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Our flagship series will propel you to the forefront of the global ecommerce revolution. From analyses of breaking current events to the intricacies of navigating cross-border sales and regulations, Business over Borders entertains and informs any audience who wants to learn more about how international ecommerce works.
Welcome to Business Over Borders. I'm your host, Leo Tucker. I'm joined today by Matt Steinbrecher, our VP of Revenue here at Reach. Matt, welcome to the show.
Matt Steinbrecher:Thanks for having me, man.
Leo Tucker:So I was thinking about, businesses that deal with recurring transactions? So they've got some kind of subscription model. So what considerations are there for the, you know, initial transaction where you're actually type it in the credit card and then those recurring billings. Let's break that down a little bit.
Matt Steinbrecher:For most subscription businesses, whether it's physical goods or digital goods, it's super important that first time authorization is is kind of the lifeblood of their business. So what you wanna be able to do is, you know, you wanna create a frictionless checkout for the shopper, which may include, you know, minimizing the amount of information that they need to enter in order to complete their order and authorize that subscription, which is more common in the digital space. And then in the physical space, you gotta get, you know, your shipping address and billing details, all that good stuff.
Leo Tucker:Sure.
Matt Steinbrecher:So it does depend a little bit between the 2, but that initial, C.I.T. as we'll refer to it, customer initiated transaction, that's kinda that first time I type in my card details. I hit submit order, and I'm expecting to get whatever, you know, good or service I'm buying. That's kinda the lifeblood for most subscription businesses because that initial transaction has to be successful in order for the recurring transactions to work properly. So, you know, you gotta think about it as the lifetime value for most subscription businesses. It'll vary a lot based on, you know, what they're selling, but it's all based on that recurring business that comes through, not necessarily, you know, a onetime transaction, and then you have to reconvert that customer over time.
Matt Steinbrecher:You're really just getting them subscribed to whatever it is your product is, and then they stay with you for the length of that. So the initial transaction is super important to make sure that you're sending as much information and data to not only the customer's bank so that they understand what is being purchased, but also, you know, your processing bank too.
Leo Tucker:Right. So we're talking about the the initial the the CIT transaction, the customer initiated transaction. We wanna make sure we get the right data for that. So that's things like correct billing address, I assume. Obviously, the the card data, you have to have that right.
Leo Tucker:You know, are there any strategies that businesses can employ to maximize the authorization going to the, you know, the the customer's bank, the store's bank, everything. What what other pieces of data are there to consider?
Matt Steinbrecher:Yeah. Definitely. I would I would like, a great example is from a lot of digital businesses where let's say you're signing up for, you know, Spotify or something similar like that. Basically, you're going to enter your card details, and typically, you may just enter your ZIP code.
Matt Steinbrecher:Not having the full billing address does impact auth rates, and it does depend on on what your merchant category code is, so, like, what types of products and services you're selling, and it does depend on where you're selling to and what kind of banks. But at the end of the day, if you're not able to provide the full amount of transactional data, meaning, like, the customer's full billing address, all that information on top of just the ZIP code, you may see a dip in authorization rates. Now the the flip side of that is by only asking for the ZIP code, you're able to minimize the amount of information that your customer needs to put in to subscribe to your product or service.
Leo Tucker:Yeah.
Matt Steinbrecher:So you're kinda maximizing your conversion rate, but because your first time that's it, that first time transaction that happens with the customer is so important to lock it down, you do wanna make sure you're monitoring that first time authorization rate to make sure that you're sending in enough transactional data to the customer's bank as well as your bank to ensure that you're maximizing that success rate at the first time authorization. Right.
Leo Tucker:I feel like I've seen that in real life. A lot of services, especially digital services I've signed up for, I'll show up to the site that says, hey. What's your name? What's your credit card number? The expiration date, maybe a ZIP code.
Leo Tucker:There's a very minimal information that they're actually collecting, so I imagine it must be a bit of a balanced game to let's keep that sign up form as lean as possible, but also collecting enough information to make sure that customer initiated transaction, that C.I.T., is going to result in being approved.
