Understanding Cross-Border Payments: A Definitive Guide
What are cross-border payments?
Cross-border payments are cash payments in which the payer and recipient are in different countries. They include both wholesale and retail payments, as well as remittances.
During the pandemic, cross-border payment services saved many lives and enabled others, including small business owners, to pursue new opportunities. With immigration restrictions, more people send money overseas electronically, and many businesses have gone online, sourced international suppliers, and decided to embrace new ways of reaching customers all over the world.
Whether it’s a small business owner receiving payment from a customer on another continent or a migrant worker sending money home to family, increased people are making and receiving cross-border payments. People have understandably come to expect them to be as quick, simple, and dependable as domestic transactions.
There are several methods for making cross-border payments. Bank transfers, credit card payments, and alternative payment methods such as e-money wallets and mobile payments are the most common methods of transferring funds across borders at the moment.
Cross-border payments are categorized into two types:
1. Wholesale cross-border payments: These are typically made between financial institutions to support the customers’ or the financial institution’s cross-border activities (such as borrowing and lending, foreign exchange, and the trading of equity and debt, derivatives, commodities and securities). Governments and larger non-financial corporations also use wholesale cross-border payments for large deals created by the import and export of goods and services or financial market trading.
2. Retail cross-border payments: These are generally made among individuals and businesses. Person-to-person, person-to-business, and business-to-business are the three main types. They include remittances, most notably money sent back to migrants’ home countries.
What is the significance of cross-border payments?
40% of the people are sending and receiving more cross-border payments than before the pandemic. And most businesses planned to do more international trade in the future by capitalising on new opportunities and mitigating risk by not relying on a single supply chain or market.
Increased international mobility of goods and services, capital, and people have contributed to the rising economic significance of cross-border payments over the last few decades. Bank of England stated that the value of cross-border payments is expected to rise by more than $250 trillion by 2027.
Recent years have seen an increase in the following factors:
Manufacturers expanding their cross-border supply chains
International asset management and global investment flows
International trade and e-commerce
Migrants transferring funds via international remittances
These developments have expanded the market for cross-border payments, combined with the ability for end-users to have direct exposure to cross-border payment services that are as secure and efficient as comparable domestic services.
Remittances, in specific, are crucial in low and middle-income economies, and in certain cases are the prime source of development finance. Competitive interest in this market is also being driven by growth and revenue expansion. As a result, creative and unique new business models and participants are arising.
How do cross-border payments work?
Currency exchanges are closed-loop systems. Domestic payment systems are not conventionally tied directly with those of other countries, so the currency is not physically transferred overseas while transferring between two jurisdictions.
International banks, on the other hand, provide account regulations for foreign counterparts and maintain their accounts with their foreign counterparts, allowing banks to make payments in foreign currency. The funds are not transferred across borders; rather, accounts are credited in one jurisdiction and debited in the other. This interbank network is also used by Fintechs and money transfer agents to provide payment services to businesses and individuals.
International Wire Transfers:
An international wire transfer is a bank service that allows you to transfer money electronically from one bank account to another in another country. The average transfer time is 1-2 business days, with a cross-border fee. Because of the associated fee and the fact that routing rules vary by country, this international payment method is not suitable for large payment volumes or B2B transactions.
Credit Card Payments:
Consumers can use credit cards easily; all they need to do is enter their card information. Cross-border payments, on the other hand, necessitate the acquiring bank converting between the two currencies for the merchant with a merchant account. As a result, this method incurs cross-border fees at various points along the payment chain.
Bank Transfers:
International bank transfers allow money to be transferred from one bank account to another. Most international bank transfers are processed via the SWIFT network. The SWIFT network is a secure messaging system that ensures your payment reaches its intended recipient. One disadvantage of this method is that most banks only keep a limited number of currencies in stock. If the currency you need is not in stock, the bank will depend on their international banking partners to facilitate the transaction where more fees added in the conversion chain.
eWallet:
E-Wallet is also known as a digital wallet which is a software-based electronic payment method that enables customers to pay for online or in-store transactions. These are accessible via mobile or web apps on smart devices, where customers can securely store their payment cards. PayPal, Alipay, Apple Pay, and Google Pay are all popular eWallets.
Some eWallets enable customers to transact in multiple currencies and place orders across borders. Although wallet-to-wallet transactions do not technically qualify as cross-border payments, they do help to facilitate the transaction. A cross-border payment occurs when funds are withdrawn from an eWallet and transferred to the merchant’s bank account with origination and payment on contra currencies.
A period of transition, with international trade accelerating and customer, demands shifting.
Businesses are keen to capitalise on the potential benefits of cross-border payments. As a fintech industry player, we can build a simpler, less risky system that not only supports them but also boosts global trade and commerce – something critical as the world’s economies prepare for the post-pandemic era.
We’ve already seen a slew of payment-related innovations that are reducing complexity. Breakthroughs in networking technologies have sped up and streamlined processes and distributed ledger technology allows transactions to be recorded in multiple locations at the same time.
