Buying goods or services abroad opens up new savings opportunities.
Maybe you found an affordable graphic designer based in Argentina or found a way to cut down your manufacturing costs with a supplier in Portugal. After that initial excitement, you’re faced with the question of how you’re going to pay them.
The truth is if you do business cross-borders, you’ll need to make cross-border payments. If you’re going to be making payments abroad, you need to know the methods, challenges, and security risks to process payments with confidence.
What are cross-border payments?
Cross-border payments (or international payments) refer to a transaction where the sender transfers money from a bank or financial institution in one country and is deposited in another country.
For it to be considered a cross-border payment, the banks must be in different countries.
For example, if you’re based in the United States and you’re dealing with a business based in Germany, but the payment is deposited into a bank account in the United States, that’s not considered a cross-border payment.
As B2B commerce becomes increasingly globalized, cross-border payments have become a common practice for businesses both big and small. They come with unique challenges and considerations that are important to understand before you start sending money.
Cross-border payment challenges
Be on the lookout for the following challenges when sending money abroad.
High costs
Banks within the United States have an established infrastructure (the ACH network) through which money is transferred daily. There’s less processing time and costs to the bank, and those savings are passed on to you.
The same can’t be said for cross-border payments. The process may involve multiple financial institutions sending the payment through separate channels meaning your money may go through several banks across countries before landing with the receiver.
This lengthy process is reflected in the costs. Expect to pay higher service fees than you would for a domestic payment.
Processing times
Just as the complicated cross-border payment process affects the costs you’ll face, they’ll also affect processing times.
Domestic payments can be processed as quickly as the same day. While some cross-border payments are reaching comparable levels of efficiency, they often come with a cost to expedite.
Otherwise, plan on your payment taking one to five business days to process and give yourself some buffer to ensure your payment arrives on time.
Security risks
When you send a cross-border payment, you have very few protections to either cancel or rescind a payment if there’s an error. It’s best practice to double-check all of the payment details before hitting send.
Beyond payment protection, you may not have complete transparency into how your money is moving through intermediary banks as part of the payment process. With so many moving pieces and steps along the way, there are more opportunities for your money to be vulnerable to a security breakdown.
When choosing how to send a cross-border payment, the security they offer is a crucial consideration to give you peace of mind.
Cross-border payment methods
Cross-border payments have fewer methods than domestic payments, but there’s still a variety with each having pros and cons. The following are five of the most common options.
International wire transfers
International wire transfers are one of the most common cross-border payment methods in both the business and personal space. Services like Western Union and MoneyGram have become commonplace for people sending money abroad.
Providers walk you through the process to ensure the payment is set up correctly before the money is sent through their network. Each payment is sent individually as opposed to being bulked together with other payments.
The fees are usually a flat amount. Generally, you can expect to pay around $50 to send an international wire transfer.
Processing times are one to three business days making international wire transfers both convenient and quick.
Pros:
- Quick processing times
- Options have long-established histories
- Convenient and easy to access
Cons:
- High processing fees
- Amount caps limit how much you can send
- Processing still isn’t instantaneous and must be planned for
International bank transfers
International bank transfers (also known as international ACH or global ACH) are done by connecting banks directly. If your bank offers international bank transfers, you can easily set up cross-border payments that are batched together and sent out in bulk.
By bulking payments together, costs are kept down. Generally, an international bank transfer will be cheaper than an international wire transfer and might even be free.
However, the batching of multiple payments together lengthens processing times. You may save money, but you should also plan on payments taking multiple business days to clear.
You’ll also face stricter caps on how much money can be sent. This may not be an option for you if you’re sending large money amounts.
Pros:
- Low to potentially no costs
- Bank-grade security
- Options for payment reversal or cancellation
Cons:
- Long processing times
- Amount caps limit how much you can send
- Limited based on whether it’s offered by your bank
Online payment platforms
Payment platforms can source money directly from bank accounts or credit cards and complete the transfer of funds. How the money gets moved varies from provider to provider, but the function is loosely the same.
