell products and services internationally, few probably realize how many aspects there are to consider with the global expansion, especially when it comes to payments. There are considerations such as establishing foreign legal entities, international taxes, foreign exchange rates, foreign bank accounts, which payment services to use for the international customers, and many more. It may sound a bit daunting after reading that, but with some planning, it doesn’t have to be. Let us break it down for you.
Entity Structure – Does your company need to open entities in the countries where the majority of customers will be located or will your existing entity suffice?
- Pros to establishing local entities
- Higher authorization rates and lower network costs for card payments (local acquiring)
- Card networks charge cross-border scheme fees when the card issuing country isn’t in the same country as the merchant entity.
- Easier to acquire and service customers in the local jurisdiction
- Access to local payment methods, which are often the preferred way to pay in a certain locale
- Access to local funding, bank accounts, and VCs
- Foreign exchange exposure is reduced as your company can settle into local bank accounts
- Higher authorization rates and lower network costs for card payments (local acquiring)
- Cons to establishing local entities
- Paperwork and legal overhead
- Cumbersome process of setting up the entity
- Filing tax returns and accounting complications
- Potentially having to set up a local office and hire a director
International taxes – When you start to sell internationally, your company will need to know where to collect taxes, how to collect them, and how to distribute them compliantly. Tax compliance should be one of your top priorities, and it really isn’t recommended to try to achieve compliance yourself as it can be costly, tax rules change constantly, and are often based on very small details. Services such as Avalara or Stripe Tax can calculate the tax based on the customer’s location, your location, and the local tax rate and help you both calculate the tax properly and collect it from the customer. This includes sales tax, VAT, and GST. Both of these vendors have strong tax products, but Avalara does currently have a greater reach (190+ countries vs Stripe’s 40+ countries).
Foreign exchange rates and bank account setup – This will depend on if your company decides to set up foreign/local entities or if it decides to go with the one-entity structure.
- Local entities – If it decides to have local entities, your company could open local bank accounts and manage the FX yourself via your bank account and by using a foreign exchange service such as OFX or Airwallex. Both services offer customers virtual accounts in different currencies. What does this mean? It means that if you’re a US-based company that has opened a company in the UK and you now have a GBP account, you could settle your GBP card payments into your local GBP account that you hold with your bank and handle your own FX.
- One-entity setup – If your company decides to not open the foreign entities, you would need to have a think about which payment provider supports the jurisdictions you wish to enter, cross-border scheme fees (these are not FX fees), foreign exchange transaction fees, who will handle the FX, and the FX costs your company will incur. For example, Stripe charges 1% if you charge an international card and then 1.5% if currency conversion is required. So, if you have a US entity and you’re selling to customers in Europe using Stripe and don’t have local entities, Stripe will add a 2.5% charge when they convert those EUR into USD to settle into your USD account. Stripe does let accounts in a few countries have multiple currencies associated with the account but on the most part it is only one currency and Stripe handles the FX.
When you’re thinking of which model is best for your company it really comes down to how many international customers you’re going to be servicing, if you want to deal with the operational overhead of establishing and maintaining multiple entities, and how much volume you’re expecting to be coming from outside of your main country. Answering those questions will help you decide which route to go down and comparing the costs of opening multiple entities vs not and having to incur foreign exchange fees. If you need help deciding which route to go down or if you need an introduction to any of the services mentioned above (Stripe, OFX, Airwallex) feel free to reach out to us at Yeeld – we’re payments experts and also very knowledgeable on FX and conducting business internationally.