What Franchisors Need To Know About Cross-border Payments

What franchisors need to knowabout cross-border paymentsConsiderations for getting paidquickly and cost-effectively fromglobal franchisees

What franchisors need to knowabout cross-border paymentsThe most accomplished franchisors haveachieved success because they evolved to meettheir franchisee needs and preferences in theglobal markets they serve. The ease of becominga franchisee and the strength of the operationalrelationship with their franchisor is foundationalto the success of both. Yet a key element of thefranchisee-franchisor relationship that often getsoverlooked is the flow of money. Put simply, howdoes the franchisor get paid in a timely mannerwithout burdening the franchisee with high fees?How efficient, localized, and transparent is thefranchise fee payment process in the differentinternational markets you operate in? The mostlucrative franchisors have prioritized theirinternational payments strategy when it comesto collecting royalties, advertising and marketingfees and more. Expertly managing foreignexchange (FX) and banking fees can make thedifference in hitting your cash management andgrowth objectives.Franchisors with international presenceknow that royalty payments can at times beunpredictable for many reasons, a majorcontributor being currency volatility. FXfluctuations can lead to unpredictable cash flowwhich can affect strategic initiatives to expand incurrent and new foreign markets.How can you improve the paymentexperience for all parties?In this whitepaper, we define some of the mostimportant terms around international payments,and explore some considerations, challenges andquestions to ask when pursuing an internationalfranchise strategy to digitize and ease crossborder payments processes.

FX 101 and cross-borderpayments et’s begin with some basic definitionsLaround the foreign exchange market andcross-border payments.The foreign exchange market is the world’s largestand most liquid financial market, with volumesexceeding all global equity and fixed incomevolumes combined. Trading takes place 24 hoursa day, opening Monday morning in New Zealandand closing Friday evening in the United States.Foreign exchange markets set the foreignexchange rate, also known as the FX rate— theratio between a pair of currencies that showshow much of one trades for the other. Due to boththe ebb and flow of currency demand and roundthe-clock trading, FX rates fluctuate regularly.Cross-border business payments are currencytransactions between organizations that arelocated in different countries. As EY explains,these transactions involve front-end providersand, increasingly, back-end ones. In the past, thepayer chose a front-end provider – bank or moneytransfer operation – to move the payment, whichthe recipient received through whatever providerthe payer chose. Long settlement periods, hightransaction costs and limited accessibility were aproblem particularly with less liquid currencies.Within this environment, back-end networks haveemerged to “optimize cross-border payments,” andenable interoperability between payment methods.These back-end providers give senders moreoptions – and can deliver greater efficiencies – toreach the receiver.

Payments considerations inexpanding a franchise internationallyHere’s a common internationalexpansion storyline:A franchisee or master franchise expresses theinterest, experience, and financial readiness tolaunch a franchise brand in a new country, andso the agreement is signed. As the franchisorstarts down the path, operational complexitiesstart piling up and in no time, the brand is operatingin the new market but struggling to get money outof that country due to legal, regulatory and taxconsiderations that weren’t settled.FX and bank fees, local laws and regulations,taxes, and ensuring regulations are followedwhen repatriating funds all need to be consideredwhen setting up international franchise paymentoperations. Will you put the FX burden onfranchisees to pay you in US dollars (or yourcurrency of choice)? What payment methods willyou offer? How will you comply with invoicingrequirements in specific countries? And how willyou ensure everything comes to you in a formatthat is easy to reconcile and doesn’t cause workoutside of your accounting system?

et’s review, at a high level, what to considerLwhen onboarding payments processes forinternational franchisees.Invoicing and collectionInvoicing in USD, for instance, and leaving itto franchisees to figure out how to pay isn’tonly problematic because of the complexitiesinvolved with FX for the customer. There arealso a number of cross-border invoicing issuesto contend with. Here are some basic questionsto consider.How will you comply with regional and localrequirements? There are regional, countryspecific and sometimes even local regulationsand laws guiding what exactly the invoice mustlook like, how it must be delivered, whether itmust be translated into the local language, andmore. You’ll also need to assure the correctdocumentation is sent by the payer for U.S.tax purposes.What methods of payment will you offer?It’s crucial to stay on top of the preferredpayment methods in specific regions – which candiffer a lot. Let’s look at a few. Bank wires — Bank wires are often the firstchoice for international business payments,but they also tend to be more complicated andmore expensive. You need to provide customerswith the proper banking details and codes, andthey need to engage with their bank to initiatethe wire. Confusing foreign exchange andbank transfer fees often cause the paymentamount to be less than intended when it arrives.Another drawback is the reconciliation workthat’s required to connect a payment to aninvoice. This makes it more complex to reliablyand efficiently determine payment status. Credit cards — Credit cards are often thefastest way to pay, but high FX rates and feescan also make them expensive for internationalpayments if you don’t pay close attention tofee structures. ACH payments — This electronic paymentmethod is experiencing high growth when itcomes to B2B payments. There were 5.3 billionB2B ACH payments in 2021—valued at 50trillion— a 20.4% increase from 2020. ACH B2Bpayments are up 33.2% over the past two years. Local digital methods — While some B2Bpayment methods may closely mirror those inthe U.S., doing business in Brazil, for instance,will require you to accept perhaps paymentmethods that are new to your business, suchas Boleto Bancario.What currencies will you support? Providinglocal currency options for payment not onlymakes it easier on the franchisee, but ensuresthat you receive payments in the accurateamount. Having cash tied up overseas is notideal, nor is the common issue of receiving shortpayments due to dynamic FX rates and hiddenfees. You’ll need to ensure a transparent andcost-effective transaction for both parties whenconsidering currency exchange rates.

