The Comprehensive Guide to Cross-Border Payments
Cross-border payments are a cornerstone of global trade and economic integration, enabling businesses and individuals to conduct transactions across international borders. As global payments reach USD 290 trillion by 2030, efficient and secure cross-border transactions are more important than ever.
These transactions are complex due to varying regulatory environments, multiple currencies, and the need for stringent security measures to ensure seamless operations.
One of the most significant trends in cross-border payments is the rise of almost real-time payments. In 2023, more than 70 countries adopted real-time payment systems. Meanwhile, ACI Worldwide reported 195 billion real-time transactions in 2022, a staggering 63% increase from the previous year.
This guide delves into the complexities of cross-border payments, examining their mechanisms, the role of instant payments, interbank systems, and strategies for managing currency risk.
Topics covered in this guide include:
What are cross-border payments?
- Definition and significance
- Types: wholesale and retail, B2B, B2C, C2C, C2B
Uses of cross-border payments
- Facilitating international trade, investment, and remittances
- Enhancing e-commerce, tourism, and corporate financial activities
- Supporting charitable donations and international aid
Types of cross-border payment methods
- Bank transfers, A2A payments and open banking, credit and debit cards
- Cryptocurrencies, digital wallets, QR codes
Cross-border instant payments
- Definition, speed, transparency, and customer satisfaction
- Role of APIs and Brite’s Instant Payments Network
Cross-border interbank payment systems
- Functionality and SEPA in Europe
- Advantages of Brite’s Instant Payments Network
Mechanics of cross-border payments
- Initiation, processing, settlement, completion, and key participants
Managing currency risk
- The importance of currency risk management and hedging strategies
What are cross-border payments?
Cross-border payments refer to financial transactions where the payer and the recipient are not in the same country. These payments are integral to international trade, enabling businesses to transact globally and individuals to send and receive money across borders.
Cross-border payments support global economic connectivity and business expansion, facilitating seamless international trade and financial activities. There are many types of cross-border payments and payment methods, such as bank transfers, credit card payments and more.
There are two main types of cross-border payment:
Wholesale cross-border payments: are typically between financial institutions, either to support the financial institution’s customers’ activities or its own cross-border activities (such as borrowing and lending, foreign currency exchange, and the trading of equity or debt, derivatives, commodities and sometimes securities).
Governments and larger non-financial companies also use wholesale cross-border payments for large transactions generated by importing and exporting goods or services within financial markets.
Retail cross-border payments: These are usually between consumers and businesses. The main types are: person-to-person, person-to-business, and business-to-business. They also include remittances, often money that migrants send back to their home countries.
Other types of cross-border payments
Beyond wholesale and retail, cross-border payments can also be defined by the following types of transactions:
- B2B Transactions: Payments between businesses for goods and services. For instance, a UK company purchasing raw materials from a supplier in Germany.
- B2C Transactions: Payments from businesses to consumers, often seen in e-commerce.
- C2C Transactions: Payments between individuals, such as remittances, sent by migrant workers back to their families in their home countries.
- C2B Transactions: Consumer payments to businesses, including online shopping and bill payments. These transactions typically include payments for subscription services.
What are cross-border payments used for?
Cross-border payments serve various essential functions in the global economy and facilitate transactions across countries. These payments are critical for international trade, enabling businesses to operate globally and individuals to transfer money across borders seamlessly. The purposes of cross-border payments can be broadly categorised into seven key areas:
International trade and commerce
Businesses rely on cross-border payments to import and export goods and services. These transactions are crucial for maintaining global supply chains and ensuring that products and services can move efficiently from one country to another. For example, a business in Germany might use cross-border payments to purchase raw materials from a supplier in Italy.
Investment and financial markets
Cross-border payments are also integral to the functioning of global financial markets. Investors use these transactions to buy and sell securities, such as stocks and bonds, in foreign markets. Additionally, multinational corporations utilise cross-border payments for foreign direct investments (FDI) and to manage their global operations.
Remittances
Another significant use of cross-border payments is for remittances. This is particularly common among migrant workers who support their families by sending a portion of their earnings back home. Remittances play a vital role in the economies of many developing countries, providing a steady flow of income that supports household consumption and economic stability.
