Over the last few years, businesses have looked outside their national borders to pursue new opportunities, alleviate supply chain disruptions and beat their growth expectations, building more resilience in a changing economy. Data shows this new international focus is here to stay.
Mastering cross-border payments is an essential requirement for any business aiming to expand internationally in our globalized economy.
A 2022 survey of businesses by Mastercard showed that:
- 65% of businesses said the pandemic opened new options for international supplier relationships;
- 59% said they were able to find more competitive suppliers in foreign markets;
- 46% said cross-border supplier relationships reduced their level of risk to business operations;
- 63% said they now “always” look globally to source vendors and suppliers.
Trends in cross-border payments illustrate this new global focus. In 2022, cross-border payments hit $156 trillion, up nearly 25% from 2018, with B2B payments accounting for over 90% of the total. For businesses today, optimizing and streamlining the cross-border payment process is essential to maximize profits and accelerate growth.
So what exactly are cross-border payments?
A cross-border payment is simply any financial transaction in which the payer and the recipient of the payment are in different countries and/or jurisdictions. For businesses, cross-border payments could fall into any of the following categories:
- Payments to individuals, such as contractors or freelancers;
- Payments between businesses, such as vendors and suppliers;
- Payments to foreign governments for taxes and fees.
How cross-border payments work
Cross-border payment methods
Wire transfers (bank-to-bank)
|Payment aggregators/gateways (PayPal, for example)||
Cross-border payments have one striking particularity: they enable payments to be made in one currency and received in another, often in the receiver’s local currency. This usually happens in one of two ways:
- Direct bank-to-bank cross-border payments
When it comes to moving funds across borders, the most straightforward approach is direct bank-to-bank payments. Here's how it works: the sender begins by instructing their local bank to transfer the funds, which are then seamlessly delivered to the recipient's account. The key requirement for this method is that both the sending and receiving banks have an established relationship. This uncomplicated process ensures a smooth and efficient transfer
- Cross-border payments using an intermediary bank
Navigating the intricacies of international transactions isn't always straightforward. When direct bank relationships are lacking, an intermediary bank can step in to bridge the gap. This method involves an additional layer: after the initiating bank sends the funds, they are relayed to an intermediary financial institution, which then forwards the payment to the receiving bank. This added step introduces a measure of time delay and incurs extra fees, yet it ensures that transactions can proceed even when direct connections are absent.
At times, the challenge can be even greater, particularly when currencies involved are less common. Imagine initiating a payment in euros that needs to be received in Iranian rials – such scenarios might require passing through multiple intermediary banks. This interconnected web of intermediaries, while necessary for facilitating the transaction, also complicates matters by elongating the process, introducing delays, and accumulating additional charges. In these intricate situations, leveraging intermediary banking networks becomes a strategic necessity.
Take a peek at our guide if you want to learn about international payment systems and their functioning in more detail.
The cross-border payment process
The payment process for domestic and international payments is broadly the same. But when the payment involves two different currencies, there are some differences worth mentioning.
Prepare for payment
Each country has unique requirements for sending cross-border payments. Did you know that in China, for example, the payee’s telephone number is required, while in Ukraine, it’s a tax ID number. Depending on where the payment is going, payers may need to provide the payee’s sort code, IBAN, or BIC/SWIFT code. Payers need to have all the required information on hand before payment is initiated.
Routing and processing
Once payment details are fed into the payment solution, they embark on a journey to the financial institution for assessment – a journey of approval or potential decline. With traditional banking, things can get intricate when more than two banks have to be involved. And that’s often the case when it comes to global payments.
Approving payments and settling finances
When the green light of approval is given, that’s when the payment gets converted into the recipient’s currency at the prevailing exchange rates. The foreign institution handles the final payment and, depending on the payment method and conversion requirements, determines the applicable accompanying fees.
Tracking and harmonizing
The Accounts Payable (AP) team tracks the final payment and reconciles it just as they would a domestic payment. However, the absence of a standardized communication bridge between banks, payers, payees, and financial institutions can cast a shadow over timely notifications. Delays or declines might play out incognito, leaving the concerned parties waiting in the wings.
What are the challenges of cross-border payments?
Globalization makes mastering cross-border payments a business imperative for organizations of all sizes. Getting there, however, isn’t without challenges.
Not every corner of the globe has a VIP pass to the widely accepted payment playground called the SWIFT banking system. While the borders of cross-border transactions are stretching their horizons, there remain currencies that still fly under the radar. This means suppliers may not be able to be paid in their local currency.
Complex fee structures
Different payment methods have different fee structures, and in many cases, a single payment can accumulate multiple fees throughout the transaction journey. Risk mitigation fees, currency conversion fees, and lift fees all apply to different types of cross-border payments. In the case of wire transfers, fees can easily top $50 USD. For businesses that make a large number of wire transfer payments each month, it can quickly add up to a hefty bill.
Lack of transparency and visibility
Imagine being handed a treasure map without any landmarks. That's the feeling many cross-border payers experience with opaque fee structures. As if that wasn’t enough, the payment journey itself is often shrouded in mystery. Payers can’t readily track the progress of each payment or generate an audit trail across each of the touchpoints along the way.
We might be living in the era of instant messaging and instant coffee, but still... not-so-instant cross-border payments. Depending on the chosen method, payees might have to wait for 5-10 days before their funds decide to show up, potentially jeopardizing supplier relationships and complicating the reconciliation process.
