Who would have thought that sending money from one side of the world to another could become so simple one day? With 195 countries, each having its own payment systems and rules, this seems like a complicated task.
However, thanks to technological progress, cross border money transfers become possible. Today, making international payments is nothing out of the ordinary. Individuals and businesses can enjoy faster, cheaper, and more reliable cross border payment methods than ever before. The world has grown smaller, connecting people and businesses across borders.
What are the most common cross-border payment methods then? And what advantages and disadvantages do they bring?
What are cross-border payments?
Cross border payments are financial transactions that take place when the payer and the recipient are located in different countries. These international transactions involve the transfer of funds from one country to another, typically through banks or other financial institutions. Cross-border payments fall into two main categories: wholesale and retail.
Wholesale cross-border payments mainly serve the needs of financial institutions, such as banks or, in some cases, fintech companies or institutions. They facilitate various activities, ranging from lending, borrowing, foreign exchange, and commodities to trading of equity and debt.
These international money transfers are not limited to the financial world, though. Governments and non-financial institutions use them for global payments and large transactions related to financial market trading, as well as imports and exports of goods and services.
Retail cross-border payments, on the other hand, are the most common in the market and encompass transactions between individuals, family members and businesses, including remittances and online purchases.
Whether for large-scale wholesale dealings or everyday retail transactions, cross-border payments play a key role in facilitating international financial exchanges. Even though they might come with additional costs, currency conversion rates, and regulatory requirements, international transactions are experiencing significant growth.
Why do cross-border payments matter?
Driven by the entering new markets and global flow of goods, capital, and people, cross border money transfers have become a significant economic force over the last few decades. Their value is expected to grow from about $150 trillion in 2017 to over $250 trillion by 2027. That’s an impressive increase of $100 trillion in a decade. How’s that even possible?
Well, think of private sector or manufacturers expanding their operations across borders, global investments, international trade and e-commerce, and migrants sending money to their home countries. All these trends have contributed to the higher demand for cross-border payments and the need to make them as efficient and safe as their domestic payments.
Cross-border payment methods
Choosing the right cross border payment method to send money internationally depends on several factors such as the transfer cross border account, transaction speed, currencies involved, and associated fees. It’s thus essential for both businesses and individuals looking to initiate cross-border payments to evaluate the available options carefully and opt for the one that best suits their specific needs.
Cross-border payment methods take many forms; however, let’s take a look at the most common ones.
International wire transfers
An international wire transfer is a common method for cross-border payments that allows money to be sent quickly and securely with no need to exchange cash. How does it work? The sender provides the bank with instructions to transfer money to a recipient who’s based in a different country. In other words, transactions like these are initiated from a specific bank accounts in one country to another in a different location.
The movement of funds across borders is facilitated through established wire networks specific to different regions. The most renowned among these is the SWIFT network which carries over five billion financial transactions a year. It assigns a unique identifier code to each recipient and shares this information with banks that support international payments.
International wire transfers are commonly used for global transactions and can be conducted in various currencies, with transaction limits varying depending on location and network availability.
Credit card payments
Credit cards stand as one of the most widely used payment methods in the payments industry today. After all, who hasn’t heard of or used a credit card to send payments these days? Due to its popularity, consumers use credit cards to make international payments as well, especially for offline purchases and as an electronic transfer for online shopping. Consumers see credit cards as a safe and secure way to pay. All they need to do is to enter the card details at the payment provider to start a transaction.
Such transactions allow businesses to check the payment status and accept payments in different currencies. Yet, they might come with additional charges, like currency conversion fees.
Digital wallets
A digital wallet is a virtual counterpart of a physical wallet–a modern solution for individuals to store and manage their funds electronically. What sets digital wallets apart is their versatility, as many of them support multiple currencies, making them ideal for cross-border payments and enhancing their value to users.
One type is a pass-through wallet which functions as an electronic card for making online transactions. The difference is that it creates a unique token for each transaction. This means that actual card details aren’t shared. Apple Pay and Google Pay, for instance, are widely embraced global pass-through wallets.
There is also a store value wallet. Here, customers can load their digital accounts with funds via bank transfers, cards, or even cash. PayPal serves as a practical example of this type.
Digital currencies
Digital currencies can be also used for making international payments. This one of the alternative payment methods is gaining popularity due to their low transaction costs and the wide range of options available. Examples include methods related to blockchain technology such as Bitcoin, Litecoin, Ethereum, and many others.
The study by Deloitte reveals that by 2024, 75% of retailers plan to embrace cryptocurrency as a payment method. As promising and exciting as it sounds, it’s crucial to acknowledge the “dark side” of this new technology and innovative approach. The value of digital currencies can be unpredictable due to changing exchange rates, and in some cases, concerns about safety arise due to potential fraudulent activities.
Paper checks
To the surprise of many, paper checks still hold their ground as a viable choice for cross-border payments, even in the era of digital banking. This classic and timeless method remains in use, particularly in the U.S. and Canada, where around 33% of B2B international payments still rely on paper checks. The process is simple: the sender writes the recipient’s name, address, and the amount to be withdrawn on the check, which can then be sent electronically.
One of the advantages of paper checks is that they don’t entail transaction fees and intermediary banks. However, they do fall behind other international payment options, mainly due to the time it takes for the check to reach its destination and be cashed, which can often stretch into several days or even weeks.
Cross-border payments and their benefits?
International payment methods offer a wide range of advantages, influencing businesses and individuals alike. From expanding horizons to boosting economic growth, cross-border payments are the cornerstone of modern international finance.
Easy access to global markets
Cross-border payments have made it simpler for businesses to expand their operations into international markets.
