Trust is a fundamental aspect for working with merchants

In today’s PSP market, trust is a fundamental aspect for working with merchants. Payment companies are empowered by collecting revenue, the lifeblood of their partners, and delivering it as promised to their business partners. Even though the majority of transactions are adequately handled, distrust is burgeoning in the payments industry between merchants and PSPs. Why? Some might ask.

The main reason is the industry becoming much more competitive. Service providers need to constantly earn higher revenues to please their investors, or force themselves out of business. This has led to a number of hidden fee cost structures, but there is nothing more disconcerting to a payment manager, accountant or CFO than foreign exchange fees.

To better inform yourself on the impact this issue has on your business, start by taking a look at the merchant revenue statements of your PSP. If your business is international and doesn’t operate locally, it’s likely that you are incurring a foreign exchange cost for the foreign to local payout currencies. The next step is to ask: “How much is my business paying in foreign exchange fees?” Chances are that unless there was a special agreement between your business and the selected payment provider, there will be no breakdown of the foreign exchange cost on the revenue statement. Why is this relevant? PSPs can potentially use the foreign exchange loophole to excessively charge your business, while they also inadvertently help contribute to tax evasion. To understand these points, we first need to briefly explain the general process.

Step 1: If your business is generating revenue in a foreign currency and collecting via a PSP, your business will normally be billed based upon the foreign exchange rate plus a fixed percentage. This is where the problem begins, as contractual wording for foreign exchange must be specific to when the exchange rate will be applied, and loose interpretation in contracts allows for manipulation in the market.

Step 2: While it is common that merchants setup their accounting exchange rates for taking daily mid-market prices (which could also be stated in the contract), some PSPs know that providers do not track and audit their foreign exchange costs properly. Therefore, they apply foreign exchange rate pricing higher than what was agreed upon, and blame revenue discrepancies on forex market fluctuation or rounding numbers.

Step 3: After foreign exchange rates are applied for local currency conversion, the only revenue a merchant will see on their revenue statements is their payout currency after the conversion cost has been applied. This means that PSPs deduct forex costs before showing the full processed converted volume. Therefore, the total actual volume shown on the provider revenue statement is understated by the foreign exchange costs applied beforehand, and local tax authorities could interpret this as tax evasion.

To make matters worse, many PSPs justify the aforementioned practice, as it is considered the industry norm. Even though there are clear implications on not just taxation, but also on company valuation standpoint. For example, imagine the impact it has on a start-up or public company. If they want to show their company earnings, they could potentially be understating their earnings by up to a few percentage points because the provider misrepresents their actual volumes. This doesn’t only cheat company shareholders, but valuations of companies trying to prove their business model is successful.

Conclusively, there are many things companies can do to protect themselves from this type of exploitation. Aside from opening local bank accounts in each major country of business, or creating foreign currency sub-accounts with the company bank, the industry itself needs to push for change. Transparency is necessary if businesses want their payment providers to trust them. If providers want more business, then their key focus should be on having nothing to hide.

About Mark Gerban

Mark Gerban is the Head of Payments at InnoGames, one of the worlds leading developers and providers of online games. Mark oversees the online payment operations at InnoGames and has a specific interest in online payment methods and anti-fraud systems. With a decade of international experience living in Germany, he has worked for companies such as gamigo and Billing Partner. At gamigo, Mark was responsible for both the business development and payment operations.

About InnoGames

With about 150 million registered players, InnoGames is one of the worlds leading developers and providers of online games. Currently, the company employs over 350 professionals from 30 nations. InnoGames has scored major success with games such as Tribal Wars, Grepolis and Forge of Empires.