Understanding Cross-Border Payments: Process, Challenges, and Solutions

Going global is a chance, but if your cross-border payments aren’t done correctly, they can steal your earnings. You can’t grow your business if there are high fees, slow payments, or rules that get in the way.

Online payment market will be worth $290 trillion by 2030, up from $190 trillion in 2023. In that regard, businesses start putting more effort into making payments more efficient.

How can you cut costs, speed up deals, and make sure that rules are followed? This article breaks down the steps needed to make a cross-border payment, talks about some of the problems that can come up, and shows you the best ways to make your global transfers run more smoothly.

What Are Cross Border Transactions and Money Exchange?

Cross border transactions are financial transfers between parties located in different countries. They often involve currency exchange and international banking processes.

Basically, all actions involving moving money from one account to another, given that these bank accounts are registered with different political entities, are considered cross border or international transactions. It’s one of the most common forms of financial interaction between parties. 

Money exchange is the process of converting one currency into another, typically through a financial institution or a currency exchange service, based on current exchange rates.

It’s important to understand that cross-border transactions often necessitate the exchange of one currency for another, as they typically involve parties in different countries using different currencies. 

Currency exchange, often known as money exchange, is a component of the cross-border payment process flow that is designed to ease the transfer of value in a currency that is accepted or usable in the recipient’s nation. The procedure guarantees that monies transmitted across borders arrive in a form that is instantly functional for the receiver while following the destination country’s currency standards and rules.

How Do Cross-Border Payments Work?

Here’s how the cross-border payments work step-by-step:

1. Transaction initiation. The sender initiates the payment using their bank or a payment service provider. They provide details including the amount, currency, recipient’s name, and recipient’s bank account information.
2. Currency conversion. If the payment involves different currencies, the sender’s bank or the payment service provider will convert the payment from the sender’s currency to the recipient’s currency. This is often done at an exchange rate set by the bank or provider.
3. Transfer of funds. The payment instructions are sent by the sender’s bank to an intermediate bank or directly to the recipient’s bank, frequently via international payment systems such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
4. Involvement of intermediary banks to facilitate the transfer. If the sender’s and recipient’s banks do not have a direct link, one or more intermediate banks may be involved to enable the transfer. These banks then forward the money to the next bank in the chain.
5. Compliance checks. During the process, compliance checks are performed to adhere to international regulations, including Anti-Money Laundering (AML), Counter-Terrorism Financing (CTF), and Know Your Customer (KYC) laws.
6. Receivement of funds by the recipient’s bank. The recipient’s bank accepts payments. If currency conversion has not been done in the previous steps, it is completed at this stage.
7. Transfer of funds to the recipient. Finally, the recipient’s bank credits the funds to the recipient’s bank account, completing the cross-border payment process.

You can review the visualization of cross border payment process flow structured by parties involved in the infographics below:

Other considerations related to cross border money transfer are:

• Fees and charges

Cross-border payments often incur fees, including cross border transaction costs, service charges, and potentially intermediary bank fees. These costs vary by provider and transaction type. 

Businesses must consider these fees for cost-effective transactions, as they can significantly impact the total cost, especially for frequent or high-volume transactions.

• Exchange rate fluctuations

Currency exchange rates can fluctuate dramatically, influencing the cost and value of transactions. 

Businesses that make cross-border payments must regularly monitor exchange rates and may employ hedging measures to reduce the risks associated with these swings, ensuring budget predictability.

• Delivery time

The time it takes for cross border money transfers to be processed and cleared can vary widely, from same-day to several days, depending on the payment method and both the sending and receiving countries’ banking systems. 

Since timely execution is crucial for maintaining cash flow and operational efficiency, it’s important to ensure the proactive transfer of funds. 

• Bank and country-specific restriction

Different countries and banks have varying regulations and restrictions on cross-border payments. These include the above-mentioned AML and CMF laws. Besides, they may include transaction limits, sanctions and embargos, indicating the purpose of payments, and providing invoices, contracts, or other proofs of the transaction’s legitimacy.

Understanding and complying with these regulations is essential to avoid delays or rejections of transactions, which can be critical in time-sensitive business operations.

• Payment method availability

The availability of different payment methods, like wire transfers, international ACH, or digital payment platforms, varies by country and by the provider of banking services.

Businesses must consider which methods are both accessible to them and to their partners and customers. It’s also important to balance factors like cost, convenience, security, and speed to select the most suitable payment method.

What Are the Types and Methods of Cross Border Payments?

It’s important to understand that there are distinct types of international payments, varied by the parties involved and the purpose of transferring funds. It’s often the case that different laws and regulations are imposed on different types. Besides, while some cross border payments may be nearly-instant, others can take banks up to a business week to conduct. 