The world’s most vibrant financial markets are desperate to make progress in this area. The G20 nations have made improving cross-border payments as a priority, and the next steps on the roadmap will be laid out in 2022. Cooperation between national authorities and private sector providers will be vital to success, but the benefits of reducing complexity and increasing transparency are already visible.
Picking the right payment processing technology provider is the first step for success:
It is critical to find a global payments processor that accepts a wide range of localised payment methods. It is also critical to select one that accepts payments in multiple currencies. You can streamline the entire cross-border payment process, improve tax compliance, and payees will appreciate the simple registration process with a SaaS-based payment solution.
There are several crucial factors to consider before jumping on the mass global payments processing bandwagon.
How to find the right partner for processing International Payments?
It’s critical to understand your business’ needs: will you work globally and require cross-border payments, or will local currency suffice for in-country operations? Always remember that your service charges should be simple and affordable for customers regardless of where they are.
Once you’ve formed a partnership with a technical solution provider or payment processing companies, you must agree on how payments will be made. Several factors influence payment method choice, including:
Your cash flow requirements(how soon can you make the payment?).
The economic conditions in your country as well as the country from which you are sourcing.
The nature of the product being sourced.
Complicated banking systems.
Adjustable currency conversion rates.
Your creditworthiness; and
Your requirement for the product.
Choosing a payment technology partner can be a challenging task. The only way to avoid getting lost in the sea of options is to first understand your company’s needs and how a chosen payment technology provider can meet them!
A sneak peek about our NetRemit – Cross border payment suite:
NetRemit is a secure online remittance product available as a web and mobile application with a user-friendly interface facilitating a seamless cross-border remittance process.
NetRemit is a highly scalable solution that can handle transactions of any volume and is flexible enough to be customised for any currency corridor across the globe.
NetRemit comes with an intuitive admin centre allowing remittance providers to offer an easy onboarding process, handle customers & transactions data, and manage the entire remittance operations in a unified platform.
NetRemit has been white labelled to 4+ banks, serving 250K customers and handling 50 million GBP worth of transactions annually.
The contemporary infrastructure of NetRemit helps money to flow seamlessly between countries through technology innovations like digital identity validation and Open Banking integration.
NetRemit improves continuously through market adoption from a business and technology standpoint with our strategical goal of conquering the cross-border payments ecosystem globally by 2025.
To discover more about NetRemit, please click here.
What are cross-border payments?
Cross-border payments are cash payments in which the payer and recipient are in different countries. They include both wholesale and retail payments, as well as remittances.
During the pandemic, cross-border payment services saved many lives and enabled others, including small business owners, to pursue new opportunities. With immigration restrictions, more people send money overseas electronically, and many businesses have gone online, sourced international suppliers, and decided to embrace new ways of reaching customers all over the world.
Whether it’s a small business owner receiving payment from a customer on another continent or a migrant worker sending money home to family, increased people are making and receiving cross-border payments. People have understandably come to expect them to be as quick, simple, and dependable as domestic transactions.
There are several methods for making cross-border payments. Bank transfers, credit card payments, and alternative payment methods such as e-money wallets and mobile payments are the most common methods of transferring funds across borders at the moment.
Cross-border payments are categorized into two types:
- Wholesale cross-border payments: These are typically made between financial institutions to support the customers’ or the financial institution’s cross-border activities (such as borrowing and lending, foreign exchange, and the trading of equity and debt, derivatives, commodities and securities). Governments and larger non-financial corporations also use wholesale cross-border payments for large deals created by the import and export of goods and services or financial market trading.
- Retail cross-border payments: These are generally made among individuals and businesses. Person-to-person, person-to-business, and business-to-business are the three main types. They include remittances, most notably money sent back to migrants’ home countries.
What is the significance of cross-border payments?
40% of the people are sending and receiving more cross-border payments than before the pandemic. And most businesses planned to do more international trade in the future by capitalising on new opportunities and mitigating risk by not relying on a single supply chain or market.
Increased international mobility of goods and services, capital, and people have contributed to the rising economic significance of cross-border payments over the last few decades. Bank of England stated that the value of cross-border payments is expected to rise by more than $250 trillion by 2027.
Recent years have seen an increase in the following factors:
- Manufacturers expanding their cross-border supply chains
- International asset management and global investment flows
- International trade and e-commerce
- Migrants transferring funds via international remittances
These developments have expanded the market for cross-border payments, combined with the ability for end-users to have direct exposure to cross-border payment services that are as secure and efficient as comparable domestic services.
Remittances, in specific, are crucial in low and middle-income economies, and in certain cases are the prime source of development finance. Competitive interest in this market is also being driven by growth and revenue expansion. As a result, creative and unique new business models and participants are arising.
How do cross-border payments work?