Some common examples of payment platforms are PayPal, Square, and Stripe.
PayPal operates as a digital wallet: you can deposit and withdraw funds from it as needed and transfers are made from one wallet to another. The transfer itself can be completed immediately, however, the deposit and withdrawal of funds may take 1-2 business days.
Stripe and Square are solely payment processors. Funds aren’t held in an account, but they will be held in transit for some time which similarly takes a few business days before depositing in the receiver’s bank account.
Pros:
- Can provide funds from credit card or bank
- Most processing fees are paid by the receiver
- Extremely easy to pay, simply provide your payment info
Cons:
- Unclear where funds or held or how they’re processed
- Exchange rates are often below market value
- May incur foreign transaction fees on your bank account or credit card
Foreign currency accounts
If you’re sending a high volume of payments in another currency, it may be worth opening up a bank account in that currency. If you choose a bank that’s located in the destination country, you may get access to lower-cost payment options.
However, opening a foreign bank account is not as simple as opening a domestic bank account. It’s a longer-term process that requires more documentation, not to mention some implications for your tax filing.
If you’re considering a foreign currency account for making cross-border payments, talk to an accountant or tax professional to understand the full effect and determine if it’s right for you.
Pros:
- No currency exchange on payments
- Opens up other payment options
- Receivers will trust local banks more
Cons:
- Complicates tax filing
- Long-term process requiring lots of documentation
- You still need to move funds internationally into the account
Digital currencies
Cryptocurrencies are young relative to other payment options. The first cryptocurrency was Bitcoin, which debuted in 2009.
Since then, more than 25,000 cryptocurrencies have been introduced, all with varying degrees of staying power.
At the heart of cryptocurrency technology is a unique, irreplicable code and history that creates units of digital currency. It’s become formalized in recent history with more businesses accepting them as payment. Examples range from the Dallas Mavericks to AMC Theatres.
There are some downsides, mainly the high volatility of cryptocurrency values. While you won’t end up paying millions of dollars for a pizza, it’s a risk to consider before committing.
Pros:
- Doesn’t depend on costly, existing bank networks
- Payments are practically instantaneous
- The blockchain network is secure and monitored
Cons:
- Digital currency values are highly volatile
- Complicates tax filing
- Security breaches have resulted in the loss of cryptocurrencies which aren’t insured and have no chance of recovery
What to consider when choosing a cross-border payment method
When weighing out the different cross-border payment methods, here’s what you should consider before making a choice.
Fees
Your choice of cross-border payment method will impact your bottom line.
To minimize your costs, you should weigh out your options based on flat fees versus a percentage fee. Which one you choose will depend on:
- The frequency you’ll be sending money abroad
- The average amount of money you’ll be sending in a transaction
A flat fee is favorable for sending large amounts of money. If an international wire transfer is $50, that would be 10% of a $500 payment but just 1% of a $5,000 payment.
Percentage fees constantly scale up with the amount. If you’re frequently sending small amounts, the percentage fee will likely be cheaper than the flat fee alternatives. For example, a 3% fee on a $500 payment would be $15, considerably cheaper than the typical $50 fee for a wire transfer.
Speed
You want to keep your suppliers happy. One thing you can do that every supplier loves is pay promptly and on time.
The last thing you want is for your payment to get caught up in processing limbo, ultimately coming through late and potentially upsetting your supplier. To combat this you need to either send payments with a large buffer or choose an option with fast turnaround times.
If it’s getting close to the due date, you may want to pay more for the expedited service.
Reliability
A reliable cross-border payment method is one where:
- The service is available when you need it
- Customer service is there to resolve issues
- They service the areas you’ll be sending money to
- There’s a proven track record backed by positive reviews
If it meets those four criteria, you’ll be able to send money confidently, when you need to, with support if things go wrong.
Security
Sending money or payment information is a vulnerable experience. But it becomes less nerve-inducing when you know the payment method is protecting you from data breaches or fraud.