Matt Steinbrecher:Yeah. Exactly. And that's where it's it's a balancing act. You gotta look at your conversion rate, so how many people actually hit submit order versus what your authorization rate is, for those people who do then hit hit submit order. And balancing that is for sure tricky, and it does vary quite a bit.
Matt Steinbrecher:Like, if we're talking about physical goods, it's a different type of ballgame where customers know that they need to enter their shipping address.
Leo Tucker:Yeah. They gotta get a product somehow. Yeah.
Matt Steinbrecher:Yeah. Exactly. Whereas when they're signing up for a, you know, subscription platform or, I don't know, whatever it might be, for a digital product or service, then, you know, there's gonna be less information required. That does come down to, you know, even more nuance to how the customer's bank ultimately receives the information. And and one thing to really focus on, I think, what a lot of people don't understand is a lot of the declines that happen with payment authorization attempts come from the customer's bank.
Matt Steinbrecher:So it doesn't have to do with, you know, there is, like, potential fraud, right, stolen credit cards and things like that, but it always has to do with, you know, me, Matt, I have a legitimate credit card. I'm buying something online legitimately, but my bank may see some of that data that's passed through in the attempt of the authorization. And they may basically say, even though he's got, you know, $10,000 line of credit with us or whatever, we're not gonna take the risk on this transaction or decline it. And I think for a lot of businesses, you wanna avoid that notification as much as possible, and by sending that accurate data to the bank, to the customer's bank specifically in the authorization attempt, it will help maximize your conversion rate and your approval rate, which ultimately is, you know, more money in your pocket.
Leo Tucker:So that makes a bit of sense because while you may be collecting a little more data, if you can stop that, you know, message from the bank saying, hey, we noticed something weird. You're you're buying tap shoes. You don't usually buy tap shoes or, you know, subscription service to tap dancing videos or whatever whatever we're doing this example. Yeah. You know, trying to avoid that extra bit of friction by, you know, maybe collecting a little more information at the beginning.
Leo Tucker:That that does make sense.
Matt Steinbrecher:So I think what a lot of people that, you know, aren't really detailed oriented in payments, like people who are payment professionals working at a subscription based company, they may not truly understand that when you send in what we're calling a sit here, which is a customer initiated transaction with the intention of rebilling that customer, like, every month or quarter or year. Mhmm. You're actually telling their bank, you know, Matt is trying to buy your digital subscription product for 9.99 a month, and we're gonna charge him every month subsequently until he basically unsubscribes to our product. And so my bank is gonna see that as an even higher risk transaction than if I were to just, I don't know, buy, like, a pair of socks or whatever online for 9.99 just as a onetime transaction. My bank is not gonna see that as as high risk because they're like, okay.
Matt Steinbrecher:This is just a one time transaction. Whereas if my bank is able to see that this is not a one time transaction, it's gonna be a recurring order, they wanna really do you know, these are all, like, real time algorithms. Right? But they're basically teaching their algorithm to do enhanced due diligence from a risk perspective on that order because it's and that's why we call them, like, a customer initiated transaction that will be recurring because you're basically acknowledging to that customer's bank, like, you will see us again at a certain, you know, point in the future.
Leo Tucker:Right. It's not just that one transaction. Yeah.
Matt Steinbrecher:Totally. Yeah. And so they're gonna be a lot more, you know, risk adverse for that transaction, meaning the bank, the customer's bank, simply because of the fact that their risk is now exponentially 999 per month for the next x amount of months. If it was truly fraudulent, maybe the person missed it or whatever it might be, but I think that's kind of the the key difference of authorization rates. As a result, what you'll see when you're a subscription based business versus a onetime based business, well, onetime based business will always have higher first time authorization rates than a subscription based business, and it's simply because of the fact that the subscription based authorization is going to the customer's bank and acknowledging that there will be more charges coming.
Matt Steinbrecher:And that's what kinda increases the risk profile of that transaction.
Leo Tucker:Oh, yeah. That's really that's really interesting. So the banks, you know, the banks sort of understand their exposure, their risk exposure with a package, you know. Hey. I'm gonna send this package.