Common types of sending cross border payments are:

• Business-to-Business (B2B) transactions. These involve transfers between businesses in different countries. B2B transactions are often large in volume and value, used for purchasing goods, services, or fulfilling contractual agreements.
• Consumer-to-Business (C2B) transactions. This type refers to payments made by individuals to businesses in another country. It’s common in e-commerce, consumers purchase goods or services from overseas companies.
• Business-to-Consumer (B2C) transactions. B2C transactions occur when businesses send payments to individual consumers abroad. This can include refunds, payments for freelance services, or direct sales.
• Consumer-to-Consumer (C2C) transactions or Peer-to-Peer (P2P) transactions. One of the examples of C2C cross border transactions is cross-border remittance, i.e., transferring personal funds from an individual to an individual in another country. 

Now, let’s proceed with reviewing the exact cross border payment methods that can be offered by financial institutions to conduct your transfer:

1. International wire transfers. Swiftly and securely transfer funds between banks globally using the SWIFT network. Ideal for large, urgent transactions, but typically involves higher fees and requires the recipient’s bank details.
2. International money order. Purchase a money order and send it overseas for the recipient to cash or deposit. International money orders are considered a secure method, but they’re comparatively slower and less convenient, so they’re often used when other electronic methods aren’t available or preferred.
3. International ACH. Automated Clearing House (ACH) transfers funds electronically between banks, suited for regular, smaller payments like payroll. It’s cost-effective but slower than wire transfers, with varying processing times depending on the countries involved.
4. Prepaid debit card transactions. This method implies loading money onto a prepaid debit card, which the recipient can use for purchases or withdraw cash. It’s convenient for regular remittances, and it offers easy access to funds, but may involve loading and withdrawal fees.
5. Online money transfer. Online transfer of funds are basically done using online platforms or apps. Fast, convenient, and often cheaper than traditional banking methods. Cross border money transfers are ideal for personal remittances and small business transactions, with varying fees and exchange rates.
6. Paper checks. It’s a traditional method involving sending a check by mail, which the recipient deposits in their bank. Less popular due to slower delivery, the risk of loss or theft, and the availability of faster electronic methods.

There are also alternative cross border payment services, including:

1. Digital wallets. In cross-border payments, digital wallets enable electronic storage and transactions of multiple currencies, offering quick, convenient international transfers and payments through mobile or online platforms.
2. Cryptocurrency transactions. Cryptocurrency transactions in cross-border payments allow for direct, decentralized, and often faster transfers across borders without the need for traditional banking systems or currency conversions.

Guide your choosing of the cross border payment platform and method based on their accessibility to both parties involved, turnaround times, convenience of conducting, and transaction fees involved. 

We should also mention Foreign Exchange (Forex). It’s not an international payment service but rather a component of cross border payment flow that enables money exchange. It can be defined as follows:

Forex is a global marketplace that enables the conversion of one currency to another. 

Forex operates through a network of banks, corporations, brokers, and individuals trading one currency for another and can be integrated as a component in a system for settling international transactions with local currency values.

Why Use Cross Border Payments: Key Benefits

Struggling with slow payments, high fees, or limited global reach? Inefficient international transactions can drain resources and slow business growth. Here’s how smart cross-border payment strategies can cut costs, boost efficiency, and expand your business:

Choosing the right cross-border payment providers and strategies can give your business a competitive advantage while saving time and money.

The List of Cross Border Payment Providers

To become a participant in a foreign exchange and payment system, you need to partner with one of many providers of cross border transfer solutions. The list of the most reliable and well-established companies for choosing include: 

• PayPal. A global online payment system that facilitates cross-border payments and currency conversions for both individual and business users.
• Wise (formerly TransferWise). This foreign exchange financial technology company offers transparent, low-cost international money transfers using real exchange rates, popular among individuals and businesses.
• Western Union. This money transfer leader provides a well-established service for international money transfers, accessible online, via mobile apps, or through physical locations.
• Currencycloud. This Visa’s solution provides a platform for businesses to manage cross-border payments and currency conversions with API-driven solutions.
• Revolut. It’s a digital banking service offering global spending and international money transfers without hidden fees, including multi-currency accounts.
• OFX. This money transfer company specializes in international money transfers and foreign exchange, offering competitive rates and low fees for both individuals and businesses.
• Fixer. It’s an API service that provides real-time exchange rate data for global currencies, used in international financial applications.
• XE Money Transfer. Known for online foreign exchange tools, including their online currency converter application, XE Money Transfer offers international money transfers with competitive rates and low fees.
• Xignite. This provider offers financial and market data APIs, including ones designed to enable real-time and historical foreign exchange rates for financial institutions and fintech companies.
• Payoneer. It’s an online service for freelancers, online sellers, and businesses, enabling efficient receipt of international payments.

