Technology has made it easier for businesses to transact overseas. Easy communication channels have made it easier for businesses to communicate and trade with each other. Advancements in logistics and shipping and a drop in international freight mean that businesses can now source and sell their products to other businesses overseas and still make substantial savings.
Despite the massive growth of international business-to-business interactions, the market still holds a lot of potential and faces numerous challenges, with research showing that the greatest challenge businesses face trying to transact with each other internationally is inefficient payment management practices in terms of time and cost.
Businesses have to pay expensive payment fees, which obstruct relationships with suppliers, and some of the payment methods take long periods to get delivered to the recipient. Luckily, this is an easy challenge to solve by applying the best practices and software technology to increase cross-border payment effectiveness.
If your business is among those hindered by inefficiencies in cross-border payments, this guide could be what you need to wiggle yourself out of the situation.
What are Cross Border Payments?
Cross-border payments are transactions between banks, businesses or financial institutions operating in different countries that may or may not share a border.
Cross-border B2B payments have surpassed the $37 trillion mark in 2022 and are expected to hit about $40 trillion by 2024.
There are two types of cross-border payments:
- Retail: These cross-border payments are typically B2C payments between a retailer in one country and a customer in another country. They can also be person-to-person, with one sending money to the other.
- Wholesale: These are payments between financial institutions like banks. They can include borrowing and lending, foreign exchange and the trading of debt, equities, securities commodities or derivatives.
Whether retail or wholesale, cross-border payments can be made in various ways, mostly through;
- E-money wallets
- Bank transfers
- Mobile payments
- Credit card payments
How Cross-Border Payments Work
Cross-border payments provide a way for money to be paid in one currency and received in another. For instance, if a buyer pays in euros, the seller can receive the payment in their local currency. Cross-border payments are crucial in allowing different countries to transact in different currencies.
For the payments to travel across borders, different methods can be used;
Cross-border payments between different banks in different countries
This is the simplest method available. Banks in different countries facilitate the payment. This could be different banks or banks with different branches within the same bank.
Using this method, no actual money changes hands. Instead, the bank of origin sends the amount from their account to the overseas account.
Cross-border payments between different banks in different countries using a correspondent bank as a middleman
Because not all banks in the world have a direct relationship with each other, sometimes the banks need a middleman to make the transfer on their behalf. This method of cross-border payments is called corresponding banking. It works the same as the method above, but the initial payment is made to the “middleman” bank, and they make the subsequent payment to the recipient bank.
It adds an extra step to the process and additional fees. This process can be more costly but is necessary where two banks don’t have a direct relationship.
Cross-border payments using the correspondent banking network
The third method for cross-border payments has extra corresponding banks or middlemen involved. This usually happens when the transaction involves uncommon currencies. The payments must go through more agents to reach their final destination.
You only need one agent if you’re transferring the euro to the Swiss Fran. But transferring to a less common currency, such as the Guinean Franc or Iranian Rial, may require extra steps.
This method of sending cross-border payments has the most steps and can be slower and more expensive than the previous two methods.
At each stage, the payment messages must be checked to ensure that the payment adheres to local legal requirements to prevent crime. Each bank has to update the balance of the incoming and outgoing accounts, and with the time differences around the globe, the time and costs taken to complete the transaction can be substantial.
Depending on the method of completing the payment, a cross-border payment begins with an invoice, just like a domestic business. The invoice can set out the payment terms, schedules, discounts and taxes. An added layer of complexity happens when multiple currencies are involved.
Once the invoice is received, the buyer can use front-end providers who act as payment gateways to handle international payments. But these might have higher transaction fees to handle the payment.
Back-end networks are more efficient and provide the sender with more options, which are a better alternative, especially for recurrent or large payments. After the payment is authorised, it follows one of the three cross-border payment methods highlighted above.
Benefits of Cross-Border Payments for Businesses
Cross-border payments might have challenges, but they have been revolutionary to businesses relying on them to function and grow. They’ve allowed businesses to market their products far and wider and source for affordable and quality raw materials directly from the supplier.
Refining management practices of these payment methods can lead to significant savings and improve international tax and regulatory compliance.
With a solid international payment strategy and solutions, businesses can achieve;
- Increased ROI
- Increased control over international transactions
- Advanced reporting tools
- Reduced need for resources
- Enhanced payment security
Using cross-border payments can also help your business;
- Establish itself as a renowned, reputable and legitimate international operation
- Offer your customers the ease and convenience of paying in their own currency and the transparency of seeing how much the transaction will cost
- Spend less time and money troubleshooting payment issues.
- Improve its operational efficiency by tracking through the chain
Steps to Sending Cross-border Payments
When sending cross-border international payments, the extra steps and factors involved with the process beyond the basic steps must be considered. For a clear idea of what to expect when sending cross-border payments, here are the 9 steps you should follow for sending funds, along with some unique cross-border payment factors.
