Unlocking Global Opportunities: Navigating Cross-Border Payments for International Success
In today’s global economy, the pressure for businesses to offer products and services across borders is ever-growing. A great opportunity for business expansion, but if you want to successfully implement cross-border sales, you need to ensure your international payments are as convenient, quick and secure as they are at home. In this article, we’ll cover everything you need to know about navigating cross-border payments successfully. Read on to discover:
1. What are cross-border payments?
2. How do cross-border payments work?
- Initiation
- Authentication and verification
- Routing
- Conversion
- Settlement
3. What are the challenges involved in cross border payments?
- Security risks
- Compliance requirements
- Exchange risk
- Higher cost
- Slower transactions
4. What are some examples of cross-border payments?
- International bank transfers
- Credit and debit card payments
- Online payment platforms
- Cryptocurrency payments
5. Why should merchants use cross-border payment methods?
- Expand customer base and increase competitive advantage.
- Maximise conversion and personalise customer experience.
- Easier to convert currency.
6. How to make cross-border payments work for your business?
7. To sum up.
1. What are cross-border payments?
Let’s talk about the cross-border payments definition. This is where the payer and the payee are in different countries.
If you’re selling to a customer in a different country, you’ll need a payment system that supports that. Seems simple enough, right?
But, as with all payment methods and practices, cross-border payments are subject to several rules and regulations. While it can seem frustrating, these are usually in place to prevent crimes like money laundering and identity theft. Not following these laws properly may end up in huge financial penalties.
It’s also important to remember that cross-border payments can also come with extra hurdles. We’re talking about exchange rates and service fees.
So, to avoid stress, surprises and even fines, you need to find a system that is secure and cost-effective.
2. How do cross-border payments work?
The payment platform offering cross-border payments uses a vast network of banks and financial institutions to move money between different countries and currencies seamlessly. Although there are many different services available, the process is mostly the same. Let’s talk about the different steps that are involved.
Initiation.
The payment process begins when the sender initiates the payment. They’re required to provide their basic details for that. These details include the amount, currency, recipient details and the purpose of the payment. Almost all the payment channels, like online banking or mobile apps, require these details for transaction purposes.
Authentication and verification.
The second step involves the identity verification of the sender. The bank employs various security checks to ensure that the payment request is indeed initiated by the right sender. This eliminates the misuse of digital payment platforms. Once verified, the bank checks if there are sufficient funds available in the sender’s account to cover the payment.
Besides this authentication and verification, the bank also performs anti-money laundering checks, and ensures that the recipient is not on any sanctions list.
Routing.
The next step is called routing. It may either involve a direct transfer of payment from the sender’s bank to the recipient’s bank, or it may involve multiple intermediary banks.
Different payment gateway and cross-border payment providers might have different steps involved for routing purposes. The time required for the payment to be processed may also vary. The routing methods also depend on the type of transaction.
Currency conversion.
In the case of cross border payments involving multiple currencies, conversion is also part of the routing process. In order to convert the currency to the recipient’s currency, this process considers the prevailing exchange rate. The currency conversion process is mainly handled by the banks that are involved in the process.
Settlement.
The receiver’s bank receives the funds and credits them to their account as soon as the currency is converted. This is where the process is completed. This is the point where the service that you’re using charges its fees and costs associated with the money transfer. These costs are dependent on various factors that include the amount, the currencies involved, and the payment system that was used.
3. What are the challenges involved in cross-border payments?
Despite the rise in popularity of cross-border payments, there are still many issues and challenges that you might face. Let’s look into some of these challenges:
Security risks.
The biggest concern when it comes to online payments is the security risk. Any breach of sensitive data can put you into severe financial and legal trouble. International payments can be more vulnerable to cyber-attacks or fraud. This is mainly because of the involvement of multiple financial intermediaries. The more it moves around, the more opportunity for interception.
Even if a data breach occurs at one single point, the whole payment system can be impacted. So, you should make sure that the payment service provider that you’re opting for, has employed cybersecurity practices to safeguard your data and money.
Compliance requirements.
The cross-border payment service that you’re using must comply with all the local and international regulations related to money transfers. Most of these regulations are directed towards anti-money laundering laws and economic sanctions. In case of non-compliance, you could get into legal trouble, which can be time-consuming and potentially costly.
Exchange risk.
In the case of international payments involving multiple currencies, exchange rate fluctuations can be a major challenge. This not only exposes the business to currency risk but can affect the value of payments, causing losses or reducing profit margins.
Higher cost.
Offering cross-border payments can be costly. You might have to bear:
- Fees and charges for currency conversion.
- Higher fees for payment processing.
- Fees from intermediary banks.
So, you should make sure you can afford these costs before you get started.
4. What are some examples of cross-border payments?
You’ll most likely carry out cross-border transactions though international bank transfers, credit and debit card payments, and online payment platforms.
But, as we've already mentioned, you'll also need to be aware of the fees and expenses associated with cross-border payments and the compliance and regulatory requirements that apply to international transactions. Here are some examples:
- International bank transfers.
- Credit and debit card payments.
- Online payment platforms.
- Cryptocurrency payments.
5. Why should merchants use cross-border payment methods?
Although cross-border payments can be more complex, you really shouldn’t let that put you off.
Cross-border payments currently account for more than 38% of global ecommerce transactions. And, the global trade based on cross-border payments is set to exceed $2 Trillion in 2023, as per Juniper Research.
In short, the rewards greatly outweigh the challenges. Not convinced? Here are some big ones:
Expand your customer base and increase competitive advantage.
By accepting payments from different countries, you can start selling products or services to customers in different markets. Access to different markets can help you gain a competitive edge over others in the industry. Allowing you to reach more customers and increase your earning potential.
Cross-border payments allow you to make the most out of the global B2C e-commerce market. You can significantly increase your sales and conversions by leveraging its benefits.
Maximise conversion and personalised customer experience.
Cross-border payment methods offer customers the ability to easily make payments using their preferred payment method and currency. Unlocking a more personalised customer experience.
When customers have a better experience, they are likely to buy more. Using reliable cross-border payment methods can help build trust among customers, which is vital to building your brand and increasing your sales.
Easier to convert currency.
Most cross-border payment methods offer currency conversion services, which can keep you on top of currency risks and minimise losses due to exchange rate fluctuations.
6. How to make cross-border payments work for your business?
To make your international efforts a success, you need a trusted payment service provider that has a good reputation in the market. But what should you look for?
You need to find a provider that has an in-depth understanding of local payments, consumer trends and the ever-changing regulatory frameworks of the markets.
Without these, you’ll struggle to succeed.
As more and more consumers shop online, they’re considering new sites and exploring new payment experiences. However, to convince a potential online customer, you must assure them that the buying process is safe, fast, and hassle-free.
Adapting to local payment methods is one of the best ways to win the trust of customers. Preferably, online businesses should offer a variety of payment options to ensure you meet the preferences of different customers. Think of it as financial inclusion.
“We have a chance to improve cross-border payments with huge benefits, especially for many of the world’s poorest people. And there is a pressing need to do so." - Kristalina Georgieva, Managing Director of the International Monetary Fund
7. To sum up.
Cross-border payments are your bridge to a global market. The easiest way to effectively expand your business across borders is to integrate your website with a payment solution that supports cross-border payments.
There are a number of issues and challenges that pop up when you start dealing with international payments. So, you need to find a platform that can help you navigate them.
Curious about cross-border payments?
