The Risks and Rewards of Localizing International eCommerce
For direct-to-consumer eCommerce brands and customers alike, the globe is getting smaller.
Until recently, online retail mostly took place domestically, with the majority of buyers and sellers coming from the same country. That’s changing — rapidly. Increasingly, consumers are seeking out international brands to find the products that they want.
In fact, 70 percent of consumers make at least one international purchase every year, according to a survey by IDC Research and ORC International. These days, customers expect to easily buy from brands anywhere — ideally on sites in their language and currency. Customers are buying globally, but they want to transact locally.
Cross-border eCommerce is taking over as the key growth engine to B2C trade, with a compound annual growth rate of 29.3 percent from 2014 to 2020, according to Accenture. By 2022, cross-border purchases are expected to make up 20 percent of all worldwide eCommerce, with sales of $627 billion, predicts research firm Forrester.
If you’re an eCommerce brand focused on growth, it’s imperative that you consider a strategy for selling internationally and reaching more consumers by catering to their geo-specific cultural and buying preferences.
To successfully expand globally, brands will need to create an online shopping experience that feels local for every customer, while also managing the regulatory and logistical risks of every new market that they choose to enter. In the worst cases, these risks can turn into real catastrophes, costing companies millions of dollars in lost sales, unexpected expenses, or even fines. In the best cases, brands that exceed customer expectations and deliver a seamless online experience are able to capture a big slice of global eCommerce growth.
Four primary risks that influence international eCommerce include:
• Fraud and data theft
• Consumer privacy and protection
• Tax collection and remittance
• Logistics and reverse logistics
In this article, we’ll take a closer look at each of these risk areas for companies looking to localize their eCommerce footprint internationally.
Fraud and Data Theft
As the volume of eCommerce grows around the globe, so does the frequency and severity of eCommerce-related fraud. In Q2 2017 alone, account takeover fraud rose by an alarming 45%, putting online retailers at a loss of $3.3 billion dollars, according to a study by Signifyd and PYMNTS. Meanwhile, the Global Fraud Index, which measures fraud attempts on eCommerce merchant websites worldwide, saw a 5.5% increase in total fraud from Q2 2016 to Q2 2017.
Identity theft is posing the biggest challenge for remote channel merchants, according to a report by EKN Research and Radial. In developed countries, CNP (card not present) represents 60-70 percent of all card frauds and is increasing every day, the researchers said. CNP fraud led to an 18 percent increase in overall credit card fraud in the UK in 2015, according to Euromonitor.
Meanwhile, massive data breaches at Experian and Yahoo made headlines in 2017. The Experian breach has cost the company a staggering $4 billion so far. In June 2016, the U.S. Securities and Exchange Commission fined Morgan Stanley $1 million for failing to properly protect customer information.
Global expansion puts greater pressure on companies to secure their customer data against breaches and theft since they’re not operating in the more familiar confines of their domestic market.
Consumer Privacy and Protection
If you operate a global eCommerce business, you should know that most countries around the world take consumer privacy and protection very seriously. These laws are particularly enforced in developed markets such as Europe, North America, and Latin America.
According to the UNCTAD Global Cyberlaw Tracker, the first ever global mapping of cyber laws, 77 percent of countries have e-transaction laws, 50 percent have consumer protection laws, 58 percent have privacy laws, and 72 percent have cybercrime laws.
The challenge for eCommerce operators is that these laws are not only constantly changing, but their application varies across the globe. For example, China has recently taken major steps to strengthen its regulatory environment for eCommerce. A new proposed eCommerce law would require eCommerce businesses to comply with China’s cybersecurity law.
“That means Amazon.com Inc. and other e-commerce companies would have to abide by the law’s requirements to store personal data on servers inside China, restrict exporting data overseas, and set personal information security standards,” according to Bloomberg. “The requirement that personal data be stored within China presents challenges for foreign eCommerce companies that process transaction and other data abroad, and for companies that use cloud services to store data.”
Similar changes are happening in Europe. In May 2018, the General Data Protection Regulation (GDPR) law will require eCommerce operators to put stricter controls on personal data collected from residents of all 28 European Union member states, even when the operating business resides outside of the EU. Some businesses may be required to hire a Data Protection Officer to oversee oversight. Most crucially, regulators will be able to impose fines for noncompliance of up to 4 percent of the company’s annual global turnover, or up to 20 million euros — whichever is higher.
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Tax Collection and Remittance
As with consumer protection and privacy, tax compliance can be quite challenging for eCommerce operators who want to do business in foreign markets. Most developed countries have strict and highly enforced regulations around what and who should be taxed, how it’s collected, and how it should be reported to tax authorities. Complying with the ever-changing local laws in each market you want to enter should not be taken lightly.
In recent years, tax authorities around the world have started to change value-added tax (VAT) rules to capture more revenue from eCommerce companies. For example, foreign eCommerce businesses with annual sales to the Taiwanese consumer market greater than $16,000 USD are now required to register for VAT in Taiwan, charge and collect VAT on their local supplies, and file bi-monthly VAT returns.
Europe is constantly tweaking its VAT rules. In January, the European Commission made a proposal to introduce more flexibility for member states to change the VAT rates that they apply to different products. In December 2017, the commission approved plans to make it easier for online businesses to comply with VAT obligations. Those changes are scheduled to take effect by 2019.
VAT thresholds vary by country, by the type of product and service being sold, and by the customers buying them, so not every business is required to collect the tax. It can get pretty complicated pretty quickly. What stays constant is the risk of severe penalties for companies who fail to remit their required VAT taxes or miss filing deadlines. In fact, company directors can be held personally liable for failure to comply with VAT requirements.
Logistics and Reverse Logistics
In recent years, eCommerce logistics has gotten much, much more complicated for brands operating around the globe. If logistics is not brand’s core competency, then entering and serving an entirely foreign market can be extremely difficult to pull off successfully.
As customers around the world get more comfortable with ordering products online, their expectations have risen dramatically. It’s critical that your logistics operation can pull off the basics without a hitch every time. Orders should ship from fulfillment centers accurately and in a timely fashion, and returns should be handled just as seamlessly. Failing consumer expectations for delivery is a definite brand killer.
Fortunately, the annual UPS Pulse of the Online Shopper survey found that 61 percent of consumers in Europe, at least, are willing to wait an extra four days on international orders. But 81 percent of these buyers also said the ability to return a product for free using a pre-paid return label would be an important factor in their buying decision.
Having a top-notch logistics partner can ensure that you meet consumer expectations on the local level for accurate and timely delivery.