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What You Need To Know About Cross-Border Payments

Sending money to someone in a different currency should be simple and reasonably priced. Even though it shouldn't be difficult, local banks have difficulty serving their customers who need to send money abroad.

Posted: 26th January 2022 by Finance Monthly
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When you're transferring money overseas, the process might seem like it takes a lifetime. But why is this so? Money is nothing more than information. The question is, why does it take longer to send money internationally than it does to email? There are three leading causes behind this. 

First and foremost, one currency must be exchanged for another. Second, compliance checks are required in order to avoid the payment of unlawful funds. And, finally, various payment systems communicate in a variety of languages. Costs, friction, and delays can all be associated with these procedures. Payment innovators and organisations like SWIFT are working hard to create better solutions and standards for data and messaging transmission and storage.

With the growth of cross-border e-commerce, businesses must be able to take payments from clients all over the world, regardless of location. As of 2022, it is anticipated that cross-border shopping would account for 5.4 trillion US dollars in sales and account for 20% of total e-commerce sales. Amazon and eBay are two of the most prominent online marketplaces for cross-border buying, primarily in North America and Europe, and they are both owned by eBay.

If you are a merchant conducting business worldwide, you need to be able to take payments from customers in all of the countries you are considering.

So, what are cross-border payments, and how do they work?

Cross-border payments are transactions in which the payer and the transaction receiver are based in different countries from where the transaction is being processed. Transactions can take place between people, businesses, or financial organisations that are attempting to move funds across borders. In order to accept cross-border payments, merchants will need to partner with a payment service provider capable of processing a diverse variety of payment methods.

  • For example, you can make online payments easy by offering local and global payment methods. It is possible to make cross-border payments using various techniques, including credit and debit cards, bank transfers, and local payment options.
  • The use of credit and debit cards is a popular choice among customers who want to make a cross-border payment since they are simple to use: users simply enter their card information and wait for the transaction to be processed.
  • Payments made via international bank transfers are another option for sending money across borders. To conduct this sort of transaction, consumers will require the merchant's IBAN and BIC.
  • E-wallets and other local payment methods can expedite overseas transactions, as can credit cards and other forms of cash.

How does a cross-border payment transfer operate?

In order to move funds across borders, banks and a diverse set of domestic companies collaborate to complete the transaction. When a transaction is made, a "correspondent bank," which represents the entity seeking the money, communicates with a "respondent bank," which represents the entity purchasing the item being purchased.

There are counterparts for every bank in each of the world's major cities in a different city. Consequently, money will first leave the buyer's bank and go to that bank's counterpart in the merchant nation, where they will be prepared for remittance to the buyer. The merchant's bank will then receive the money and it will be deposited into the merchant's account as soon as possible. These banks frequently collaborate with others to move money, which frequently entails more than four banking locations interacting with one another, traversing many currencies, and dealing with a variety of taxes.

What are the benefits of investing in cross-border payment solutions?

Customers want to make payments in an easy and familiar method, such as by credit card. As a result, it is advisable to research the preferred payment methods in the territories you intend to target. Depending on the country, international payments usually take between two and five business days to clear. The greater the number of financial institutions that the money must pass through, the longer it will take to complete the transaction.

You must identify all elements of a cross-border transaction if you want to run a successful worldwide business. These processes must be recognised and, if necessary, modified to ensure that the consumer has a positive experience while making an international purchase online.

As the number of individuals who own smartphones continues to rise worldwide, they have practically unlimited access to financial services and online payment solutions, with mobile wallets experiencing considerable and consistent development. Because of this expansion, the volume of cross-border business is expanding.

Cross-border payments: What the future holds

The market for cross-border payments has traditionally been dominated by financial institutions. Because there was minimal competition among the dominant global correspondent banks, cross-border transactions were fraught with difficulties for ordinary customers and companies alike.

As real-time cross-border payments become more widely accepted, techniques such as Visa Direct and SWIFT GPI will rise in popularity, and this will become more common. Strong Customer Authentication, mandated by PSD2 regulation, is another characteristic that makes cross-border payments more efficient. Payments made inside the European Economic Area will be required to go through a two-factor authentication procedure in order to authenticate the identity of the cardholder as a result of this new legal requirement. 

Looking at the public opinion, it is recommended that merchants deal with a payment service provider that provides quick payment processing, transparent charge structures, a secure worldwide payment gateway, a variety of local payment options, and a variety of settlement currencies.

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