International bank transfers give you the best protection for canceling a payment or getting it returned. Plus, you’re likely going to have more transparency into the process and how your money is being routed to the destination.
International wire transfers can’t be pulled back—once it’s sent, it’s sent. This makes wire transfers a more likely payment method requested in scam cases, so much so that the Federal Trade Commission (FTC) has a long list of consumer alerts.
Online payment platforms will vary in terms of how much consumer protection they offer. For example, PayPal has a buyer dispute center that may be able to help you get your money back.
If you’re navigating sending a cross-border payment for the first time, consider doing the process in person at a bank or wire transfer service. You can get your questions answered and see what their screening process is before committing the money.
How to optimize your cross-border payment process
Whether you’re sending your first cross-border payment or you’re trying to find more efficiency in your existing process, here’s how to optimize your cross-border payments.
Leverage multiple payment methods
There’s not one perfect cross-border payment method, but rather different methods that suit different situations. If you make use of most of each available option, you’ll maximize the upsides while minimizing the downsides of each.
This will also benefit you when looking for new suppliers or opportunities. Some suppliers may have hard and fast rules about what payment methods they accept and won’t be willing to work with you if you don’t use their preferred method.
Track exchange rates
When you send money becomes a more crucial consideration of a cross-border payment.
With exchange rates always fluctuating, you’ll want to take advantage of when they’re in your favor or try to bide your time if they aren’t presently favorable.
If you’re doing a lot of business in a specific currency, it’s worthwhile to check how the exchange rate is trending and potentially make payments early when the market benefits you. The savings might be small, but every dollar saved is another that can be reinvested into your business.
Simplify with technology
To make international payments easier, some platforms offer the full breadth of cross-border payment methods in a single place. This means you can easily compare options to choose the best fit for that given transaction.
At BILL, we streamline the payment workflow by offering one simple process for both domestic and international payments to over 130 countries. With competitive exchange rates and costs, you’ll pay less, save more, and move money faster.
Make international payments stress-free with a one-step process and total confidence that you’re doing it at the lowest possible cost while staying compliant.
Cross-border payment compliance
International payments have a more robust set of regulations that transfers need to adhere to. Part of the responsibility falls on you as the sender to both who you’re sending the money to and how you’re sending it.
The main body of regulations are Anti-Money Laundering (AML) regulations. What this means to you as the sender is that you’re vetting both the receiver and the method of sending the money.
Your responsibility as a sender is to know where your money is going and how you’re sending it.
Complete your due diligence by collecting the recipient's personal information including name, address, and date of birth. You should also dig into the reputation of the service you’re using including customer reviews and vetting what channels your money is being sent through.
If you’re concerned that you have been scammed or that your money is being used for illicit purposes, file a report to econsumer.gov.
Econsumer.gov is a collection of consumer protection agencies that collaborate to combat fraud and money laundering. Any information you provide could help identify a trend.
Take the following steps to keep yourself compliant and give yourself some peace of mind:
- Know your resources: Anything you're suspicious about can be reported to econsumer.gov or your financial institution. Banks have the responsibility to report suspicious activity to FinCEN.
- Develop an internal policy: Outline the necessary steps that need to be taken before initiating an online payment. This should include collecting information about the recipient, acceptable payment methods, and a point of contact if there are any uncertainties.
- Keep documentation: Receipts, invoices, and business information should be stored and kept for 5 to 7 years at a minimum.
- Define your risk tolerance: Set your limits for how much risk you are willing to take when sending a cross-border payment. It helps to define traits like the number of reviews or the amount of social presence that you look for in either the recipient or the payment method.
Cross-border payments and reporting in one
Save yourself the time and stress of navigating different cross-border payment methods with BILL, a payment platform that synchronizes with your accounting for a seamless experience.
With options to make payments to over 130 countries, you get access to safe, secure, and transparent payment options that let you streamline workflows and pay with confidence.
Reach out for a demo to see BILL in action.
