Cross-border payments: when money has no limits
Welcome to a new era. Many people need to make cross-border payments because you can now work and collaborate with people from different nations. The term 'Cross-Border Payments' has started to become popular, especially in the B2B environment.
Learn all about Cross-border Payments. Learn how they work, their main uses, limitations and all the information you need to start applying them in your business.
What are Cross-border Payments?
Cross-border payments refer to financial transactions where the sender and receiver are located in different countries. These payments cover both bulk and retail transactions, including remittances.
There are a variety of ways to make international payments. Among the most common are bank transfers, credit card payments, and alternative methods such as e-wallets, mobile payments and payment platforms.
The main types of international payments are:
- Wholesale international payments: these are generally transactions between financial institutions or businesses, either to support their customers' activities or for their own global operations, such as loans, currency exchanges, and transactions in equity, debt, derivatives and commodities markets. Governments and large corporations also use international wholesale payments for significant transactions related to the import and export of goods and services, as well as transactions in the financial markets.
- International retail payments: Involve transactions between individuals and businesses. The most common types include person-to-person, person-to-business, and business-to-business payments. In this area, remittances play a very important role, especially in the funds that migrants send to their countries of origin.
Why are Cross-border Payments important?
In recent decades, the increased international mobility of goods and services, capital and people has contributed to the growing economic importance of Cross-border Payments. It is estimated that the value of cross-border payments will grow from nearly $150 trillion in 2017 to more than $250 trillion in 2027, which equates to an increase of more than $100 trillion in just 10 years.
Among the factors that have intensified in recent years are:
- The cross-border expansion of manufacturers' supply chains.
- Cross-border asset management and global investment flows.
- International trade and e-commerce
- Immigrants sending money through international remittances.
These trends have increased the demand for cross-border payments and the need for end users to have access to cross-border payment services that are as efficient and secure as comparable domestic services. Remittances, in particular, play a vital role in economies such as those in Latin America and, in some cases, are becoming the main source of development finance.
Income growth and expansion are also driving competitive interest in this market. In response, new business models and innovative players are emerging.
How do international payments work?
Currencies operate in closed-loop systems, which means that, traditionally, the payment systems of one country are not directly connected to those of other countries. For this reason, when a transfer is made between two jurisdictions, currency is not physically transferred from one country to another.
Instead, international banks facilitate transactions by opening accounts with their counterparties abroad. These banks, in turn, have accounts with foreign institutions, allowing them to make payments in different currencies. Thus, when an international payment is made, the funds do not physically cross borders; instead, they are credited to an account in one country and the corresponding amount is debited from the account in another country.
The more intermediaries involved in a cross-border transaction, the greater the delay and associated costs. In transactions between currency pairs with high trading volume, such as the U.S. dollar and British pound sterling, the chain of intermediaries tends to be shorter. However, when it comes to converting currencies with lower trading volumes, it is common to need more correspondent banks. Each additional bank in the chain adds time and cost to the transaction.
This series of transactions between two specific countries is known as a "payment corridor" or "country corridor". As the chain lengthens due to the intervention of more intermediaries, the transaction becomes slower and more costly, which can affect the efficiency of international payments.
In addition, it should be noted that each country has its own taxes for this type of payment, so it tends to be extremely expensive in countries such as Latin America and even Africa. For this reason, although safe, Cross-Border Payments through banks are not usually a good alternative if you are looking for speed.
Other payment providers, such as fintechs and money transfer agents, also use this interbank network to offer payment services to businesses and individuals. This global infrastructure allows international payments to be made efficiently, ensuring that transactions are completed without the need to physically move money between countries.
This is where specialized payment platforms like TruBit Business come in. Such platforms allow money to be sent and received almost immediately, with the help of a private network and virtually no intermediaries.
These platforms save time and money because there are not many intermediaries, i.e. the experience is similar to a deposit between 2 ordinary users.
For example, this is how TruBit Business works. This process has allowed us to save a lot in every way:
What are the challenges that Cross-Border Payments has to solve?
In addition to the above, Cross-border payment has had to work on some problems that naturally occur when making international shipments, such as the following:
Fragmented and truncated data formats: When payments are made, messages are sent between financial institutions to update the sender's and recipient's accounts. These messages must include sufficient information to confirm the identity of the parties involved and verify the legitimacy of the payment. However, data standards and formats vary considerably between jurisdictions, systems and messaging networks.
Complex processing of compliance checks: Uneven application of regulatory regimes for sanctions and financial crime verification may require multiple verifications of the same transaction to ensure that parties are not exposed to illicit financing. Banks may use different sources to perform these checks, which may result in payments being flagged incorrectly, for example, where entities have similar names to those in sanctions or financial crime databases.
Limited hours of operation: Bank accounts can only be updated during the hours when the underlying settlement systems are available. In most countries, the operating hours of these systems coincide with normal business hours. Even when the hours have been extended, this has generally only been done for specific critical payments. This causes delays in clearing and settlement of cross-border payments, especially in corridors with large time differences.
Legacy technology platforms: much of the technology underpinning cross-border payment systems is still based on legacy platforms, built when paper-based payment processes were first migrated to electronic systems. These platforms have fundamental limitations, such as reliance on batch processing, lack of real-time monitoring and low data processing capacity. This leads to settlement delays and "trapped liquidity".
High funding costs: to enable rapid settlement, banks must provide upfront funding, often in multiple currencies, or have access to foreign exchange markets. This creates risks for banks, which must set aside capital to cover, meaning that this capital cannot be used to support other activities. Uncertainty about when incoming funds will be received often leads to overfunding of positions, which increases costs.
Long transaction chains: these frictions make it costly for banks to maintain relationships across jurisdictions, which explains the use of the correspondent banking model. However, this results in longer transaction chains, which increases costs and delays, creating additional funding requirements, repeated validation checks and the possibility of data corruption along the way.
Weak competition: there are significant barriers for companies to offer cross-border payment services. In addition, it is difficult for end users to accurately assess the cost of initiating a payment, which complicates the evaluation of the value for money offered by different providers. These barriers can increase prices for end users and businesses, and slow down investment in modernizing cross-border payment processes.
Most of these challenges are banking, as we mentioned to you fortunately. For Fintech or technology companies, most of them have certain trust issues, especially when talking about very large amounts.
For that reason, the most important thing is to choose your platform according to the advantages and disadvantages that each one offers you. For example, if you will go for the banking side, it is convenient to investigate all the chains involved in the transaction to see if it is your best option.
On the Fintech side, a platform that offers you customized solutions will be the best, since each case is a world of its own and we are not only talking about transactionality. TruBit Business allows you to talk directly with accounts managers who will study your case and provide you with the right solution for you.