The brands on Entrepreneur's 2023 Franchise 500 Ranking have a few things in common. They are all pretty much household names. They represent some of the most successful companies in the U.S. And in recent years, they’re growing faster outside of the U.S. than within it.
Over this time frame, the group opened 28,369 franchise units outside of the U.S., as compared to 21,828 new franchises in U.S. borders., a 12.2% increase over three years.1
We can see how important foreign investment is to franchisors. When deciding where to invest, dozens of factors come into play, which are detailed comprehensively in the regular EGS GlobalVue™2 reports produced by international franchising experts Edwards Global Services (EGS). The report ranks 9 factors, areas such as projected GDP growth, legal concerns, the ease of finding investors, and more to rate ease of expanding by country on a scale of 1-4.
In that planning process, there’s one critical success factor that deserves a thoughtful look: setting expectations and structure on how license and ongoing royalty payments will be collected.
“Very often, (when it comes to payment) what I’ve found in the past is that franchisees say, ‘Well in our country, it’s sometimes difficult to make cross-border payments. We’ve got these things going on, we don’t know what’s going to happen,’” said William Edwards of EGS, who has more than four decades of experience in the global franchising industry. “If you introduce structure, process and standards, there’s no ambiguity.”
Let’s look at some of the reasons why solving cross-border payments is a success factor in any international franchise expansion.
FX 101 for Franchisors
You’ve secured a franchisee for five Ryan’s Rockin’ Diners in Thailand. The contract and payment terms are written in USD, and you expect payment in USD. This means your franchisee must exchange Thai Baht for USD and ensure that the payment is in the correct amount. And that comes with a few issues.
The complexities of the FX market are many. FX rates change frequently, some of the countries you’ll want to do business in don’t want USD leaving their borders, and without very good visibility into fees, it’s likely that franchisee payments will be short.
Perplexed? You’re not alone. About half of global trade3 is invoiced in USD, according to the Bank of International Settlements). And 95%4 of businesses say they could increase their global expansion efforts if they had an easier way to deal with exchange rates. Dealing with currency fluctuations is the biggest challenge to expanding into global markets.
“Everyone is trying to figure out when will I be paid, where is the payment and what have I been paid for?” said Greg Leven, who is SVP of B2B for Flywire.
Challenges behind collecting cross-border franchisee payments
Global franchisors know that collecting cross-border payments isn’t simple. Payments are often late or short, or both things. This makes it much more challenging to predict and manage cash flow, and can impact profit margins.
“Probably the largest (payment) challenge that we’ve faced as a franchisor is in collecting that timely and full remittance fee,” said Jim Perkins, who is the Executive Vice President of International Development at Dickey’s Barbecue Pit.
Here’s why.
Banking differences/local economy. Central banks in a lot of countries do not like hard currency leaving their country, and they particularly do not like USD going out of their borders. A few are very clear on this: South Africa, Brazil and China, according to Edwards of EGS. For that reason, the culture and emotions behind banking can be very different depending on where the franchisee is located – and can make the act of paying take a long time.
“It’s a transaction within a transaction,” Dickey’s Perkins said. “For franchisees, it means setting appointments. It’s driving to the appointment. It’s finding a place to park. It’s walking in, waiting in line, sitting down and then explaining to a bank manager what you’re trying to do. And that bank manager doesn’t want U.S. currency leaving their bank. That emotion is massive, and it’s difficult to manage remotely.”
FX rate fluctuation. Franchisees are paying you a percentage of gross sales in their local currency. And if their local currency goes the wrong way, your share of that money (your USD version) is going to be lower. If the fee structure isn’t clear (see below), the rates aren’t the most competitive and you lack visibility into the timing and amount of payments, the impacts of currency fluctuations will be felt more.
Lack of clarity on fees. The payment method (ie. wire transfer vs. credit card vs. digital payment) used by a franchisee impacts fees. Some of the stickier areas with franchisees include:
- The difference between the midmarket rate5 and the actual cost of obtaining the currency. The rate a consumer sees online is the inter-bank rate – what banks and large financial institutions (not consumers) trade currency at. The actual cost of obtaining a currency will almost always be higher than that rate because of the fees charged by the partners involved in the trade.
- Credit card fees. There are exceptions depending on the card type, but when a foreign payer uses a credit card, they are paying an FX fee of 2% or more and a Foreign Exchange Markup (an additional charge levied by the card scheme on top of the midmarket exchange rate that a payer may see online). Payers don’t always know about these charges until they see their credit card statement.
Security and fraud. As we have covered above, franchisee payments are often fraught with emotion – and the payee wants guarantee of a safe and secure payment process. It’s easy to understand why. Cross-border payments fraud is a major concern for small and mid-size business owners, according to a recent global survey by Mastercard covered in PaymentsDive6. AFP’s 2023 survey7 shows that the top three payment methods most vulnerable to fraud are: checks, corporate/commercial credit cards and wire transfers – and that the most common fraud vehicles are an individual action (forged check or stolen card) and Business Email Compromise (BEC). Nearly half cited wire transfers as the top payment method used in BEC attempts, according to the survey.
Payment delays. The timeliness of cross-border payments8 are impacted by local laws and regulations, payment systems, and foreign exchange. And there non- structural things to consider that delay payments – such as bank holidays or incorrect SWIFT information.
3 steps to solving the last mile of cross-border transactions
1. Understand the impact of FX and minimize exposure.
Dickey’s Barbecue Pit collects master fees – which is a licensing fee (or a subset of that, a regional fee or local fee), and royalty fees on a monthly basis. For Dickey’s, all contracts and all remittances are due in USD and all fees covered by the franchisee, based on the Citibank rate, New York City, at close of business daily. So there’s no discussion on exposure, or minimizing or maximizing transaction risk. Payments processes are integrated with their system of record – FranConnect.
Clarity is very important – both for the franchisee and the franchisor.
“It’s important for the CFO to understand exactly how much money is going to come back and when, as opposed to what the fees are that you’re charging for,” Edwards said.
2. Be ready to present franchisees with systems, processes and standards for payment.
The challenge of getting timely and accurate payment comes down to what’s in the mind of the host country – and it’s a question best answered with exactly what you expect and how the franchisee accomplishes it. Perkins has actually fielded questions from franchisees on whether Dickey’s will accept alternative payment methods like Buy Now Pay Later and blockchain-based/crypto-currency payments.
“The challenge of receiving payment is no longer a challenge, because I can come back to, 'listen we’ve got a structure, we’ve got process, and standards,” he said. “It’s transparent. And after I acknowledge we've executed an agreement, the franchisee partner knows they’ll be in touch with a representative from Flywire, as well as a representative from Dickey’s. And I pass it over to Flywire.”
Solid processes get franchisors out of the ambiguity that often stalls payments.
3. Focus on your core business – which isn’t payment processing.
If a franchisee in Bangkok has a question about the amount and timing of a payment, when can your billing department in Dallas get back to them? Does your business have the capacity to manage refunds and chargebacks if necessary? Can you provide support in local languages?
Franchisors like Dickey’s Barbecue Pit have found success in offloading these to a payment partner.
“I get Dickey’s out of the business of pulling in funds via the finance department. We’re not good at it, we’re a franchisor,” he said. “We leave it to Flywire."