Disclaimer: Opinion paper by Jérôme Traisnel, CEO and co-founder, SlimPay
As companies continue to grow across borders and customers look to become shoppers of the world, a noticeable paradigm has emerged with merchants in the United States—common payment methods in America don’t do well in Europe. This is due in large part to the lack of understanding of payments in Europe by U.S. merchants, and the reasons consumers shop internationally. The current American “one-payment-type-fits-all approach” does not work with European consumers. They’re reluctant to use American-based payment systems due to unfamiliarity and perceived security issues, and instead opt, for vetted European processes. If U.S. merchants want to reach European consumers and compete in the predicted 2016 €509.9 billion e-commerce industry in Europe, they must adapt to the changing European payments habits of subscription-based payments. In fact, nearly 60 percent of European consumers already have between one and five monthly subscriptions.
It’s important to take a moment to understand what a current subscription-based model look like in 2016. Many people think subscription models are only for magazine or newspapers, but many modern tech companies also use subscription-based models such as Uber, Birchbox, TaskRabbit. While there is no one-fixed price-per-month, the new definition of subscription-based payments includes any company that has authorized access to make payments on a consumer’s behalf, or a pay as you go model for a product or a service.
In Europe, payments rely on SEPA direct debit from your banking account
In the U.S., merchants use ACH (Automated Clearing House) to conduct recurring payments. These payments utilize your debit or credit cards to authorize payments, whereas in Europe, within the SEPA zone(Single Euro Payments Area), payments rely on direct debit from your banking account. For instance, in the U.S., you would use your credit or debit card to pay your mobile phone bill instead of authorizing a direct debit from your checking account using your bank account number and routing number. In Europe, direct debit is used to pay everything from recurring Netflix payments to utility bills.
While the prevalence of technology adoption in the U.S. and Europe has simplified the lives of many consumers, merchants must remember that not all customers have the same behaviors. Although they both demand services and goods in near real time, companies with foreign payment methods will be seen as cumbersome and quickly forgotten about. As a boutique merchant in the U.S. conducting business in Europe, this is not an option. Payments should be as easy as sending a SMS, but they’re not.
US merchants must have a strong understanding of the Directive on Payment Services (PSD), which was adopted in 2007 to regulate the emerging FinTech industry in Europe.
To be competitive in Europe, U.S. companies must transition from ACH technology to SEPA-like payments when selling to European consumers. Further, U.S. merchants must have a strong understanding of the Directive on Payment Services (PSD), which was adopted in 2007 to regulate the emerging FinTech industry in Europe. Now 10 years later, the laws are being updated (PSD2) to include payment service providers (third-party providers, banks, payment institutions) who will be required to meet certain security measures to ensure safe and secure payments through a conducted by PSD. According to Finextra, “online merchants should carefully review their payments strategies to ensure they are well-positioned to take advantage of the change,” and “those who move quickly will be able to gain a bigger slice of the shift in payments revenues.”
Combining SEPA-like payments with an optimized signup process and digital signatures could lead to higher conversion rates, and ultimately, more revenue from Europe for U.S. merchants. There’s also a big advantage compared to relying on credit and debit cards—bank accounts don’t expire and are rarely stolen. With subscription-based payments, there’s never a need to input new card information, making it effortless to keep paying for a service as customers. In Europe, 85 percent of consumers make use of subscription payments. Moreover, 40 percent of European consumers have already saved their payment credentials at least once and they are 87 percent of to consider that 2-factor authentication increases payment security, showing that they seem pretty much ready to operate a switch in behaviors.
Consumers are more likely to make continuous purchases if the transaction happens in real time and there is no bill later.
Fortunately, there are companies that can help U.S. merchants expanding to Europe, such as Zuora, a cloud-based technology that helps companies build subscription business models by establishing and monetizing recurring customer relationships, transparently and in compliance with PSD2. Consumers are more likely to make continuous purchases if the transaction happens in real time and there is no bill later. In Europe, this is common practice and U.S. companies should fit this model in an effort to appeal to European consumers.
Risk and fraud are still huge concerns no matter the industry you’re in. Specifically, when doing business across the Atlantic, both the merchant and consumer share the burden. Frictionless payments are preferred, but they need to be secure. Security always trumps ease of use, and the advantages of strong authentication outweigh the disadvantages for 86 percent of the European consumers (see our survey on Europeans and the Subscription model). While tech helps with that, U.S. merchants should switch to a direct debit payment solution that appeals to the European consumer to have a chance at success overseas.
Luckily, there are companies that are working to provide subscription-based payments for companies looking to expand internationally, but there is still a lack of understanding by many American companies. Instead, we’re seeing the charge being led by French and German FinTech startups that have home court advantage, the Euro area. SlimPay is fully committed to the task and other companies are also working in the space.
