Before we talk about whether cross-border payments could be right for your business, it’s important to be clear about what the term means. The broad definition of cross-border payments is:

Financial transactions where the payer and the recipient are based in separate countries.

That is, the payments must cross a border in order to be completed.

It’s either because the buyer themselves has a preference, or because their Finance team does. After a purchase has been made, this needs to be reconciled and processed, and using the wrong payment method can cause buckloads of admin and reconciliation issues. Safe to say, whomever does the reconciliation usually has a say in what payment method to use.

Retail: these cross-border payments are typically B2C payments between a retailer in one country and a customer in another, or person-to-person payments with one sending money to another.

Wholesale: these cross-border payments can be between financial institutions such as banks, and can include borrowing and lending, foreign exchange, and the trading of equity and debt, derivatives, commodities and securities.

Cross-border payments are simple transactions and can be made in a variety of ways, most commonly through:

Cross-border payments provide a way for money to be paid in one currency, and received in another. For example, a buyer pays in euros, and the seller receives the payment in their local currency. Cross-border payments thus fill an important function, because different countries transact in different currencies. While the euro is accepted in several European countries, for example, other currencies are unique to their country of origin and can only be used in the home country.

For payments to travel across borders, there are different methods that can be used.

The simplest method available is payments between banks in different countries. This could be between two different banks, (Bank A and B) or between different bank branches within the same bank (Bank A1 and Bank A2). No actual money changes hands with this method. Instead, the bank of origin sends the amount from their account to the overseas account. You can see in figure 1 that a simple message is sent by one bank to another, and the transaction is complete.

Not all banks around the world have direct relationships with one another, so sometimes two banks in different countries need a middleman to make the transfer for them – one that has a relationship with each bank. This method is called correspondent banking, and it works in much the same way as method 1, but the initial payment is made to the correspondent bank (middleman), and then they make the subsequent payment to the final destination bank. As you can see from figure 2, this adds an extra step to the process, which can also add time and additional fees to the process.

The third cross-border payment method is the same as method 2, but with extra correspondent banks or middlemen involved. This usually happens when not-so-common currencies are used, and the payment has to go through more agents to get to its final destination. For example, transferring the euro to the Swiss Franc would most likely only need one agent, but transferring to a less common currency, such as the Iranian Rial or the Guinean Franc may require extra steps. As you can see from figure 3, this method involves the most steps, and therefore can be slower and more expensive than the previous two methods. At each stage, the payment messages must be checked to make sure that they adhere to local legal requirements to prevent crime, and each bank has to update the balances of the incoming and outgoing accounts – and with time differences across the globe, this can add to the time it takes and the transfer costs. The payment flow that travels through the involved intermediary banks is called the ‘country corridor’ or ‘payment corridor’.

There are several reasons for a business to consider cross-border payments, but the main one holds true for any business: revenue.

Offering cross-border payments means that your business can stay competitive in an increasingly global online market and expand into new markets where borders are no longer an issue.

Being able to accept cross-border payments means you can do business with anyone, anywhere that is right for your business, regardless of geography.

Other ways cross-border payments can help your business are:

1. Gain respect from your customers, showing you are a legitimate international operation.

2. Offer your customers the ease and convenience of paying in their own currency, as well as the transparency of seeing exactly how much their transaction will cost.

3. Spend less time and money troubleshooting payment issues.4. Improve your operational efficiency by tracking payments through the chain.