Cross-Border Payments in 2024: Navigating the Complexities of Global Transactions

In our increasingly globalised world, cross-border payments — transactions where the sender and the recipient are based in different countries — have become more and more important. Indeed, cross-border payments are essential to the world’s economy, having made it quicker and easier than ever before to move funds between countries.

The impact of cross-border payments becomes evident when one examines the industry’s rapid growth. According to FXCintelligence, the market will reach around $290 trillion by the end of the decade, driven by global e-commerce trends, cross-border trading, and increased digitisation within the payments industry.

With all that being said, these types of transactions are not without their drawbacks and challenges. Cross-border payments are complex, expensive, and not as accessible as they could be, in large part because of the number of processes and intermediary bodies involved. This article will explain what these obstacles are and discuss why it is important that we overcome them.

How Cross-Border Payments Work

When a transaction is made between two accounts based in the same country, the entire procedure is relatively straightforward, with funds simply being transferred from the payer to the payee. It’s when the accounts are in different countries that this process becomes more difficult and drawn out.

The first step in a cross-border transaction is the initiation of the payment via a bank or payment service provider (PSP), during which the sender inputs the necessary payee details. After this, the bank or PSP must convert the money being transferred into the appropriate currency when applicable. This is one of the many complexities of the cross-border payment process, made more difficult still by constantly changing exchange rates.

Next, the converted funds are sent either directly to the recipient or to an intermediate bank. Intermediaries are required when there is no direct link between the payer and the payee’s respective banks. In some cases, there may be more than one intermediary involved in the transaction, in which case the funds are transferred from one to the next in a chain. As one might expect, the more intermediate banks that are involved, the more costly and time-consuming this process becomes, especially when one takes into account the number of regulatory hoops these bodies have to jump through. These include Counter-Terrorism Financing, Anti-Money Laundering, and Know Your Customer compliance checks, amongst others.

Finally, after having navigated these various intermediaries, the transferred funds at last reach the payee’s bank and are credited to their account. If, for whatever reason, the sender did not make the necessary currency conversions, this is carried out by the recipient’s bank.

Types of Cross-Border Payments and Their Benefits

There are a broad variety of cross-border payment types, each with its own benefits, drawbacks, and particular uses. When choosing between these methods, you should always weigh up the pros and cons, being mindful of your specific needs.

Here, we’ve broken down three of the most popular options:

• Wire transfers are transactions between two banks or financial institutions. While these payments are subject to limits, such caps are usually set quite high, so this method is often used to send large amounts of money. It should be noted that while wire transfers are convenient and reliable, they aren’t the fastest option and are also subject to bank fees.
• Electronic funds transfers (EFTs) are digital payments made from one bank account to another. Otherwise known as electronic payments or e-cheques, this payment type is secure, readily accessible, and faster than many of the alternatives. EFTs are also more affordable than traditional transfers, though you may still have to pay a flat fee and could be charged for currency conversion.
• Online payment platforms make it possible for companies and individual consumers to make quick, convenient transactions from their computer or mobile, usually at little cost. This method of payment is usually very secure, but users should remember that they are not invulnerable to cyberattacks.

The Challenges of Global Transactions

According to a recent report from McKinsey and Company, many of the challenges faced in the cross-border transaction industry stem from a wide variety of operational inefficiencies. Suboptimal back-office processes, outdated operating models, and excessive management costs all contribute to the time delays and high fees associated with global payments. These issues can best be addressed by implementing efficient best practices and more advanced payment technology, as well as by promoting a culture of transparency to reduce enquiries and expedite regulatory processes.

McKinsey also highlights the possibility for collaborative solutions in the cross-border transaction industry, noting that such efforts in the realm of domestic payments have resulted in greater efficiency and better service. We can find a real-life example in SWIFT’s Global Payments Innovation, an initiative that has brought together more than 250 banks and sees over $100 billion a day in cross-border payments. This is made possible by a range of shared multilateral service level agreements, as well as end-to-end tracking and real-time payment processing.

Conclusion

Cross-border payments allow both individuals and companies to transfer money from one country to another quickly and with relative ease. Unsurprisingly, the possibility for such transactions has had a great impact on a wide range of industries, from international trade and tourism to investment and remittances and beyond. As a result, cross-border payment technology has rapidly established itself as the beating heart of our global economic circulatory system.

With that being said, there’s no denying that the industry has its fair share of challenges. High costs, delayed processing times, and other such obstacles have an impact on the efficiency and accessibility of global transactions. Given the increasing importance of this revolutionary technology in our society, it benefits all to address these issues. This will be difficult, likely requiring extensive operational overhauls and the implementation of new payment technologies, but if we work together and embrace a spirit of collaboration, these lofty goals will surely prove achievable.