In the era of economic globalization, cross-border payments have become a vital necessity.
In 2019, their value totaled $130 trillion and is estimated to reach $250 trillion
by 2027. Since the volume of cross border payments is demonstrating such rapid growth, it is an absolute must for business owners to be aware of what these transactions are and how to initiate and process them efficiently. Our guide is your key to mastering the intricacies of such international payments.
What Are Cross Border Transactions?
Cross border payments are financial transactions performed between a payer and a recipient based in different countries. By definition, these payments are far more complex than domestic transactions, as they involve multiple jurisdictions, time zones, and legal regulations. Typically, a cross border transaction is thought to lag a domestic payment when it comes to speed of the transfer process, accessibility, cost, and transparency.
Cross-border transactions can be categorized as:
- Retail payments - performed as B2B, B2C, and P2P transfers, including remittances. For example, shopping at e-stores located overseas, sending a sum of money as a gift to your friend living abroad, and providing financial help to a family member in a foreign country.
- Wholesale payments - conducted between governments, financial institutions, and large non-financial organizations. Some examples are foreign exchange, trading of commodities and securities, payments for the import and export of goods.
The importance of both cross-border transaction categories for the modern global economy cannot be overestimated. It is an intensifying payments niche due to a variety of factors, including:
- Manufacturers scaling up their supply chains
- Growth of e-commerce and international trade
- Global investment flows
- Migrants forwarding funds as international remittances
As a response to these global trends, innovative technological solutions and business models drive the development of cross border money transfers and payments.
Main Cross Border Payment Methods
These days, there are various payment methods that can facilitate a cross-border transaction. For your convenience, we have made a compilation of the major methods available.
The global cross-border transaction methods you are likely to come across nowadays are:
- International Wire Transfers. It's the oldest method of cross-border transaction, often referred to as “remittance”. This procedure requires the payee to visit a bank or agency and make the payment in person. Such a global transaction process normally takes up to five working days, is costly, and has limited traceability, yet is still widely used.
- Credit Cards. Payment cards are owned by the vast majority of people and relieve us from the need of carrying cash, even when traveling to foreign countries. Every person is likely to have made a cross-border payment through one of the four major credit card networks: American Express, Discover, Mastercard, or Visa.
- Virtual Wallets. This category includes eWallets, mobile wallets, and digital wallets that can store funds, process global payments, and save user data.
- Forex Cards. These cards are perfect for travelers as they enable easy international money transfers and payments, as well as help avoid currency exchange rate swings.
- Visa Direct. This service provides push payments (within 24h from authorization) for individuals and businesses worldwide.
- SWIFT GPI. GPI stands for Global Payments Innovation. It’s a convenient, fast, and transparent worldwide payments service with fully traceable transactions launched by SWIFT in 2017.
SWIFT GPI is a combination of the traditional SWIFT global banking and messaging services with improved rules. Such cross-border payments entail that any bank that joins the network must have transparent fees, transaction tracking, and official confirmation when the funds are credited.
- MasterCard Send. A cross-border transfer service that enables real-time money payments without any reliance on the bank’s ACH system.
Cross-border transfers have improved significantly within a fairly short period of time, and progress doesn’t stop, so there are even more advanced tech solutions for payments arising:
- Open Banking APIs. This technology is here to open doors for cross-border payment process optimization by exposing a range of data to third-party financial service solution providers.
- Decentralized Ledger Technology. DLT has the power to speed up the backend processes of international payments and transfers, improve the transactions’ transparency, minimize compliance-related costs, and present an unprecedented payment method on a global scale.
Now that you are aware of the main cross-border payment methods and services available let’s take a glimpse at how exactly they work.
How Do Cross-Border Payments Work?
It is important to understand that when an individual or an organization initiates a bank transaction between two jurisdictions, the currency doesn’t physically travel abroad, as the payment systems of different countries are not connected directly. In reality, what happens is that a payment is credited from the sender’s account in their country, and the receivable amount is debited at the beneficiary’s jurisdiction.
Banks also cooperate with other parties, such as Payment Service Providers, for the sake of settling such issues as currency conversions, varying tax regulations, and global transaction fees. Besides, cross border finance is not always as simple as sending a payment message with a debit and credit request from one financial institution to another, as not all banks have direct links. In such a case, a correspondent bank steps in as an intermediary.
The less common the currency pair, the more intermediary services get involved in the transaction, forming a correspondent-banking network and resulting in additional processing fees added to the payments or transfers.
What Are the Cross-Border Transaction Charges?
As a general rule, a card-issuing bank charges increased commissions for cross-border payments. This is due to the costs they bear for conducting such transactions since both the payment system and acquiring bank also apply fees to these money transfers.
There are many charges associated with cross border payments, such as:
- Bank fees. Typically, the most costly part of the transfer, charged for transactional services.
- Cross-border fees. What is a cross border fee? It’s a percentage applicable to a consumer’s purchase performed with a foreign credit card. The rate varies depending on the card issuer. For instance, an MC cross border fee equals 0.60% of a transaction settled in USD, while PayPal charges 4.6% + $0.30.
- Taxes. This expense category varies from one transaction to another, as country-specific taxes apply.