Tourism and travel
When individuals travel internationally, they often need to make payments in foreign currencies. Cross-border payments facilitate these transactions, allowing tourists to pay for accommodation, meals, and other travel-related expenses. This supports the tourism industry and promotes cultural exchange and global connectivity.
E-commerce
E-commerce is increasing the volume of cross-border payments. Consumers now regularly purchase goods and services from international and overseas online retailers, requiring efficient and secure payment methods. Cross-border payments enable businesses to reach a global customer base and provide consumers access to a broader range of products.
Corporate transactions
Large corporations frequently engage in cross-border payments for various corporate activities, such as mergers and acquisitions, joint ventures, and other strategic initiatives. These transactions are vital for expanding business operations, entering new markets, and achieving corporate growth objectives.
Charitable donations and international aid
Non-profit organisations and governments use cross-border payments to provide international aid and support humanitarian efforts. These payments are essential for delivering resources to needy areas, funding development projects, and supporting global charitable initiatives.
Different types of cross-border payments methods
Cross-border payments deliver numerous advantages for businesses but pose certain challenges. Understanding these benefits and barriers is key for businesses and individuals engaged in international commerce.
Benefits of cross-border payments:
- Global market access:
- Cross-border payments allow businesses to expand beyond domestic markets, which helps them reach new customers and access international opportunities while driving growth and diversification.
- Cross-border payments allow businesses to expand beyond domestic markets, which helps them reach new customers and access international opportunities while driving growth and diversification.
- Enhanced customer base:
- Accepting cross-border payments enables businesses to cater to international customers, boosting customer satisfaction and loyalty and increasing sales and revenue.
- Accepting cross-border payments enables businesses to cater to international customers, boosting customer satisfaction and loyalty and increasing sales and revenue.
- Economic growth:
- These payments facilitate international trade and investment, fostering economic growth by enabling the flow of goods, services, and capital across borders.
- These payments facilitate international trade and investment, fostering economic growth by enabling the flow of goods, services, and capital across borders.
- Currency diversification:
- Engaging in cross-border transactions allows businesses to hold multiple currencies, helping manage exchange rate fluctuations and protecting profit margins.
Drawbacks of cross-border payments:
- Complex regulatory environments:
- Navigating different countries’ varying regulations and compliance requirements can be challenging and time-consuming.
- Navigating different countries’ varying regulations and compliance requirements can be challenging and time-consuming.
- Higher costs:
- Cross-border transactions often incur higher fees, including currency conversion and transaction fees, which can impact profitability.
- Cross-border transactions often incur higher fees, including currency conversion and transaction fees, which can impact profitability.
- Longer processing times:
- These payments can take longer to process than domestic transactions due to differences in banking systems, time zones, and additional verification.
- These payments can take longer to process than domestic transactions due to differences in banking systems, time zones, and additional verification.
- Currency volatility:
- Exchange rate changes can impact a payment’s value, posing a significant risk. Effective currency risk management is essential to mitigate this risk
Different types of cross-border payment methods
Cross-border payment methods vary widely, offering different levels of convenience, cost, and speed. Here is an overview of the most commonly used methods:
Bank Transfers:
Bank transfers are a traditional method of transferring funds between bank accounts. While this method is secure, it can be slow and costly due to fees and exchange rates. Bank transfers remain a staple for large transactions and business-to-business payments.
Account-to-account payments and Open Banking:
Meanwhile, account-to-account (A2A) payments leverage open banking technologies to provide faster and more efficient cross-border transactions. They have all the security of a bank transfer but neither costly fees nor lag time.
Open banking fundamentally changes how remittance and cross-border payments work by streamlining how people can send and receive money. For more information on open banking, please see our dedicated Remittance in Banking article.
Credit and Debit Cards:
Today, credit and debit cards are still widely used for many online and in-person transactions. They offer convenience but often incur higher fees.
Did you know that over 90% of all flight tickets purchased in the US between January and November 2023 were made with a credit or debit card? Despite their cost, these cards are often the go-to for many consumers due to their ease of use and widespread acceptance.