Currency exchanges are closed-loop systems. Domestic payment systems are not conventionally tied directly with those of other countries, so the currency is not physically transferred overseas while transferring between two jurisdictions.
International banks, on the other hand, provide account regulations for foreign counterparts and maintain their accounts with their foreign counterparts, allowing banks to make payments in foreign currency. The funds are not transferred across borders; rather, accounts are credited in one jurisdiction and debited in the other. This interbank network is also used by Fintechs and money transfer agents to provide payment services to businesses and individuals.
International Wire Transfers:
An international wire transfer is a bank service that allows you to transfer money electronically from one bank account to another in another country. The average transfer time is 1-2 business days, with a cross-border fee. Because of the associated fee and the fact that routing rules vary by country, this international payment method is not suitable for large payment volumes or B2B transactions.
Credit Card Payments:
Consumers can use credit cards easily; all they need to do is enter their card information. Cross-border payments, on the other hand, necessitate the acquiring bank converting between the two currencies for the merchant with a merchant account. As a result, this method incurs cross-border fees at various points along the payment chain.
Bank Transfers:
International bank transfers allow money to be transferred from one bank account to another. Most international bank transfers are processed via the SWIFT network. The SWIFT network is a secure messaging system that ensures your payment reaches its intended recipient. One disadvantage of this method is that most banks only keep a limited number of currencies in stock. If the currency you need is not in stock, the bank will depend on their international banking partners to facilitate the transaction where more fees added in the conversion chain.
eWallet:
E-Wallet is also known as a digital wallet which is a software-based electronic payment method that enables customers to pay for online or in-store transactions. These are accessible via mobile or web apps on smart devices, where customers can securely store their payment cards. PayPal, Alipay, Apple Pay, and Google Pay are all popular eWallets.
Some eWallets enable customers to transact in multiple currencies and place orders across borders. Although wallet-to-wallet transactions do not technically qualify as cross-border payments, they do help to facilitate the transaction. A cross-border payment occurs when funds are withdrawn from an eWallet and transferred to the merchant’s bank account with origination and payment on contra currencies.
A period of transition, with international trade accelerating and customer, demands shifting.
Businesses are keen to capitalise on the potential benefits of cross-border payments. As a fintech industry player, we can build a simpler, less risky system that not only supports them but also boosts global trade and commerce – something critical as the world’s economies prepare for the post-pandemic era.
We’ve already seen a slew of payment-related innovations that are reducing complexity. Breakthroughs in networking technologies have sped up and streamlined processes and distributed ledger technology allows transactions to be recorded in multiple locations at the same time.
The world’s most vibrant financial markets are desperate to make progress in this area. The G20 nations have made improving cross-border payments as a priority, and the next steps on the roadmap will be laid out in 2022. Cooperation between national authorities and private sector providers will be vital to success, but the benefits of reducing complexity and increasing transparency are already visible.
Picking the right payment processing technology provider is the first step for success:
It is critical to find a global payments processor that accepts a wide range of localised payment methods. It is also critical to select one that accepts payments in multiple currencies. You can streamline the entire cross-border payment process, improve tax compliance, and payees will appreciate the simple registration process with a SaaS-based payment solution.
There are several crucial factors to consider before jumping on the mass global payments processing bandwagon.
How to find the right partner for processing International Payments?
It’s critical to understand your business’ needs: will you work globally and require cross-border payments, or will local currency suffice for in-country operations? Always remember that your service charges should be simple and affordable for customers regardless of where they are.
Once you’ve formed a partnership with a technical solution provider or payment processing companies, you must agree on how payments will be made. Several factors influence payment method choice, including:
- Your cash flow requirements(how soon can you make the payment?).
- The economic conditions in your country as well as the country from which you are sourcing.
- The nature of the product being sourced.
- Complicated banking systems.
- Adjustable currency conversion rates.
- Your creditworthiness; and
- Your requirement for the product.
Choosing a payment technology partner can be a challenging task. The only way to avoid getting lost in the sea of options is to first understand your company’s needs and how a chosen payment technology provider can meet them!
A sneak peek about our NetRemit – Cross border payment suite:
NetRemit is a secure online remittance product available as a web and mobile application with a user-friendly interface facilitating a seamless cross-border remittance process.
NetRemit is a highly scalable solution that can handle transactions of any volume and is flexible enough to be customised for any currency corridor across the globe.
NetRemit comes with an intuitive admin centre allowing remittance providers to offer an easy onboarding process, handle customers & transactions data, and manage the entire remittance operations in a unified platform.
NetRemit has been white labelled to 4+ banks, serving 250K customers and handling 50 million GBP worth of transactions annually.
The contemporary infrastructure of NetRemit helps money to flow seamlessly between countries through technology innovations like digital identity validation and Open Banking integration.
NetRemit improves continuously through market adoption from a business and technology standpoint with our strategical goal of conquering the cross-border payments ecosystem globally by 2025.
To discover more about NetRemit, please click here.
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