Leo Tucker:You're only getting the package once. You know. But with a subscription business, it's unknowable. You know, you could have it for the rest of time and, you know, I don't know how long I've been charging my credit card for my Netflix subscription.
Leo Tucker:It's it's it's been a minute.
Matt Steinbrecher:Yeah. And you have to think too about how many people maybe accidentally, you know, a a a big thing in the industry right now and why banks are a little bit more especially US banks, where subscriptions are becoming more and more popular and banks are becoming more and more limited with their not limited, but they're they're starting to shut down more transactions. We're starting to see authorization rates overall are are just a little bit lower is really because there's a lot of US customers that are you know, they get, like, a free trial, and then you reattempt to authorize that transaction, and now that customer is locked in, but they maybe don't want the product or they just wanted the free trial, but they forgot to unsubscribe. And so, like, now you're getting into unsubscribe. And so, like, now you're getting into churn games, which is a whole different side of the transaction, not necessarily, like, that first time authorization.
Matt Steinbrecher:But it's really important to, like, talk about free trials and, again, the consumer experience right now in the States in particular and probably really similar in Canada since we have, pretty similar, let's say, consumer behavior characteristics.
Leo Tucker:Right.
Matt Steinbrecher:But what happens a lot is people basically sign up for stuff, and then they completely forget they have a subscription. So you'll get ads or whatever on social media. They're like, oh, well, you can sign up for this subscription identification thing where you basically sync up your credit cards to this app, and this app will tell you, oh, by the way, you're paying for these x y z subscriptions that you're probably annoyed who you're paying.
Leo Tucker:Oh, interesting.
Matt Steinbrecher:And because of that, you're starting to see banks kinda wise up a little bit more if a subscription business is using, like, aggressive tactics to try and extract as much money off the card as possible even if the customer's not using the product.
Leo Tucker:Right. Kinda dark dark patterns there on the website at checkout and, you know, small print in the terms of service, things like that. Is that what we're talking about?
Matt Steinbrecher:Yeah. Exactly. You know, like, if it if you do an annual subscription to a software, for example, most softwares, if I do a a billing on January 1st and my and I'm doing an annual subscription and my next billing is following January, if I decide to cancel my subscription in mid February, a month and a half in because I'm not satisfied with the service or whatever, a lot of people won't prorate your discount. So you're basically like, alright. Well, your service runs until the following January as you originally agreed, but we're not gonna prorate you and discount you for the, you know, whatever it is, ten and a half months that you didn't use our product.
Matt Steinbrecher:And then the customer might be upset, so they file a chargeback with the bank who saw all this data and transactional information so they understand that the the behavior of me as an individual when I sign up for a annual digital subscription, and I've I've filed 2 or 3 chargebacks for that type of data or that type of, like, authorization payload that the bank has seen in the past of me, they know that, like, that paid for annual Netflix and annual Spotify and annual Hulu and then charged all 3 of those back over the last 5 years of his behavior. And they're now analyzing that in real time to say, when he goes and buys an annual subscription on a digital SaaS platform, it's it's pretty it's pretty likely that he's going to have a chargeback, which means that is now that's hard cost for the bank to deal with the chargeback and go through all that. So they know that I'm a higher risk of doing that, and therefore, they're gonna shut me down more often as a consumer, and the the bank is basically gonna decline an attempted transaction on, like, I don't know, Disney plus.
Matt Steinbrecher:Right.
Leo Tucker:Right. Right.
Matt Steinbrecher:But if you do that as a consumer quite a few times, your risk profile to your bank goes up and up and up every time you do a chargeback. So the authorization rate, conversely, for the merchant that's trying to capture your business is going to suffer if you have a higher risk profile to your issuing bank. And that's something like, again, kinda deep in the weeds of the way that this real time authorization rate works, but most people don't really understand that that's how it all kinda comes full circle between me as an individual with a credit card issued by my bank and, you know, you as a merchant trying to capture as much money as possible from the credit card issued by my bank.
