Your guide to cross-border payments

Cross-border payments are a growing area of opportunity for fintechs. As the global economy becomes increasingly interconnected, businesses and individuals are looking for more efficient and cost-effective ways to send money overseas.

This bite-size guide provides an overview of cross-border payments, the benefits and drawbacks, and the different types of payment methods available.

What are cross-border payments?

Cross-border payments are transactions that involve the transfer of money between two parties located in different countries. These payments often involve currency conversions and can be made for a variety of reasons, such as to purchase goods or services, to send remittances, or to make investments.

The global cross-border payments market is expected to reach $2.1 trillion in 2023. This growth is being driven by several factors, including the development of e-commerce, the rise of remittances, and the expansion of cross-border investment.

Businesses who need to initiate cross-border payments should make sure that the selected financial vendor has access to the payment network needed. It is equally important to choose the most suitable payment method to address specific business needs such as: speed, currencies involved and fees associated with each payment method.

How cross-border payments work

Making a cross-border payment typically involves the following six steps:

1. Initiation — The sender provides the necessary information, such as the amount, currency, recipient's details, and purpose of the payment, through channels such as online banking or in-person at a local bank branch.
2. Authentication and verification — The sender's bank verifies the sender's identity, ensures sufficient funds cover the payment, and may conduct anti-money laundering checks and verify sanctions lists.
3. Routing — The sender's bank sends payment to the recipient's bank, directly or with one or more banks in between.
4. Conversion — Funds in different currencies are converted into the recipient's currency at the prevailing exchange rate, either by the sender's bank or an intermediary bank.
5. Settlement — Once the conversion is complete, the recipient's bank receives the funds and adds them to the recipient's account.
6. Fees and charges — Payment transactions may include transaction, currency exchange, and bank fees, which vary depending on the involved banks, payment system, and amount and currency.

Benefits and drawbacks of cross-border payments

Like any payment method, cross-border payments have both advantages and disadvantages.

Some of the benefits include:

• Convenience — Cross-border payments can be made quickly and easily, from anywhere in the world.
• Security — These payments are typically very secure, due to the use of encryption and other security measures.
• Flexibility — There are various cross-border payment methods to choose from, allowing businesses to choose the best way to meet their needs.

However, there are also drawbacks to consider:

• Costs — Cross-border payments can be expensive due to the fees charged by banks and other intermediaries.
• Limited access — Not all countries have the same level of access to cross-border payment services, forcing consumers and businesses to use third parties instead of their regular banks.
• Inefficiency and slow speed — Payments can take several days to clear due to a lack of standardisation in the banking industry.
• Currency risk — Businesses may face potential losses or reduced profits due to the changing of exchange rates when partaking in currency exchange.
• Compliance — All organisations must adhere to anti-money laundering laws and economic sanctions or risk consuming time and incurring costs.

Cross-border payment methods

Cross-border payments can be made via multiple methods, such as:

Wire transfers

Wire transfers are a popular and secure way to send money internationally, and can be completed quickly. Wire transfers are subject to currency conversion fees and often involve less favourable exchange rates than other payment methods.

Credit card transactions

Aside from wire transfers, credit card transactions are one of the most popular forms of cross-currency payments. These are a convenient way to send money internationally and can be completed quickly and easily, eg. purchasing an item from Amazon.com if you are based in another country. This method can work out to be expensive to consumers due to the high fees charged by credit card companies and financial institutions.

Payment rails

Payment rails are a newer type of cross-border payment system that is designed to be faster, cheaper, and more transparent than traditional methods such as wire transfers. It relies on new technologies such as blockchain to facilitate secure, peer-to-peer transactions without the need for intermediaries. This can significantly reduce fees and processing times associated with traditional payment methods.

Cryptocurrencies

Cryptocurrencies offer several advantages over traditional payment methods, including faster processing times, lower fees, and greater transparency and security. However, cryptocurrencies are also highly volatile and may not be accepted by all merchants or financial institutions.

The future of cross-border payments

Rapid digital innovation is a pivotal catalyst in transforming the cross-border payments landscape as more fintechs are pushing to make end-to-end money movement more instant and transparent. Borders are becoming increasingly borderless and industry ecosystem players are continuously looking to improve user experience.

The future of cross-border payments is likely to be characterised by hyper-personalisation. For example, Slide — a startup that was a part of our Fintech Foundation incubator programme — will look to provide a subscription plan with no fees, no commissions and no additional costs to help migrants transfer money to their loved ones.

In addition to digital innovation and hyper-personalisation, banking APIs used as vital tools to consume and extract value from SaaS are also likely to positively impact the future of cross-border payments. For example, APIs seamlessly integrate into existing treasury systems, providing treasurers with immediate visibility into FX rates, enabling more effective currency exposure management, risk mitigation, and faster reconciliation.

API connectivity is being leveraged with technologies like SWIFT GPI and virtual account management to enhance the beneficiary and sender experience. These advancements provide greater visibility and transparency into payment status, allowing senders to access upfront FX rates and beneficiaries to track transactions in real-time.

Diving deeper into virtual and standard accounts, they offer businesses a centralised account structure to manage cash flow across currencies. By eliminating the need for multiple local accounts in different markets, virtual accounts can provide better payment sequencing, detailed reporting, and the ability to transfer funds across currencies.

How to choose the correct cross-border payment method

To determine the most appropriate cross-border payment method for you, consider the amount to be sent, desired speed, cost, and security of the payment.

Sending large amounts of money quickly will require a wire transfer. However, wire transfers can be expensive. If you are sending a smaller amount of money and you are not in a hurry, a credit card transaction may be a more cost-effective option.

Our Fintech infrastructure APIs streamline development, reducing costs and time to market. With standardised interactions, you can make payments, issue bank accounts, and perform FX transactions across multiple banks. Easily enhance your digital banking offering by integrating additional providers.

Need to securely and openly transfer money? Make an informed decision about which payment networks work best with your product with a quick demo with our experts.