Cryptocurrencies:
Cryptocurrencies are increasingly used for cross-border transactions due to their speed and low transaction costs. However, while they offer a decentralised alternative to traditional banking systems, crypto comes with a host of regulatory challenges and is highly volatile.
Digital Wallets:
Mobile payment solutions like PayPal, Alipay, and WeChat Pay provide a seamless and fast way to make cross-border payments. They have gained popularity in recent years due to their user-friendly interfaces and the ability to store multiple payment methods. For example, in 2023, Alipay and WeChat Pay were responsible for more than $7.5 trillion in digital wallet transaction value in China alone.
Cross-border instant payments
Cross-border instant payments refer to transactions that enable the immediate or near-real-time transfer of funds across borders, leveraging advanced technological solutions to ensure swift settlement. For example, the instant A2A payments offered by Brite. These types of payments offer distinct advantages.
One of the primary benefits is speed. Instant payments drastically reduce transaction times, enhancing liquidity and improving cash flow management for businesses and individuals.
As outlined in the G20 Roadmap for Enhancing Cross-border Payments, by 2027, 75% of all payments cross-border payments across remittances, retail and wholesale payments are expected to be completed within an hour, with the rest within one business day.
This rapid settlement of funds ensures that recipients can access their money almost immediately, which is particularly beneficial in time-sensitive situations.
Transparency is another crucial advantage of cross-border instant payments. Real-time updates and confirmations provide both the sender and the recipient with immediate transaction status, reducing uncertainty and increasing trust in the payment process. This transparency is crucial for maintaining accurate records and ensuring all parties know the transaction’s progress.
Moreover, the speed and efficiency of instant payments contribute significantly to higher customer satisfaction. In sectors such as e-commerce and remittance services, where quick and reliable transactions are paramount, instant payments meet the growing demand for faster and more efficient payment methods. Customers appreciate the convenience and reliability of instant payments, leading to a more positive overall experience.
A critical component enabling the efficiency of cross-border instant payments is the use of APIs (Application Programming Interfaces). APIs facilitate seamless integration between different financial systems, allowing for the efficient and real-time processing of cross-border payments. Brite’s Instant Payments Network is an exemplary API in this context, which streamlines the process by consolidating various bank APIs into a single, powerful API. This integration significantly simplifies the payment process, ensuring faster and more reliable transactions.
In summary, cross-border instant payments offer a range of benefits, including enhanced speed, transparency, and customer satisfaction, making them an increasingly important component of the global financial landscape.
Cross-border interbank payment systems
Cross-border interbank payment systems facilitate transactions between banks in different countries, ensuring secure and efficient fund transfers. These systems connect various national payment systems, enabling the seamless movement of funds across borders. One of Europe’s most significant examples of such a system is the Single Euro Payments Area (SEPA).
SEPA unites numerous European countries by standardising and simplifying cross-border payments in euros. It allows consumers, businesses, and public administrations to make and receive payments using the same conditions, rights, and obligations, regardless of location within Europe. This harmonisation of payment systems across borders enhances the efficiency and security of transactions, making cross-border payments as easy as domestic ones.
At Brite, our Instant Payments Network leverages the benefits of SEPA to offer rapid and secure A2A payments. By integrating various bank APIs into a single streamlined API, Brite facilitates real-time processing of cross-border transactions, ensuring that funds are transferred swiftly and securely between banks in different countries. Bo Liljefors, Chief Product Officer at Brite Payments, explains: “With our solution, consumers benefit from instant settlement between bank accounts and a frictionless payment experience.”
Cross-border interbank payment systems like SEPA are crucial in facilitating secure and efficient international transactions. By leveraging innovative technologies and integrated networks, these systems ensure that funds can move seamlessly between banks across borders, enhancing the overall efficiency of global financial operations.
How do cross-border payments work?
Cross-border payments involve a series of steps that ensure the secure and streamlined transfer of funds across international borders. This process includes the initiation, processing, settlement, and completion of the transaction, with various key players involved at each stage.
Initiation:
The cross-border payment process begins when the payer initiates the transaction through their financial institution or a payment service provider. This step involves entering the payment details, including the recipient’s information and the transfer amount.