Self-service payment processesCan you offer a fully digital payment experiencefor the payer – such that the payer is able tocomplete the entire transaction online andview its details? Or are you emailing an invoicewith instructions for manual payment – leavingthem with little visibility into the status of theirpayment? Depending on how frequently you areinvoicing your franchisee and how complex thepayments are, manual work and inefficienciesadd up quickly on both sides of the transaction.Transaction security and privacyTransaction security and compliance withapplicable security and privacy laws andregulations is critical. An evaluation of paymentproviders must include their maturity with:SOC II Type 2 (or SOC 2) evaluates theoperational procedures and technical controlswithin a service organization that accesses,stores, and processes customer data. Theassessment is based on strict informationsecurity policies and procedures that measurethe organization’s ability to properly manageand protect the security, availability, processingintegrity, and confidentiality of customer data.PCI DSS is the industry standard for companiesthat accept, process, store or transmit credit cardinformation. This certification was specificallydesigned to reduce credit card fraud by ensuringsecure environments and increasing the controlsaround cardholder data.EU–US Privacy Shield is a framework designedto ensure that US-based companies adhere tothe rules of the European Privacy Act when theydo business with European entities. Specifically,the General Data Protection Regulation (GDPR)provides stipulations on how personal data canbe exchanged for commercial purposes betweenthe European Union and the United States.Complexity and cost of managing multiple bankaccounts and banking relationshipsReceiving overseas payments is rarely as simpleas opening a local bank account. The franchisormust consider the corporate treasury function.Will there be an increased treasury challengeif this is going to be an ongoing relationship? Doyou need to hold foreign currency and the localcurrency? How much will it add in cost?FX complexitiesHedging currency risk must be considered inany overseas expansion, but especially whenthe global economic environment is volatile,interest rates are high and inflation is a concern.Individual currencies and markets present uniqueand complex considerations. Flywire surveyedhundreds of global financial professionals forthe past two years, and they consistently rankdealing with currency fluctuations as the biggestchallenge to expanding into international markets.A full 95% said that if they had an easier way todeal with exchange rates, they could increaseglobal expansion efforts.

Long DSO and impact to cash conversion cycleHaving timely visibility into all global transactionswas a top need of treasurers surveyed inMcKinsey’s 2021 Global Payments Report. That’shardly a surprise, given that on the receivablesside, the average U.S. firm now waits 33 days toreceive a cross-border payment, according tothe PYMNTS’ August 2021 Global B2B PaymentsPlaybook. Anecdotally, we’ve heard that globalinflationary pressure has extended that by nearlytwice or three times as long – with companieswaiting as much as 90 days to receive payments.Support when something goes wrongHow will you support franchisee payers whenthey have questions – around the clock, andmeet needs in local languages? How will youmanage chargebacks? Most businesses don’thave the resources or expertise to take this onthemselves.Operational efficiencyHow will you reconcile multiple bank accounts,handle transactions in different currencies andget visibility into where payments are globally?If your company has standardized on an ERPsystem, how will you best ensure work doesn’toccur outside of it – with each entity’s head ofaccounting pulling reports from different systemsinto Excel? Matching wire transfers that cameinto a bank account with customer invoices,combing through bank accounts and credit cardstatements to make sure everything lines upcorrectly is painstakingly manual work.Geo-political risk and issuesThere’s a range of events and situations thatbring risk to overseas expansion, but on thewhole geopolitical risk and uncertainty are rising.Worries over geopolitical risk landed among thetop 10 CFO concerns for the first quarter of 2022in the CFO Survey, a long-time survey run by DukeUniversity’s Fuqua School of Business and theFederal Reserve Banks of Richmond and Atlanta.