- Exchange rates. Since we are dealing with international transfers, we should not disregard currency differences and the exchange rates flux.
However, the members of SEPA are exempt from most of these charges on payments - more about it below.
The Challenges That Traditional Cross-Border Payments Face
Some methods of cross-border payments are inherently more complex than the domestic ones, as they involve multiple currency systems. Here are the main challenges faced by such transactions:
1. Slow Transactions
Cross-border payments initiated through a bank typically take up to five days to process. It is an extremely slow pace as opposed to local transfers.
Besides, the long chain of parties involved in the process of facilitating such payments is often a reason for delays since if one institution fails, the transaction can’t be reviewed by the rest before the issue is resolved.
2. High Costs
International money transfers and payments have already evolved substantially compared to even a few years ago. However, the major part of such payments still remains significantly more expensive than local financial transactions because of the number of intermediaries involved in the process.
3. Lack of Transparency
Another common issue that comes with international transactions and has a negative impact on both consumers and business entities is the cross-border payments’ lack of transparency. According to research conducted in
2017 by SWIFT and EuroFinance, 64% of business clients agreed that they need real-time tracking of payments and 47% requested an improved breakdown of costs and deductions.
4. Security Issues
Unfortunately, if a hacker manages to breach a cross-border payment pathway, the bank may not be able to recover the funds sent by the consumer. Thus, international transactions are also associated with security risks that are much lower for other payment methods.
Losses associated with such fraudulent incidents can be extremely costly and yet not uncommon. For instance, one of the biggest money heists happened in Bangladesh central bank in 2016 and amounted to $81 million.
Security hazards are heightened by the fact that every country that participates in cross-border payment transactions is governed by its own regulations, so if the money has to travel through a country with a less reliable security system, there’s no guarantee that it’s safe.
How Does SEPA Affect Cross-Border Payments?
SEPA, or the Single Euro Payments Area, is a pan-Europan initiative aiming to simplify Euro currency cross-border bank transaction processing within the eurozone (36 member states). It was first introduced in 2008 for credit transfers only, followed by direct debits in 2009. SEPA came into full force in 2016.
SEPA makes cross-border payments as simple as local ones and even has similar rates. In other words, SEPA transactions are typically free. Yet, some banks may choose to charge an extra fee if they also perform local transfers at a cost.
Luckily for businesses, there are also all-in-one tech solutions that enable convenient management of all the steps and fees of cross-border transactions.
How to Optimize Cross-Border Payment Processing
If your business is constantly dealing with cross-border payments, you might be wondering how to refine the processing of such international transactions. Here are three simple steps that can help you:
1. Find Out the Overseas Suppliers’ Preferred Payment Method
Companies that operate on an international or a global scale will find it helpful to determine the preferred payment methods of their suppliers based overseas. Since they already have local regulations to comply with, this is likely to speed up the services they provide and support frictionless cooperation.
2. Send Money in the Receiver’s Currency
By initiating international payments in the currency of the receiver, your business is likely to save at least
10% of the cost of imported goods.
While some companies believe that sending cross-border payments in a currency other than their domestic one is unsafe, it’s not true. On the contrary, doing so has the potential of creating opportunities for more beneficial terms with suppliers.
This is due to the fact that some global suppliers don’t have an account in Euros, US dollars, or any other currency your company operates with. Therefore, to accept the payments you send them, their bank entities have to convert the currency and impose a fee. You forward cross-border payments in the suppliers’ local currencies enables them to avoid high conversion commission and often leads to them agreeing to offer you discounts.
For instance, one survey uncovered that 60% of its respondents who started paying their global suppliers in their local currencies managed to negotiate a discount of up to 2%, 11% of survey participants received a 3%-5% discount, and another 11% received a deal of over 10% off.
3. Understand International Payment Rules
There are a lot of global remittance regulations that can influence every cross-border payment you conduct. For example, any international payments that are not reported can result in a fine starting
from $50 up to $500 each.
It is best to have an in-house professional specializing in cross-border payment compliance. Luckily for businesses, there are also all-in-one tech solutions for payments that enable convenient management of all the steps and fees of cross-border transactions.
Cross-Border Transactions with Payneteasy
Payneteasy was established in 2006 and has grown to be a leading player in the market. We work with banks, platform providers, PSPs, and merchants worldwide to provide custom payment solutions for conducting cross-border transactions seamlessly.
- Full support for e-commerce, m-commerce, and alternative payment methods.
- Support for P2P transfers: cards, e-wallets, and more.
- Set of APIs suitable for different payment types.
- Conversion tools and multi-currency support.
Our payment solutions feature 350 integrations with various Payment Service Providers, wire transfers, APMs, and crypto. At Payneteasy, we ensure a cost-effective transaction flow and top security for the efficiency of your business.
Since 2017, we have been providing our international clients with an opportunity to perform cross-border payments between cards of different foreign banks with our white label Smart.Transfers solution, featuring:
- Registration-free P2P transfers
- Online fees calculation and SMS or email confirmation
- Same rules for domestic and cross-border payments
- Transfers by card number
- Free client support included
With the help of this service, any business linked to the Payneteasy platform will provide its clients with stress-free access to international money transfers and payments.