Leo Tucker:So, Matt, this whole time, we've kind of been talking about US based businesses. You know, we got our our Disney Plus, our Paramounts, our Hulu's, and everybody else. Let's talk a little bit about cross border businesses. So you've got a company who's selling a a product on recurring billing, some kind of subscription, but they're selling in multiple markets. Let's say they're based in the UK or they're based in the EU and they're selling into the US, which is quite common.
Leo Tucker:How does that dynamic affect auth rates and ultimately sort of cost of customer acquisition?
Matt Steinbrecher:It basically just gets more and more complex anytime you introduce anytime you introduce cross border into things, it gets a lot harder to be successful as a subscription based business. I'll use the example of software and SaaS companies specifically because, ultimately, software is infinitely scalable across borders. You can sell it anywhere in the world.
Leo Tucker:Yeah. You're not gonna run out of software. Yeah.
Matt Steinbrecher:Totally. But, like, physical product, you gotta get it through. There's customs brokers. There's shipping. There's time frames for shipping.
Matt Steinbrecher:It's it's more of a pain. Totally doable. But
Leo Tucker:Yep.
Matt Steinbrecher:When we're talking about software where I'm instantly able to access it, I enter my card details. I wanna use that software straight away. I hit complete order, and then I get access to whatever the software is. If we're looking at the UK based business selling US consumers, the most important thing is, again, to try and maximize that customer initiated transaction, that first time authorization request on on the US customer's credit card. Mhmm.
Matt Steinbrecher:And the reason being is because if you're able to get through on that first time authorization request, it's much more likely that you will be successful on the recurring authorizations, the MITS, merchant initiated transactions, which would basically be charging my credit card as if I were the consumer on whatever cadence that I, you know, choose monthly, quarterly, annually, whatever. The thing a lot of people don't understand is why most businesses like this UK software business would look at their approval rates or their authorization rates domestically in the UK and would see, like, really good performance. They might see, like, you know, high 80% to low 90 percentile acceptance rates on the first time transactions, which is really good for, you know, a subscription business. It totally depends on, like, the average order value and a bunch of other stuff. But Yeah.
Leo Tucker:Absolutely. But let's let's assume good auth rates, you know, and Yeah.
Matt Steinbrecher:Absolutely. Yeah. Like, high high eighties, you know, like, 88 to, like, 94% would be pretty good in a domestic subscription business with a lot of other variables in there. Demographics play a huge key in that. But when you look at your cross border set, your first time authorization, it's probably gonna be, like, 50 to 60, which is way lower.
Matt Steinbrecher:So when you look at, as a business, your cost of acquisition, right, if you're a software company, you probably have, you know, meta ads, and you probably use Google SEO, or Google Shopping or something like that to be able to advertise your business. And you basically are looking at your return on ad spend for the US is going to be lower. And the predominant reason because of that is you're getting people converting. You're getting a US customer to come to your website, go through the checkout, enter their credit card details, click complete order, hoping they're gonna be able to access your software right away, but then they get a a decline from their bank.
Leo Tucker:Yeah. But 30% more of them are not you know, the bank says sorry.
Matt Steinbrecher:Yeah. Exactly. And it's usually, like, it's usually anywhere from 20 to 30% on average.
Leo Tucker:Oh, that's massive.
Matt Steinbrecher:And it's yeah. It's huge. I mean, you have to understand that that's, like, a massive impact to the cost of acquiring a customer successfully. So you'll see the conversion rate drop for those US customers, but then also your cost to acquire those US customers goes up exponentially even if it might make more sense apples to apples, like your cost of converting a customer in the US just because it's such a drastically larger market, and depends, like, what your product is, it might be easier for you to actually convert people in the US. But your barrier to entry of getting that that return on ad spend that's as positive as it is in your domestic market like the UK is this decline rate.
Matt Steinbrecher:Right? It's all these transactions that are first times being declined.
Leo Tucker:Potentially half the customers that you could you could have in that one market just because of the authorization rates. Yeah.
Matt Steinbrecher:So if it costs you, let's say, $30 in ad spend to get a customer to convert on your, you know, $69 a month SaaS company, that return on ad spend is pretty good. You get, you know, 50% back, or rather a 100% of your investment back, within your 1st month of the subscription. And, of course, there's a bunch of other fees that you have, like sales reps and, you know, the cost of your software, whatever.
