The Ultimate Guide to Cross-Border Payments
Research confirms that the majority of cross-border payment management practices are not efficient from both a cost and time perspective. Businesses’ current practices often result in reduced productivity, increased labor, expensive payment fees, and hindered relationships with suppliers.
Benefits of Cross-Border Payments
As globalization is increasingly intertwined into the everyday operations of businesses, refining cross-border payment management practices is becoming more important. According to the research, 73% of US-based companies regularly make cross-border payments of some kind. Refining management practices can lead to significant savings and improve international tax and regulatory compliance.
With a solid international payment strategy, businesses can achieve a greater ROI, dedicate fewer of their operational resources to the accounts payable (AP) department, gain better control over international transactions, leverage advanced reporting tools, and enhance payment security.
Interested in making your global payment management practices more efficient? Keep reading to learn how.
Steps to Sending Cross-Border Payments
Both domestic and international payment processing involves seven steps. With cross-border payments, additional factors must be considered.
When sourcing globally, you will find an international supplier you want to purchase from. If you’re buying online, you’ll be directed to the payee’s checkout page to make your payment. If you’re buying over the phone, a sales representative will conduct the checkout process. Either way, you’ll be presented with payment options.
Ideally, if you’re buying online, the checkout page will offer a localized experience, meaning it features your native language. The payee uses your URL to determine which language to present the checkout page in and will hopefully offer local payment methods that you are familiar with.
2. Routing and Processing
Once you enter your payment information, it will be sent via an encrypted gateway to obtain authorization to deduct the funds from your account. Here’s the catch: If you are using a global payments platform that is connected to only one bank, the transaction may be flagged. Using a platform that is connected with multiple banks around the globe improves the chances of the payment being processed the first time around.
Whether you’re paying publishers or setting up a new supply chain, you want to ensure each payment goes through without error. A global payments platform can automate the payment process for you, regardless if it’s a one-time or recurring transaction.
3. Payment Approval or Denial
Your payment will be approved or declined. Verification takes place to ensure you have sufficient funds in your account, and if necessary, a currency conversion will take place. This applies only if you are sending USD to an account that accepts a different currency and the payee has requested a different currency.
Hopefully, the cross-border payment is using banks that support international payments. If so, the transaction is more likely to be approved. A global payments platform excels in intelligently routing the payment through a bank that is most likely to approve the transaction.
4 & 5. Confirmation (Approval or Denial) and Fulfillment
You will receive confirmation that the transaction has been approved or declined. If declined, you’ll receive a return code outlining why it wasn’t processed. If approved, your order then goes into the fulfillment.
At this point, depending on the type of cross-border payment you’ve used, there’s a good chance the funds will still appear in your account and not in the payee’s. A Global Automated Clearing House (ACH) payment takes anywhere from two to five days to reconcile.
You will receive a reconciliation report from each bank that you work with. This can be extremely confusing and is an inefficient way to keep track of your cross-border payments. With a global payments platform, you can receive a consolidated reconciliation report showing all payouts through all banks and which transactions have been reconciled, as well as which ones have not.
Anna Barnett of PayStream Advisors served as the lead analyst on the research study mentioned earlier. She says that, in order to perform cross-border payments correctly, businesses must have their AP department integrate multiple extra steps and controls into their cross-border payment management strategy.
An example of an extra step would be to implement a practice that validates the accuracy of payment data. And with more than 26,000 global payment rules impacting cross-border payments, using a global payment platform that checks payments against these rules is of the utmost importance.
Anna goes on to discuss how international payments are often made via multiple payment rails, making them much more complex than domestic-only reconciliation. Having a single platform to work from streamlines the global payable process.
Any business that wants to sell or acquire products and services on a global basis should integrate cross-border payments into its AP practices. Not every payment gateway can process international payments, making it crucial to use one that can. More so, using one that has extensive knowledge of navigating the cross-border payment ecosystem can help make your operations as efficient as possible.
5 Types of Cross-Border Payments
There are multiple global payment methods to choose from. When making payments to overseas affiliates, the supplier chooses a preferred method and then you are responsible for paying according to that method. This is why you should use a global payments platform that supports multiple payment options. More importantly, choose one that allows you to make multiple payments simultaneously, even when they are in different formats and currencies.
1. International Wire Transfers
This type of global payment provides an immediate exchange of funds but usually comes with a transfer fee that often exceeds $50. For a $500 wire transfer, a $50 fee would be 10% of the total transfer. For a $20,000 transfer, the $50 fee may be more reasonable.
Wire transfers are not ideal for large payment volumes due to their steep transaction cost. They also come with limited traceability. Since routing rules vary from country to country, wire transfers are not an efficient option for global business-to-business (B2B) transactions.