Exchange rate risk
Global transactions frequently involve currency conversion, leaving payers exposed to fluctuations in FX rates. The relative value of two currencies can change between the time the invoice is issued and the moment the payment is being settled. It’s this unpredictability that makes it difficult to effectively manage currency exposure.
Risk of fraud
Payment fraud impacts 70% of businesses, and fraud attempts have increased since the pandemic. While the reasons for this aren’t clear, security experts believe that the switch to remote work has led to more vulnerabilities due to unsecured networks, devices, and files.
Regulation and compliance
Moving money between countries and jurisdictions requires visibility into—and compliance with—local laws and regulations. Managing these manually is time-consuming and labor-intensive for internal teams. Not to mention that consequences can also be very costly when violations occur.
Siloed, manual processes
Many cross-border payment methods aren’t easily integrated into standard business solutions such as ERP platforms and accounting software. This slows accounting and reconciliation activities and makes it difficult to automate and scale the payment process. Lack of integration and automation can slow business growth and leave the payment process prone to error.
Optimizing the cross-border payment process
The current state of cross-border payments is unfortunately riddled with time-consuming and inefficient tasks, extended settlement periods and the burden of costly, unpredictable fees. Don’t you think it’s high time for a change? Businesses can—and should— take steps to optimize, simplify, and streamline their global payments.
- Negotiate payment currency
Some organizations believe that paying in anything other than a major currency such as the euro or the USD exposes them to risk. Little do they know that in many cases, paying suppliers in their local currency opens up opportunities to negotiate better payment terms and discounts by avoiding currency conversion fees. Remember: having the flexibility to pay in various currencies gives businesses a strategic edge, and enhances their ability to skillfully negotiate and seamlessly execute cross-border payments.
- Stay on top of foreign currency exchange rates
Currency risk is a significant issue for organizations that rely on cross-border payments to conduct business. By staying on top of FX markets and locking in favorable rates, you can hedge against rate fluctuations and protect your margins. Leading payment platforms offer flexible hedging solutions to minimize your exposure to exchange rate risk.
- Partner with a global payments platform
If your company often deals with international transactions, it's a smart move to consider getting a helping hand to make your daily operations smoother and more efficient. Instead of relying solely on traditional banks, partnering with a cross-border payment specialist can offer a range of benefits.
You'll not only access more competitive exchange rates but also enjoy a faster and smoother cross-border payment experience powered by cutting-edge technology.
Most importantly, you'll gain access to experts who know the ins and outs of global payments and currency exchange. Trust us, such a combination would not only enhance a business’s efficiency, it would also bring a sense of operational tranquility.
Choosing a B2B cross-border payment solution
As businesses expand into new global markets, the complexities of cross-border payments can cause a few headaches: impacting cash flow, exposing the organization to unnecessary risk, hampering supplier relationships, and even hindering growth to name a few.
Finding the right global B2B payments partner eliminates those complexities, freeing up time and resources to focus on other areas of managing and growing your business.
The fintech scene is popping with all sorts of solutions for cross-border payments these days. But sorting through the buffet of options to find the one that has the functionalities your team needs to operate efficiently is not always easy. Let’s take a look at some key questions to keep in mind when you’re sizing up these cross-border payment solutions.
What countries and currencies are available?
Most global payment solutions operate within the major markets and currencies. If you have relationships in emerging markets, make sure your platform supports those countries and currencies.
Can you manage multiple currency accounts?
The most robust solutions allow you to open and manage multiple demand deposit accounts (DDAs) in the currencies you need to streamline and accelerate routing and reconciling payments. Look for centralized account management and the ability to connect external accounts for a complete 360-degree view of your corporate accounts.
Can you hedge against FX risk?
Leading-edge solutions not only provide real-time visibility into exchange rates, but they also let you lock in exchange rates for a period of time so you can worry less about the impact of exchange rates fluctuations on your finances.
Are there flexible payment options so you can control both speed and cost?
Efficient cash flow management depends on having multiple payment options so your finance team can balance payment speed and cost. Look for solutions that combine maximum control over payment timing with complete fee transparency.
Is there end-to-end visibility and robust payment tracking?
Look for a solution that allows you to track payments in real-time, so you don’t need to chase them. You also want visibility into the intermediary banks and associated fees that accumulate along the way. The best solutions allow you to share real-time payment tracking with your trading partners to build trust and cut down on payment inquiries.
What security protocols are in place?
You don’t want to discover that you’ve placed your hopes in the wrong partner. Make sure that your cross-border payment partner is fully licensed and complies with all financial regulations—inquire about SWIFT membership and SEPA certification. At the account level, look for security features such as single-use passwords and two-factor authentication. After all, the security of your cross-border payments should be at the top of your concerns.
At the end of the day, the best cross-border payment solution is one that meets your business needs and integrates seamlessly with your processes. If you notice it’s missing key functions or your team is finding it difficult to use its safe to assume that adoption will be poor.
Looking to take your cross-border payments to the next level? iBanFirst has you covered. Our platform is designed with your unique needs in mind, offering cutting-edge technology paired with the expertise of our top FX professionals. With iBanFirst, you can efficiently handle funds across 140+ countries and protect your business from currency market ups and downs.
Get in touch today to learn how iBanFirst can help elevate your cross-border payments game with ease.