How To Streamline B2B Cross-border Payment Process for SMEs
SMEs, specially from the tourism and import & export industry need to optimize their B2B cross-border payments process to be more profitable. Learn...
Configurable cross-border payment solutions allows banks and B2B businesses to increase revenue, find new customers, and be a global player. Learn how.
According to a recent study, B2B cross-border payments will increase by 30% in 2022, reaching $35 trillion. Furthermore, according to research, cross-border payments made by SMEs increased sharply year over year, indicating a broader potential increase in cross-border trade payments. In 2020, 43% of SMEs said they did international business, up from 34% in 2019. SMEs represent almost 90% of the businesses worldwide according to a world bank report and provide almost 50% of the employment. And the B2B cross-border payments market size is expected to grow to $2515 billion by the year 2030 from the figure of $1000 billion in 2021.
Banks have long offered services to small businesses. They have supported working capital needs through liquidity management services and lending, in addition to providing domestic bill payment solutions through banking portals. However, when it comes to cross-border payments and foreign exchange (FX), which typically account for 8%-14% of overall bank payments revenue, small businesses frequently lack the infrastructure required to process complex payments, making cross-border payments more difficult to handle.
With the potential growth and profitability on offer from cross-border trade in the coming years, SMEs, MSMEs, banks and other financial institutions cannot afford to miss out on this opportunity.
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To capitalise on this, businesses and banks must first understand the tools and processes that can assist them in excelling in new markets. This article aims to give a walk-through on the process of understanding how cross-border payments work, explaining international online payment processing and the options available, and providing insights on some of the best payment approaches for cross-border business.
Cross-border payments are an exchange of funds between companies, financial institutions, banks, or people engaged in business B2B, DTC in various parts of the globe, divided by boundaries of nations. Credit card payments, bank transfers, and other payment methods such as digital wallets and location-based alternatives are commonly used for cross-border payments.
Physical transfer of currency is not part of cross-border payments. Domestic payment systems are typically not linked to those of other countries. Global banks, open accounts with their international peers in the target country for remittance.
Consider an Indian international bank and a United States international bank. There will be no physical funds sent from India to the US when a transfer is made. Instead, the account in the United States will be credited in USD, while the account in India will be debited in INR. Money transfer companies and fintechs will use these banks' services for the same reason.
Although in some cross-border payments, it is not always that easy. Not every bank in every country maintains direct contact with its overseas counterparts. An account in Brazil and an account in the India may not be directly connected, but they may both have accounts with a bank in Japan, China or the US. The Japanese, Chinese or the American bank can act as a middleman or as a correspondent bank. These banks will charge a fee, and the transaction will take longer as a result of the additional step.
When making cross-border payments in currencies that are more frequently exchanged, there is usually only one intermediary at most. Banks are most likely to communicate directly. For example, exchange between currencies like USD, EUR, INR, JPY & CNY.
Currencies such as the Ghanaian Cedi and the Venezuelan Bolivars are traded less often. In such cases due to less demand, banks may be unable to communicate directly as they did not setup direct lines of cross-border payment transactions. Cross-border payments will be routed through more correspondent banks if this occurs. Each correspondent bank will have its own set of procedures that will take time and money. This implies that the total cost of a transaction will rise and be passed down to the business or individual making the transaction.
Foreign exchange fees and processing fees will be assessed by each bank involved in the transaction. There will also be legal checks in place, such as financial crime requirements and updates to each account's balance.
If the transaction is between different time-zones, banks involved will be processing during their own domestic business hours. This could delay the process by days.
Credit cards continue to be the most popular payment method in the world. They're also commonly used for international or cross-border payments. Consumers & businesses regard them as a safe and secure method of payment as only the credit card information needs to be setup to begin a cross-border payments transaction and then await verification.
Then the credit card companies occasionally need to convert between two currencies and must always communicate with the local acquiring banks which are involved in the cross-border transaction. This is not always easy. The associated fees are always passed down to the business or individuals making and receiving the payment.