With the ability to receive business to business or retail payments from various countries, companies are no longer restricted to their domestic market. They can now market their products and services across borders. This not only facilitates reaching new customers but also expands the possibilities of acquiring new suppliers and business partners at the global scale.
Enhanced efficiency and payment processing
Cross-border payments speed up the transaction process and reduce operational costs. By eliminating unnecessary delays and administrative hurdles, businesses can optimize their resource allocation and enhance their overall efficiency.
This approach also mitigates foreign exchange risks and contributes to improved customer service, as the payment process becomes faster and easier.
Cost savings and improved cash flow
When processing cross-border payments, businesses can save money by taking advantage of better exchange rates or lower fees. This is often the case when cross-border payments take place between countries that have direct correspondent relationships, the same currency, or integrated financial systems.
Take the European Union with its SEPA (Single Euro Payments Area) as an example here. Financial institutions within the EU often have direct connections and usually share a common currency, allowing for efficient and cost-effective cross-border transactions with fewer intermediaries involved in the process.
As a result, this cost saving can be either passed on to customers in the form of cheaper products and services or reinvested back into the company. Regardless of what the business chooses, it will help to boost profits. Reduced processing expenses can, in turn, lead to better cash flow. Using quick settlement cross-border payment options is yet another way for businesses to increase their payments flow.
Personalized customer experience
By providing customers with various multiple payment methods of international payments, businesses enable their customers to make purchases quickly and conveniently using their preferred method and currency. For example, 92% of shoppers prefer to make purchases on websites that display prices in their local currencies.
Delivering a more personalized customer experience leads to fostering long-term customer loyalty and boosting sales. It’s said that companies which use localized payment methods can improve their revenue by up to 69%.
Cross border payments: key challenges
Do cross-border payments have their own set of challenges? Absolutely. While they offer numerous advantages, it’s important to recognize that they also entail certain risks and challenges.
Operational complexity
Sending funds across borders can be complicated as it usually involves multiple parties like banking institutions, intermediaries or relevant international organizations, and regulatory authorities. This can make the whole process time-consuming and prone to mistakes compared to payments in local currencies, resulting in delays in receiving cross border payments and extra costs.
It’s been calculated that when multiple intermediaries are involved in the process, transaction processing can extend by 2 or 3 days, and sometimes even several days in less-developed markets.
Higher costs of international transactions
As mentioned above, international payments can involve different intermediaries, with each of them charging a transaction fee for their part. Apart from that, there are also currency conversion costs and taxes.
Truth be told, the lack of direct relationships and integrated financial systems results in more intermediaries and more complex correspondent banking relationships, driving up overall transaction costs. This can be especially challenging for small and medium-sized businesses.
Regulatory requirements
Making cross-border payments involves dealing with various regulatory rules and compliance tasks, for example, anti-money laundering laws and economic sanctions. These can be challenging, time-consuming, and potentially costly if companies fail to meet them.
The lack of transparency
Once a payment is initiated, both the sender and recipient often have no means to track it in real time. This lack of visibility extends not only to the payment status during transit but also to the foreign exchange fees associated with these transactions. Depending on the international transaction type, these fees could end up impacting consumers’ finances.
A study by payment company Wise looked at money transfers in 25 European banks. They found that 92% of these banking institutions aren’t fully transparent about their currency conversion fees.
Fraud and security threats
International transactions involve the exchange of sensitive financial and payment data, leaving them exposed to potential cyber threats and fraudulent activities such as identity theft and payment scams.
Sadly, cross-border payments often face big security problems. In 2016, Bangladesh’s central bank lost $81 million in a theft, showing how serious the issue can be.
Conclusion
Cross-border payments have become the norm, opening doors to faster transactions, expanded markets, and improved efficiency. The benefits are vast, yet so are the key challenges–from navigating complexity to handling costs and security threats.
Nevertheless, we should ask ourselves: Can we truly imagine our lives without the seamless flow of international transactions?
Enhance cross-border payments with Neontri
Cross border payments involve multiple currencies, meeting regulatory requirements and offering high transaction speeds. At Neontri we solve these challenges with our expertise in e-commerce and banking software development. Our developers have experience in integrating mobile payment solutions, mobile banking systems and credit card processing even in the most demanding cross border payments landscape. We design solutions for secure payment gateway integrations, robust fraud protection, and scalable transaction processing—all essential for smooth international payments.
Our experienced team of developers will help you with payment integration or connect your e-commerce platform with popular payment gateways and POS systems through API based integration services and custom solutions. Get in touch with us to upgrade your payment infrastructure and cross border payment process. See how we can support your global transactions and grow your business.
FAQ
What is the future of cross border payments?
The future of cross border payments is speed, lower costs and more transparency through blockchain and real time payments. As these take off we’ll see more global transactions and benefits for businesses and consumers.
What are the trends in cross border payments?
The trends include digital currencies, blockchain for secure transactions, and real time payments. Fintech companies are also partnering with traditional banks to offer more efficient and cost effective international payments.
What are the key challenges of cross border payments?
High fees, slow processing, and complex regulations are some of the common challenges. What adds layers of complexity to international transactions is also currency conversion and compliance with anti-money laundering (AML).
Resources
https://www.mollie.com/growth/cross-border-payment-guide
https://www.forbes.com/councils/forbesbusinesscouncil/2023/05/05/cross-border-payment-options-and-their-challenges/
https://www.inpay.com/news-and-insights/how-to-overcome-the-challenges-of-cross-border-payments/
https://www.bankofengland.co.uk/payment-and-settlement/cross-border-payments
https://www.cm.com/payments/
