National borders do not limit the range at which a business can function. It’s vital for any company to understand how cross-border payments work to have an efficient business.
All about Cross-Border Payments
What are Cross-Border Payments?
Today’s ecommerce world has a global reach. Payments, remittances, and purchases all often require money exchanged across borders. Cross-border payments defined as funds paid to or taken in from different countries, so the location where the merchant is registered is different from the country where the customer's card was issued
Many different scenarios need to be accounted for when a merchant needs to deal with international payments because each country has its own set of rules. The demand for cross-border payments is so high that steps are being made to improve cross-border payments as a whole.
Cross-Border Payments must know
If you want to have a global business, all steps of a cross border transaction need to be identified and sometimes adapted to make sure the customer will have a good experience when making an international purchase online. Take a look at what you need to consider to expand your business cross-border.
Cash Flow in Cross-Border Payments
When someone makes a purchase, there’s a system that carries the money from the buyer’s account to the merchant’s account. With cross-border payments, it becomes more complex. International transactions require a change of currency, foreign transaction fees and dealing with an exchange rate. To navigate through these channels, a banking system ushers the money along.
In every cross-border payment, banks and a group of varying domestic entities work together to transfer funds. When a purchase is made, a “correspondent bank,” or the entity requesting the money, speaks with the “respondent bank,” which represents the entity buying something.
Throughout the major cities of the world, each bank has a counterpart in another city. So funds will first leave the buyer’s bank and go to that bank’s counterpart in the merchant’s country to prepare for remittance. The merchant’s bank will then receive the remitted funds, and they will be settled into the merchant’s account. These banks often work with others to transfer the money, which often involves more than four banking locations dealing with one another, navigating currencies, varying taxes, and transaction fees. Because there are so many entities working on a single purchase, the process is very slow.
Practical use of Cross-Border Payments
Let’s look at a cross-border transaction example to better understand how this process might work.
Cross-Border Payments Fees
What are the Fees Associated With Cross-border Transactions?
There are numerous costs when it comes to cross-border transactions. Most of them are absorbed by bank fees, which are more costly than any other part of the transaction. So while cross-border payments are costly, they are in such high demand, that they grow.
Cross-border transactions affect individuals as well as companies. Remittances are often sent from an immigrant family living in developing countries. These kinds of transactions are also subject to cross-border payment fees.
Other fees include a cross-border fee, which varies. This fee is a percentage that applies to a consumer’s purchase made with a foreign credit card. This rate can vary between credit cards, so it’s difficult to know what percentage will be charged in a transaction.
The biggest unknown taxes, as each country has its own tax system. Taxes apply to everything, and that means more than just sales tax. Value Added Tax (VAT), customs duty rates are applied to shipments. These all vary from country to country.
Finally, each country has its own currency, which means exchange rates must be calculated. While not an actual fee, the rate is in constant flux, so it’s important to keep tabs on what is being purchased. This affects the consumer when it comes to actually buy the goods, but if the merchant is obtaining any services across borders, then it applies to them, as well.