Digital payment platforms like Paytm, Apple Pay, Google Pay, PayPal use digital wallets to facilitate funds transfers from one business to another. Companies can load money into their wallets, choose their currency, and send money with a few clicks. Funds can be tracked from one location to another, and companies can even automate payments. Some digital wallets support multiple currencies and cross-border payment transactions, so a customer in the UK can use their Apple Pay account to purchase from a business in Singapore. The funds will be transferred to the business’s bank account once the payment has been processed. The process is commonly referred to as a cross-border payment.
The most commonly used terms to categorise cross-border payments are;
Typically, these retail cross-border payments are made by and are between consumers and businesses. As the term suggests they include DTC (Direct-to-customer) and B2B (Business-to-business) cross-border payments. When relatives or immigrants living in a country transfer payment to family members or individuals in their home country, this sort of cross-border money transfer comes under the C2C (customer-to-customer) or P2P (Peer-to-peer) category.
Cross-border payments of the wholesale category are made between banks or other financial institutions. Banks and other financial entities most often use these to support their customer-base and their own cross-border money-transfer activities. Foreign exchange, equity & debt trading payments, lending and borrowing are all part of the wholesale category. Governments also use wholesale cross-border payments to conduct large financial deals and transactions.
Cross-border payments are classified into four main transaction categories;
These sorts of cross-border payments are usually for relatives and family living in another nation. It is speculated that C2C cross-border payments will reach USD 0.8 trillion in 2022.
Interest payments, refunds, salaries & wages payments, all come under the B2C category which is expected to reach USD 1.6 trillion by 2022.
Loan payments, purchase of good online (e-commerce), tourism spending are classified under C2B cross-border payments. These are expected to reach USD 2.8 trillion in 2022.
Cross-border payments for import & export businesses, cross-border transactions between tourism companies and hotels or transportation companies come under the international B2B payment category. This category of B2B cross-border payments will grow to about USD 150 trillion in 2022.
In comparison to domestic payments, which are processed almost instantly, traditional bank transfers used for cross-border payments typically take one to five business days to process. This is due, once again, to the large number of parties involved in a single transaction. Every single transaction involves numerous intermediary services. Another reason for the slow pace is a lack of automation and standardisation across multiple banking networks and payment infrastructures. Another issue is that multiple countries are involved in a single transfer. For example, an individual or entity attempting to transfer funds from an East European country to a South Asian country may have their funds rerouted through Germany or even Russia, and then through India before arriving at their intended destination. As a result, because there are numerous processes to complete and multiple transaction facilitators involved, cross-border payments may take longer than expected.
International transactions are required by both businesses and consumers, and there are two options: new payment service providers that provide an instant, less expensive alternative, or outdated, expensive, and slow bank transfers. While it is true that foreign transactions are more complicated, businesses must make every effort to reduce processing time in order to meet client expectations.
In cross-border payments, a sizable number of intermediaries are involved in the process of getting the money to the end payee. Intermediaries are frequently the sender and the recipient's payment service provider, the payment infrastructure, and the related banks. FX fees and regulatory expenses are extra. Cross-border payments are ridiculously expensive due to the costs incurred by using each of these middlemen.
There is more competition for cross-border payment services as a result of the rise in international labour and multinational corporations. Price will always be a key factor when retail and consumer clients choose a service provider. Customers will unquestionably pick a banking institution with competitive rates.
Your business will have to abide by international regulations if it accepts cross-border transactions. Nations each have their own regulations regarding the use of personal data, international payments, imports, and exports. It is vital to perform your research to ensure that your business and its offerings are compliant with local legislation in any country from where you take cross-border payments.
Cyberattacks are a persistent risk to the global financial system. Any one of the countries involved in the transactions may have a weak spot that might be used to steal the money even before it reaches the target nation. Security laws may differ and vary between different countries. It cannot be guaranteed that the two participating countries will use the same security measures. As a result, there is a chance that the transaction could be compromised, preventing the funds from ever reaching the recipient's account, especially if the destination country's bank operates under less stringent security regulations. This could eventually lead to losses.
Cross-border payments may experience transparency issues because there are so many middlemen involved. The SMEs could encounter a lack of transparency in terms of costs, timeliness, and money arrival while trading with many middlemen. As a result, it is quite challenging to track payments and have a complete understanding of the entire process, and it could cost money. The results of the business might be significantly impacted by this.
