Payment processing is frequently one of the best areas to take advantage of residency arbitrage. Potentially lower costs, better technology, more currencies, laxer regulations, more banking options not to mention it can be critical to tax planning.
Yes, the card schemes (mainly Visa and Mastercard) have systems to try to prevent such arbitrage and they are getting a bit better but mostly they aren’t very good at it and when you combine differences in their rules with the tax laws it creates many wonderful international structuring opportunities.
So how does international payment processing work?
The card schemes (this is what we call Visa and Mastercard, who are far from the only players but they are the biggest global players by far and the most international players) have divided the world up into regions. In order to obtain processing in a region you need to have a legal entity registered in that region (in most cases). In some cases they try to demand an actual presence but even so there are fairly simple ways around this.
Various regions have their own interchange tables. Interchange tables are the most basic rates charged by the card schemes to process transactions. Don’t get distracted you’ll essentially never pay the interchange rates because an ISO (independent sales organization) or MSP (Member Service Provider) will mark up those rates to obtain their share and it might get marked up a few times depending on how many intermediaries are involved in delivering the end result. Generally speaking these organizations will charge somewhere between what’s called interchange +0.15% and 1+% more when it is high risk business and less when it is lower risk, more when it is lower volume business and less when it is higher volume business. The rationale is obvious, the providers need to make money and the greater the processing volume the less they need to mark it up in order to be profitable.
This is the first potential arbitrage, interchange rates vary around the world so you can take advantage of lower rates by setting up your processing through one region or another. There are usually cross border fees for foreign transactions to help prevent this (in some cases it means setting up separate processing in multiple regions is advantageous) but in some parts of the world the cross border fees still don’t make up for the differences in rates.
You can check regional interchange rates for many parts of the world on the Visa and Mastercard websites (some people will tell you this information is private and cannot be disclosed that’s nonsense, it is public).
Keep something in mind very often processors aren’t passing the savings on to the end client. Europe is quite famous for this, interchange rates dropped April 1st to new lows, incredibly low levels but by and large processors didn’t lower the rates merchants pay. It helps to know this because it helps to know how much negotiating leverage you’ve got.
This is another thing to know about payment processing, rates are typically negotiable in fact in shopping business around I’ve seen as much as a 2% spread in gross processing fees, which is unbelievable! You should definitely shop around to multiple processors, leverage them against each other, and negotiate with them to get the rates as low as you can. Particularly if you’re low risk high volume you can negotiate a long way because it’s better for them to have the business than not have the business.
The next key is regulations. There are some products that simply can’t be sold and consequently won’t be accepted in certain regions these including gambling related transactions, health products and pharmaceuticals, porn, etc. Depending on where you are located you simply might not be able to obtain processing. On the other hand if you are able to establish your processing in a different region you may not have any issues at all.
Currencies are similarly an issue. If for example you process in the US you tend to only be able to accept USD (there’s something called like for like settling, this means you can process in a particular currency and deposit into an account in that currency, which saves on foreign transaction fees either for you or your customers or both). If on the other hand you’re in Canada you can probably accept USD and CAD, possibly also EUR and GBP depending, though unlikely. If you’re in Europe you can probably accept a whole multitude of currencies. This might or might not be useful depending on the nature of your business location of customers, etc. but it’s another advantage of being flexible.
Then there’s payment types. In certain parts of the world Visa and Mastercard will cover pretty much all the possible customers throw American Express into the mix and you’re most likely good. If on the other hand you’re dealing with the German market it may be important to deal with Giro card or in Brazil you may need to deal with some of the local payment methods or perhaps elsewhere accept China Union Pay. There are literally dozens of payment methods around the world and depending on what markets you want to be able to sell to you may need to accept a different variety of them, in fact being able to accept more options may radically increase your sales.
Beyond this there is technology. A great deal of what takes place in processing is based not on the processor or acquiring bank but on the gateway technology you use. On an extreme end you’ve got technologies such as interchange optimization used by Amazon, which detect the type of transaction and route it to different acquiring banks based on the rates they are offering in order to save every penny (this can add up on high transaction volumes). It might also include the ability to tokenize transactions to make for easy recurring transactions or sophisticated fraud protection technology to decrease chargebacks, fraud and also eliminate lost transactions due to imprecise fraud targeting. Depending on what processor you’re using you may be limited in what gateways connect or connect easily, this might affect the shopping carts you can use or use easily. The technology can offer major advantages over and above the cost of processing this is where companies like Stripe and Braintree have differentiated themselves making tools easy for developers.
And of course we’ve got tax. Want to process in the US? You need to have a US legal entity, which means you’ve got to pay US tax on the worldwide income. What if you could pay zero tax or close to it? That’s a big advantage but can’t be facilitated everywhere.
There are enormous advantages to being able to arbitrage your payment processing, the key is understanding how it works and how to take advantage of differences.