You will need to find an international supplier or another business you want to purchase from. If you’re buying through an eCommerce platform, you will be directed to the payee’s checkout page to make your B2B payment
after identifying the items you want to purchase.
Someone will complete the checkout process if you’re buying over the phone. You will be presented with various payment options for your B2B purchase.
If you’re buying online, the checkout page might offer a localised experience, like providing information in your native language and some of the local payment methods you’re familiar with.
Preparing for the payments
When sending the cross-border payment, you will need to provide information based on the country you’re sending the money to. You must also consider that not all cross-border payment options are available in every country. You may need to consider using other entities other than what you’re used to to complete the payments.
You will need details like the Sort code and IBANs for SEPA payments in the UK. In other countries, a BIC or SWIFT code is necessary.
Verify compliance with global payment rules
You should verify that you’re sending the payment in accordance with all the applicable global payment rules. There are thousands of rules you should comply with, and in many cases, these rules vary in every country the payment will pass through.
Your global payments service provider understands the payment industry and can see to it that the payment adheres to all the necessary regulations and goes through with minimal challenges.
Monitoring and oversight of global payments status
When you send an international payment, you must maintain complete oversight of the payment. However, this can be challenging when making multiple payments. That’s why you should use a global payment platform that gives a single platform to view the status of each payment. The service should provide an effective user experience. It should also provide invoice automation tools to see who is responsible for approving payments and why they haven’t been approved.
Routing and processing
For security and safety reasons, payments are sent via an encrypted gateway to obtain authorisation to deduct funds from your account. If you’re using a global payments platform that is connected to only one bank, the transaction may be flagged.
You should use a platform connected with multiple banks around the globe to improve the chances of the payment being processed on the first instance.
Additionally, a good global payments platform can automate your payment process, whether a one-time or recurrent transaction.
Payment approval or denial
Verification takes place to ensure you have enough funds in your account and determine whether a currency conversion is necessary and at what currency exchange rate. The payment can be approved or denied depending on the information obtained during verification.
Good global payment systems should intelligently route the payment through a bank that is most likely to approve the transaction to avoid unnecessary delays.
Confirmation and fulfilment
You will receive a confirmation that the transaction has been approved or declined. You will receive a return code outlining why it wasn’t approved if it was declined. If approved, the order goes into fulfilment.
Depending on the type of cross-border payment you’ve used, there’s a good chance the funds will still appear in your account and not in the payee’s. Most global payment systems will take anywhere from two to five days to reconcile.
You will receive a reconciliation report from each bank that you work with. It can be extremely confusing and inefficient. However, a global payment system platform can make it easier by providing you with a consolidated report showing all the payouts through all the banks and which transactions have been reconciled and those that haven’t.
What Should Businesses Look for When Using International Payments?
International payments are vital for businesses with cross-border business partners. There are some factors that businesses should consider before jumping into international payments. Although these factors haven’t made cross-border payments impossible, they have made some hesitant about expanding into international markets;
Currency conversion and foreign exchange rates
Currencies are constantly fluctuating based on various market factors. It can be challenging to correctly convert one currency into another to ensure your international partners feel like invoices have been fully addressed.
Cross-border payments often include intermediaries like banks that facilitate the movement of funds. These add processing and currency conversion fees as well as delays in the transaction time.
Fees and regulation
Transactions must comply with security and privacy laws. Each country has legal hoops you must jump through to satisfy documentation and auditing standards, not to mention transaction fees.
Common Challenges with B2B Cross-Border Payments
Complex is the best word to use to describe cross-border payments. With complexity comes challenges, and B2B cross-border payments are not an exception.
Global payments might have numerous challenges, but there are some common ones that every business might face as they break into international markets and need a global payments service to help them navigate the challenges.
Because currency exchange rates are in constant flux, it can be difficult to calculate the current forex rate accurately. Using services like Pay iO that are upfront with their exchange rates and provide you with the real mid-market rate can make it easier to account for the fluctuations. Otherwise, you might pay a higher rate than you otherwise would.
Regulations governing money transfers vary between countries, and the compliance standards may vary between industries and countries.
Taxes and fees
Multiple banks and entities are involved in the transactional process. Each of them will assess its fees and can significantly add to the total cost of doing business. You should also factor in any necessary taxes and fees in the different countries.
International money transfers and payments are monitored to prevent fraud or criminal activity. The downside is that these measures also make it hard to conduct legitimate business and might affect the time it takes to complete transfers.
International payments are unpredictable and are compounded by the added complexity inherent in international payments, which may make it difficult for businesses to compete with other countries.
There’s no doubt that cross-border payments between businesses can be a nightmare. But they are a necessary evil in keeping the global economic wheel turning. The silver lining is that businesses can make the most out of the services by choosing a good global payment services provider offering multiple payment options. Traditionally, banks were the most preferred, but now, additional options like Pay iO have the experience and expertise to take the sting out of cross-border payments between businesses.