There is a pressing requirement to improve cross-border payments and address the problems faced by financial institutions like banks and businesses. A couple of cross-border payment categories that have seen fintech growth are;
These experts frequently collaborate with the banks, financial institutions of the sending and receiving parties rather than having a direct interaction with them. Back-end networks allow interoperability in cross-border payments by building partner networks via direct links with regional banks and alternative payment methods in both liquid and non-liquid markets.
The money-transfer organizations focus primarily on digital cross-border payments and interact directly with senders, whether they are businesses or consumers.
These providers often establish direct banking ties and net payment flow between the sending and receiving nations when dealing with currencies like INR and USD. Setting up an international bank account number can be difficult in many emerging nations, where capital regulations make payment outflows difficult and payment mechanisms are frequently fragmented. Because of the circumstances in these nations, companies that facilitate digital money transfers frequently depend on partners like back-end networks.
Then there are the front-end and back-end cross-border payment providers that are increasingly leveraging the non-traditional money transfer solutions market. Back-end networks that are an alternative to conventional bank rails have come up as cross-border remittance solutions with both front-end configurability and a powerful back-end integration like the Fable Growth Suite. The Fable Growth Suite provides configurable end-to-end cross-border payment solutions for banks and there is a version for B2B businesses too.
Security measures for cross-border transactions are improving. Although there is no single set of protocols followed by every country, the measures being taken by the payment enablement systems are as follows;
Identification of the receiver and the sender, is mandatory. This is being developed further and will allow, crucial criteria and data gathering, and it will be simple to confirm a person's identification. An entity that participates in a financial transaction is identified by a reference code known as a Legal Entity Identifier, or LEI.
Due diligence is a procedure that aids in gathering all the information regarding the parties concerned. It is important to take note of any prior information indicating whether the party engaged in any criminal action, such as fraud or bribery. Every transaction should go through this process because it aids in gathering as much data as possible about a third party.
With the right cross-border payments solution, your business can retain and monetise from existing customers. You can cross-sell and up-sell other financial products to retail customers, use built-in modules for running promos and loyalty programs and maintain business relations and keep the account of customers moving to other countries. You can also grow a customer base in countries without a physical presence.
Have complete control over the customer facing functionalities (front-end) of your remittance service. Provide consistent brand experience. Configure your product offerings and run promotional campaigns.
Get under the hood and control your processes, partners, integrations, and compliance with a configurable back-end. Manage partner relations, Control fund collection and delivery, experience interoperability and ensure compliance with regulations.
Increase your business profitability
Improve profitability by participating in every stage of the remittance value chain. Earn more revenue per transaction and at every stage during user acquisition, collection, compliance, transaction settlement and delivery of funds by eliminating multiple layers of intermediary costs.
Real-time analytical data and reporting capabilities
Start-to-end tracking enables complete visibility throughout the correspondent network. This means businesses and banks can identify delayed payments within minutes and, more importantly understanding why they may have been delayed. Thus, boosting your operational productivity and eliminating extra costs. Almost real-time payment tracking and confirmations from any account to any other account worldwide. For B2B, the corporate initiating the payment can be certain that the payment has arrived, and the supplier can release the goods more quickly.
Secure payments due to financial regulation and multi-factor security
Avoid risks and penalties. Get quick validations with our advanced compliance modules. Choose from a vast range of pre-integrated compliance partners. Easily integrate with your internal compliance engine. Make informed decisions with our proprietary risk scoring matrix for customers and transactions. Get ad-hoc requirements and regulatory reforms implemented with minimal IT involvement. Work with ISO 27001 certified and GDPR compliant cross-border payment solution providers.
To know more about the configurable cross-border payment solutions Fable Fintech offers, read The Platform Model.
The cross-border payments ecosystem is currently undergoing change thanks to several banks with established client bases and fintech companies with adaptable offers and go-to-market strategies. This is a fantastic chance for banks and SMEs to gain market share internationally. If you are a bank, tour operator, destination management firm, or imports and exports organisation searching for more information on the best cross-border payment solutions for your business's revenue growth, get in touch with the fintech specialists right now. Get in touch with a cross-border payment solutions team now!
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