Leo Tucker:And such. Yeah.
Matt Steinbrecher:When you're looking at just the ad spend, the cost is, you know, significantly lower if you're able to get those people converting at a 90 plus percent rate when they enter their credit card details. When you're getting a 50, 60% conversion when they're entering credit card details, your cost essentially doubles. So that Yeah. Return on ad spend is now gonna go from, you know, basically within that first half of that month, they subscribe, you get ROI to now the full month is just your ad cost because you're getting half of the people or, you know, 30% less or 20% less. We're just kinda going through some basic economics, like unit economics of acquiring a customer is much higher.
Matt Steinbrecher:And that's where a lot of people don't understand, like, why. Why are my decline rates lower in these international markets? And, again, it always comes back to the customer's bank. If my bank sees me buying stuff I live in Austin, Texas. If they see me buying stuff consistently here in Austin, and then all of a sudden I'm trying to buy a software that's based out in the UK, and all the other softwares and subscriptions that I have are predominantly US, they're gonna see that as high risk.
Matt Steinbrecher:It could be high risk of fraud. It might be that the risk profile of me as an individual because I always buy subscription softwares, and then I end up calling my bank and charging back because I don't like them or whatever.
Leo Tucker:Like we discussed earlier. Yeah.
Matt Steinbrecher:Exactly. Yeah. So it's like there's all these different things that go into it, but, ultimately, the biggest one is the fact that my bank is based in the US, and I'm using Capital 1 or Wells Fargo or whatever. And your bank in the UK is, you know, HSBC or Barclays, and that's cross border. So my bank may not recognize your bank.
Matt Steinbrecher:With the larger banks, it's a little different. Right? Like, JPMorgan's basically the biggest bank in the world. Like, their rates will be a lot higher than if I'm using a small Texas based credit union.
Leo Tucker:This isn't coming from Austin, Texas. I don't think so.
Matt Steinbrecher:Yeah. Exactly. And it's the same concept as and I tell people this all the time. It's the exact same concept as if you leave the country, go on vacation to Thailand or Mexico or whenever you swipe your card and it gets declined. You get a call from your bank that says, hey.
Matt Steinbrecher:Did your card get stolen? Was this actually you? Now you call your bank back. They say, okay. Great.
Matt Steinbrecher:You'll be in Mexico or Thailand or whatever for the next 10 days. We'll make sure we we, you know, process all of your requests. That's all happening in a millisecond when it comes to, you know, your transactional data being processed and then crossing borders between these banks. And so if that data is not really thorough, or just the fact that there are 2 different countries, banks originating in 2 different countries, ultimately, you're gonna have a much higher decline rate. So a lot of people look at that and they say, you know, if I were able to get my decline rate to a normal level like I have in the UK, my cost of acquisition would actually be lower in the US.
Matt Steinbrecher:Like, my performance would be better in the US, and I'd probably be more successful business in the US, or I can grow my business drastically faster in the US because there's just way more people in the US than there are in the UK. And so that's where you see these businesses trying to analyze this, but a lot of the times they won't connect the dots. It's like, why are my decline rates so much higher in the US than they are in the UK? And it's simply because your bank's based in the UK, your customer's bank's in in the US.
Leo Tucker:What's what's the fix? That's a big problem.
Matt Steinbrecher:There's really, like, one one to 2 ways that you can do this. The first way is if you're a larger company. Right? Your Netflixes, your Spotifyes, these guys have entities, businesses, operations all over the world. Like, they are multinational companies because they're doing 1,000,000,000 and 1,000,000,000 of revenue every year, getting subscriptions from from customers all over the globe.
Matt Steinbrecher:There's a lot of different elements that go into it, but, ultimately, how do you compete? Like, how do you get your performance to be better? You can't really compete with someone like Netflix because they're massive. You know, they have the resources to go and put boots on the ground all around the world, whereas with most of small software businesses that are scaling up quickly, they don't have the resource to go say, okay. Well, we know our return would be better growing in the US than it is in the UK.