Guide your choosing with the availability of service for your region, transaction fees, convenience of usage, and other factors significant to your business. 

You can discover additional information about fintech integrations and providers from another our blog post. 

Key Challenges for Cross Border Payments and Solutions to Them

In over 13 years, DashDevs has helped multiple customers worldwide implement cross border payment technology in their digital products. We have faced limitations of international payment that can result in pitfalls like overdue payments, transaction errors, and high fees if not addressed timely. That’s why we provide you with these challenges of cross border payments and tried and tested solutions to them:

Cost Complexity

**What is it? **High fees and hidden costs are common in cross-border payments due to intermediaries and complex banking processes.

How to solve it: Look for transparent pricing models and trustworthy providers. Alternatively, utilize fintech cross border payments solutions like blockchain or peer-to-peer platforms, as they reduce the number of intermediaries, thereby lowering costs.

Regulatory Compliance

What is it? It is a range of standards and laws that govern the matter of cross-border payments.

• Regional regulations governing transactions within specific areas, addressing local financial practices and cross-border interactions.
• National regulations which are country-specific laws controlling financial transactions, banking practices, and foreign exchange.
• Transaction-specific regulations which are specific rules applied to certain types of transactions, considering purpose, amount, or parties involved.

How to solve it: It’s not like there is a particular solution to all the complexities involved with meeting regulations. You just must be aware of the restrictions they impose for your transactions to stay compliant. Partnering with experienced financial service providers or using software that automatically updates with regulatory changes can aid in compliance.

Lack of Transparency

**What is it? **Lack of transparency refers to the difficulty of tracking the progress of payments and understanding the various fees and exchange rates applied.

How to solve it: Opt for payment platforms offering real-time tracking and detailed breakdowns of fees and rates. Blockchain technology can also offer greater transparency throughout the transaction process.

Security Threats

What is it? Risks like data breaches, fraud, and cyber-attacks due to the involvement of multiple parties and complex transaction processes.

How to solve it: As a service provider, establish robust security protocols such as advanced encryption, multi-factor authentication, and continuous monitoring of transactions. As a customer, opt for payment service providers that prioritize security and are compliant with international standards like PCI DSS.

Currency Exchange Rate Fluctuations

What is it? Fluctuating currency exchange rates can significantly affect the cost and value of cross-border transactions

How to solve it: In case you have your own payment processing system in place, then establish robust security protocols, including encryption, multi-factor authentication, and continuous monitoring. Alternatively, choose financial institutions or payment platforms with strong security reputations and compliance with international security standards.

Slow Processing Times

What is it? Cross-border payments can be slow due to the involvement of multiple banks and the need for currency conversion and compliance checks.

How to solve it: Utilizing faster payment methods like SWIFT GPI or digital currency transactions can speed up processing. If such options are available at your provider, of course. Also, working with banks and providers known for efficient processing in relevant regions can help.

Keen: DashDevs Case Study

At DashDevs, we specialize in developing secure, efficient, and scalable cross-border payment solutions. One of our recent projects involved creating a comprehensive cross-border payment system for a fintech client looking to streamline international transactions for their customers.

Challenge: 

Our client needed a solution that would enable fast, low-cost international payments while ensuring compliance with regulatory frameworks in multiple countries. The challenge was to integrate various payment providers, currency exchange mechanisms, and compliance checks into a seamless user experience.

Our approach:

• Enabled seamless cross-border money transfers with multi-currency support, minimizing conversion fees for users.
• Integrated multiple payment gateways and leveraged blockchain technology to reduce transaction delays and enhance transparency.
• Implemented robust KYC/AML checks, fraud detection, and encrypted data transfers to ensure compliance with international regulations.
• Developed an intuitive user interface for mobile and web, simplifying international transactions to match the ease of domestic ones.

Our results:

Our client significantly reduced processing times and transaction costs, giving them a competitive advantage in the cross-border payments market. With DashDevs’ expertise, they now offer a seamless, secure, and compliant cross-border payment process flow, positioning themselves as a trusted provider in the global financial landscape.

Final Take

For both international businesses and individuals making global transactions, cross-border payments are unavoidable. Understanding the different types of cross-border transactions, security challenges, transparency issues, and compliance requirements is essential to ensuring smooth operations.

Whether you’re looking to optimize your cross border payment process flow or implement a scalable fintech solution, our team is here to assist. Let’s build a seamless global payment infrastructure together—talk to our experts today.

Contact DashDevs