Processing:
Once the payment is initiated, the payment service provider or financial institution processes the request. This involves conducting compliance checks, such as anti-money laundering (AML) and know your customer (KYC) procedures, to ensure the transaction’s legitimacy. Additionally, currency conversion is performed if the payer and recipient use different currencies.
Settlement:
After the payment is processed and compliance checks are completed, the funds are transferred through intermediary banks or payment networks. These intermediaries play a key role in assisting the movement of funds across borders, ensuring that the transaction adheres to international regulations and standards.
Open Banking-powered A2A payments, like those facilitated by Brite, streamline this process, making it faster and more efficient. The quick reconciliation such systems provide is particularly beneficial for businesses, as it simplifies cash flow monitoring.
Completion:
Finally, the transferred funds are credited to the recipient’s account. The payer and recipient receive confirmation of the transaction, which includes details such as the transaction ID and the final amount received. This step ensures that both parties are informed of the successful completion of the payment.
Key players
- Payers and Recipients: These are the individuals or entities involved in the cross-border transaction. Payers initiate the payment, while recipients receive the funds.
- Banks and Financial Institutions: These organisations help facilitate the transfer of funds and handle currency conversion. They also ensure that the transaction complies with regulatory requirements and provide the necessary infrastructure for payment processing.
- Payment Service Providers:
These companies offer platforms and technologies that enable the efficient processing of cross-border payments. They provide currency conversion, compliance checks, and transaction tracking services.
Currency risk management – what is it and how does it work?
Currency risk management involves employing strategies to protect against potential losses due to changing exchange rates. For businesses engaging in cross-border transactions, mitigating the financial risks associated with currency volatility is crucial. Currency risk management is essential to maintaining financial stability, controlling costs, and safeguarding profitability.
Why is currency risk management so important?
- Financial stability:
Currency risk management helps businesses and individuals maintain financial stability amidst volatile currency markets. By implementing effective strategies, companies can avoid significant losses that might arise from sudden and unpredictable changes in exchange rates. - Cost control:
Managing currency risk minimises the impact of adverse currency movements on transaction costs. This control is vital for budgeting and financial planning, ensuring that expenses remain predictable despite fluctuations in currency values. - Profitability:
Effective currency risk management protects profit margins by stabilising expected revenues and expenses. By mitigating the risk of unfavourable exchange rate movements, businesses can maintain consistent profitability and avoid the financial strain of unexpected currency losses.
Strategies for managing currency risk
One effective strategy for managing currency risk is hedging, which involves using financial instruments such as futures, options, and swaps to lock in exchange rates. These tools allow businesses to secure a specific exchange rate for future transactions, thereby eliminating the uncertainty associated with currency fluctuations. By hedging, companies can protect themselves against adverse movements in exchange rates, ensuring that their financial obligations remain stable.
Diversification is another important approach: it involves spreading investments across various currencies and markets to reduce exposure to any single currency’s volatility. By diversifying, businesses can balance potential losses in one currency with gains in another, effectively mitigating the overall risk. This strategy protects against currency fluctuations and opens opportunities for gains in more stable or appreciating currencies.
Forward contracts are also commonly used in currency risk management. These agreements to exchange currency at a predetermined rate on a future date provide certainty regarding the exchange rate for future transactions, enabling businesses to plan and budget accurately. Forward contracts are particularly useful for businesses with predictable future cash flows in foreign currencies, as they allow for precise financial planning without the risk of currency movements.
Currency risk management is a critical aspect of financial strategy for businesses involved in cross-border transactions. By employing the strategies above, companies can protect themselves from the uncertainties of currency fluctuations, ensuring financial stability, cost control, and consistent profitability.
Optimising cross-border payments with Brite
Inc conclusion, cross-border payments are integral to global commerce and economic integration. Implementing effective strategies and leveraging advanced technologies, such as instant A2A Payments powered by Open Banking can boost the efficiency and reliability of these transactions.
Brite Payments offers innovative solutions for cross-border payments, providing seamless, secure, and efficient services that cater to the needs of businesses and consumers. With a focus on real-time processing and advanced risk management, Brite ensures optimal performance and customer satisfaction in the global payments landscape.
If you would like yo know more about how Brite can help your business stay competitive and ensure smooth international transactions, then get in touch with one of payments exper