Matt Steinbrecher:But how do we get that decline rate to go down? Like, how do we get that sit rate to go up or our approvals to go up on those initial transactions in the US? The only way to really do that is to go and create a US entity, to create a US bank account, to now become a multinational corporation. The moment you do that, you have to have boots on the ground, which means employees. You're subject to typically, like, an income tax that would come from the IRS now, but now you also have employees in the US, which means there's different employment laws, and there's different employment laws across every single state within the US.
Matt Steinbrecher:And so when you think about it as a business owner, you're like, okay. For for me to see the return in the US and get the performance results that I want, I need to make a massive investment in basically becoming a multinational corporate. I think a lot of people are a little bit, not not totally understanding the true cost of of acquisition to, like, actually open a US entity. A lot of people don't understand that, you know, you can go on LegalZoom today, and for, like, $99 or whatever, you can set up a Delaware LLC or a Wyoming LLC. It's super simple.
Matt Steinbrecher:But then as soon as you start moving money through that LLC and you start having employees on the ground and you actually create, like, a bank account with a legitimate bank here in the US, you now need to have a director who could sign on behalf of the business. Like, there's all these additional things that snowball. So it's not necessarily just the creation of fantasy. That's dead simple. You know, most of the time I tell people, like, at minimum, you're looking at a quarter $1,000,000 investment, when you really add it all up of, like you know, labor costs, man hours, lawyer fees, setting everything up properly so you're not, like, overpaying on taxes.
Matt Steinbrecher:And if you don't set things up properly, you're either gonna get audited and get screwed or you're gonna end up paying way more than that to your legal, counsel to set it up where you're basically optimizing your your cash flow between your US and UK entity.
Leo Tucker:Right. I don't love this plan a. What you got? What is what you got for plan b? I don't I don't love plan a.
Matt Steinbrecher:Plan b is, you can use a merchant of record, which is basically reseller, and you can have a distributor, like Reach. This is what we do fundamentally, and you can basically use us as a distributor in the US, and this is an example, where we will now kinda resell the product to US customers, on your subscribers rather on your behalf, and we can get you that performance increase without you needing the entity here. So by us kinda becoming, a reseller of your digital good or this, you know, SaaS company in this example, we give you the infrastructure you need to get the better performance, to get the better ROAS, return on ad spend. So you have that return that you want going into the US, but you don't need to go for that upfront cost. And I think that's kinda one of the biggest things a lot of people miss is are there other options other than creating that entity structure?
Matt Steinbrecher:And most just don't know about it, but, ultimately, there are definitely alternatives, just to be able to maximize your your first time authorization rate.
Leo Tucker:Excellent. That seems a much more palatable, especially at the small and medium business size, you know. You know, I'm sure the Amazons of the world and the the Deltas and the Netflixes, they can do whatever they want. They can have the tax structure and the team to support filing and entity management. But for, you know, vast majority of the other companies that don't have that kind of capital, you know, merchant of record reseller model is the way to go.
Matt Steinbrecher:It's a build versus buy scenario. If you're doing $200,000,000 a year in the US as that software company, it might actually make sense for you to have boots on the ground here. Some of the biggest players in the world don't do that, and they don't set this up. And they just deal with those low, first time approval rates as part of their cost of acquisition in a particular country. And so I think that's kinda it comes back to, you know, how can you really maximize your business as it scales up internationally.
Matt Steinbrecher:You have to use some sort of reseller model, before you go and build it all yourself. Like, it just it doesn't make sense financially to build it all yourself first as kinda your initial strategy as you expand it. You'll just you'll bleed more money than you make in most instances.
Leo Tucker:Matt, I think we've covered a ton of ground here today. Appreciate you joining us on the show, and, we'll be talking to you soon.
Matt Steinbrecher:Yeah. Sounds good. Thanks for having me.
Leo Tucker:Well, thanks again for joining us on Business Over Borders. I'm your host, Leo Tucker again. And as always, thanks for joining us. Don't forget to like and subscribe if you thought this content was entertaining, educational, or both. Thanks.
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