Cross-border payments: trends and challenges

cross-border payments

Last modified on March 21st, 2024

The New York Federal Reserve was duped into sending a cross-border payment, worth approximately $81 million, from the Bangladesh Central Bank’s account with them in 2016. A member of staff’s computer was hacked, and the money was laundered into casinos, where it was effectively lost. Cross-border payments present specific challenges, from payment security, to costs and speed.

Read on to learn how the Trustpair platform can help secure your cross-border payments thanks to international account validation.

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What are cross-border payments?

Cross-border payments are transactions between two parties in different countries. They enable the sender to make international payments, and for the recipient to receive the funds in their own currency. This can be facilitated for both business and personal payments.

There are two types of cross-border transactions:

  • Wholesale
  • Retail

Wholesale payments occur between financial institutions only. These cross-border transactions involve processing large amounts, such as currencies for exchange or international borrowing or lending.

Alternatively, retail cross-border payments happen between individual and individual in different countries, business and business accounts, or individual and business. One of the most common examples of a retail payment is remittances; the payment of money from an economic migrant to their family back home. However, retail transactions also include the likes of:

  • E-commerce payment for products or services
  • Paying a foreign supplier securely
  • Blockchain transactions for global crypto-currency purchases and sales
  • Buy now, pay later card wallets

 

How do cross-border payments work?

The cross-border payment process has always been challenging because currencies are closed systems. For example, I can’t come to the USA and bring Vietnamese Dong to pay with – vendors would never accept it! Likewise, online retailers, foreign central banks, and individuals can’t accept USD from a customer without an exchange into their currency system. This goes for payments via electronic check, wire transfer, or instant payment methods.

Cross-border payments therefore require the bank to pair with a foreign counterpart. When one account is debited, the other is simultaneously credited. This way, the physical funds are not flown across the seas – they are settled through a ledger. By compiling all the daily transfers into one, the books are balanced over the day.

It’s certainly a complicated experience. Even more so when banks don’t yet have a relationship with a pair in the right country for their customer. In this case, a payment chain will be set up with multiple intermediaries, each required to credit or debit before the next pair is triggered. Although this increases both the time and fees associated with the payment, it’s currently the best way to make the cross-border transaction.

 

How has the landscape of international payments changed in recent years?

International payments have been growing year on year thanks to increased globalization. In fact, the current trend of 190 trillion cross-border payments in 2023 has led to the prediction of a further 290 trillion international transactions in 2030.

With the help of the digital age, consumers now have the choice to shop with more vendors than ever before, and from all over the international market. This, paired with more manufacturers choosing to build their products abroad over locally, enables both the business and customer to save on costs.

Similarly, increased accessibility to cross-border payments has meant that global investments and foreign asset management have been more attractive than ever before. 89% of wholesale payments can go from the originating to beneficiary banks within just one hour. With faster payments, international financial institutions can participate in foreign trading and stock markets.

Excluding refugees, there are reports of 147 million people living outside of their country of origin. Many of these migrants moved for economic means, to better the lives of themselves and their families. As such, they will regularly pay to send money home in the form of remittances, using cross-border transfers to do so. The regions of the Middle East and North America are the most expensive to send international payments to.

 

What are some of their challenges?

While wholesale international payments have been around for a while, it took a lot of convincing to create a cross-border channel for retail payments. That’s because of the key challenges:

  • Cost
  • Speed
  • Payment Security
  • Data flows

Cost

International payments can end up costing an average of 6.3% of the overall transaction value, which is significantly more than the cost of domestic payments. A key factor to the pricing is if multiple intermediary banks are required to get involved. That’s because the institutions take a percentage of the transaction value, and more pairs of banks will lead to a higher cost of services.

Bringing the cost down requires a streamlined and integrated approach to cross-border payments. Businesses can work with an end-to-end facilitator to help this and prevent multiple intermediaries.

Speed

Domestic payments can take seconds to clear but are often completed within 1-2 days at the latest. In contrast, cross-border payments take up to 33 days on average. This is largely down to the opposing time zones of working hours, and the fact that each intermediary is required to validate the account of the payment originator to prevent the risk of money laundering.

Payment speed can affect the ability to meet purchase terms or wrap up month-end operations and cause a strain on vendor relationships, for example.

McKinsey predicts that the future of cross-border payments will involve ‘an integrated experience, rather than a fragmented chain’. Whether this looks like a single global payment area, or the involvement of crypto to act as an international currency, only time will tell.

Payment Security

With cross-border payments, it’s much harder to recognize source payments and validate the identity of the payee. That’s because each of the markets has its own identity validation requirements, and one might not meet the rigorous standards of another.

Regulations are fairly muddy in this department, with responsibility shared between the recipient, and the banking institutions who monitor and facilitate the international transactions. However, the challenge is made even harder when multiple intermediaries are required, and because there are thousands of consumers to validate per day.

Until an entire market shift happens to create a global standard, companies could find it advantageous to use software that prevents payment fraud. Trustpair provides continuous data monitoring support to secure your payments before they’re made. By verifying vendor information with global databases, businesses can avoid working with vendors linked with money laundering, or that intend to commit fraud.

Learn more about wire transfer fraud in our latest fraud report!

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Data flow errors

One other challenge related to cross-border payment systems is that different countries use varying data formats, making it harder to extract the right information. Couple this with opposing languages (and characters), and another factor is required to facilitate a cross-border payment: translation.

Both translation and re-formatting open up the payment information to a new potential point of failure. Not only is there a risk of manual error, but third-party translation platforms can lead to corruption from cyberfraudsters, and payment failure.

Learn more about cyber fraud in this article.

Again, an integrated global system is required to prevent the risk of data errors. Since Trustpair works to secure payments to international vendors, it works in real-time to provide a data monitoring solution. Enhancing cross-border payments, it provides a certification of security during the process and secures the integrity of your data.

The 411 on cross-border payments

Cross-border payments for businesses are known as retail payments and require banks in different countries to partner with one another. To send the money, payment processing requires institutions to validate the identity of the originator. Trustpair can aid companies in securing their international payments by continuously monitoring supplier data in real-time. Our platform provides automated account validation and several other fraud management features.

FAQ

Each economic area has its own regulations for cross-border payments. In the US, standard AML regulations must be followed even for non-domestic payments, which is part of the larger Banking Secrecy Act. Alternatively, the EU aims to decrease fragmentation within its collective group by sticking to Euros for both the transaction and its fees, as per regulation CBPR2.

Cross-border payments work when a payment originator initiates the request. Ideally, their bank has an account with a financial institution in the recipient’s country. In this case, their bank account in the end country is credited, while the originator’s account is debited. If a pair doesn’t yet exist, the institution must find an intermediary bank that is mutually partnered. Where more institutions are involved, the fees for cross-border payments grow.

Our fraud prevention platform secures all digital payments – including cross-border payments – thanks to ongoing account validation throughout the entire payment process. Our system monitors payment data – bank information, account number, etc – and detects any change or anomaly. If a suspicious activity or transaction is flagged, the platform sends a real-time warning to the financial team who can review the payment before it’s processed. Overall, our platform will help you have a global overview of your fraud risk – which is especially helpful for cross-border payments, particularly susceptible to security breaches.

Our services also include extensive customer support, detailed fraud analytics as well customized workflows, and real-time warnings in case of risky situations. On top of that, the platform provides an easy and intuitive customer experience.

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