2. International ACH
Commonly referred to as a Global ACH, an international ACH makes it simple to make payments to overseas suppliers and affiliates. Global ACH payments can be made through various entities, including SEPA, BACS, and local banks, but are not carried out via a card network. They are inexpensive and extremely convenient. The downside to Global ACH payments is that they can take several days to process. Due to their low transaction fees, they are ideal for making large volumes of payment and are very simple to set up on a recurring basis.
You must have the payee’s International Bank Account Number (IBAN) and other account information to make a Global ACH payment. Keeping up with each payee’s account information can be overwhelming without a global payments platform.
3. Prepaid Debit Cards
Also known as cash cards, prepaid debit cards make it simple to pay international affiliates. Your funds are automatically deducted from your account and transferred to the payee’s debit card account. Prepaid debit cards are processed over a card network and provide immediacy, which is of immense value when you need to make a quick payment to a global supplier. The transactions often come with a fee for both the payer and payee.
To withdraw funds from the prepaid debit card, the payee will likely have to pay an ATM fee and there is a confusing reconciliation process. Most importantly, the transactions are not covered by federal consumer protection laws. They are, however, beneficial for making payments to global affiliates who operate in a country with limited banking infrastructure.
There are two main drawbacks of making global PayPal payments: They come with a high transaction fee, and there is no clear policy outlining how funds are held. You may have one payment clear instantly, while another one to the same entity takes multiple days. Using a global payments platform that supports mass payments with PayPal is an effective way to enhance the payment experience and can reduce up to 80% of the PayPal payables workload.
5. Paper Checks
When a global affiliate is unable or unwilling to provide bank routing information, you can use a paper check to make an international money transfer. All you need is the payee’s name and an address to mail the check. This type of payment method doesn’t always come with a transaction fee depending on the financial institutions and mediators involved, making it extremely economical. However, it may be weeks before the check is received through postal mail and cashed, which can negatively impact your cash flow management. Paper checks are also prone to fraudulent activity.
How to Send a Cross-Border Payment
The first step in sending a cross-border payment is to supply unique information according to the country you are sending the payment to. You must also consider that not all cross-border payment options are available in every country. This means that, even if you pay all entities within your supply chain using Global ACH payments, you may have to resort to a different payment method when introducing a new entity that can’t accept this payment option.
In China, to make a Global ACH number, you’ll need to have the payee’s telephone number. In Ukraine, you need the tax ID number. In the United Kingdom, you’ll need the payee’s SORT Code. In almost all European countries, you’ll need payees’ IBANs to conduct global SEPA ACH payments.
A global payables platform provides payee onboarding, which allows payees to upload their payment preferences and bank account information. This simplifies the accounts payable process and provides a centralized location for you to store each payee’s data.
The next step in sending a cross-border payment is deciding whether it’s a one-time or recurring transaction. If you are going to make payments to an entity on a regular basis, setting up recurring payments is an excellent way to negotiate pricing discounts. It also ensures the payee is paid on time, which is crucial to maintaining a good relationship.
You’ll also want to ask about early payment discounts when setting up cross-border payments. 40% of companies surveyed in the study mentioned earlier report receiving early payment discounts of 1% to 10% from their suppliers. If you can acquire this kind of discount, you’ll want to use payee prioritization features within your global payments platform to make sure those entities are paid early each month.
Next, you’ll need to verify if you are sending the payment according to all applicable global payment rules. There are more than 26,000 rules, which makes the use of a global payments platform all the more valuable. Can you imagine if your AP department had to check each cross-border payment against that many factors? With a global payments service provider, your AP team can focus on core AP tasks, rather than on verifying global compliance.
Lastly, sending international payments requires maintaining complete oversight of each payment. When making hundreds or thousands of international money transfers, achieving complete oversight can be time-consuming. Using a global payments platform gives you a single platform to view the status of each payment. Instead of checking each payment individually for reconciliation, you can filter them according to ones that are past due or have yet to be reconciled. From there, you can use invoice automation tools to see who is responsible for approving the payment and why it hasn’t been approved.
How to Save Money with Cross-Border Payments
The World Bank published the Remittance Prices Worldwide report in 2016, which stated the fintech industry had lowered the cost of remittance. During the last quarter of 2016, transferring money internationally had an average transfer cost of 7.4% of the total transaction. Banks had the most expensive transfer cost (11%). Money transfer companies, like global payments platforms, had a lower transaction cost of about 6.26%.
As you can see, partnering with a global payables platform can save money on cross-border payments. Reduced transaction fees, however, aren’t the only financial advantage of this type of services provider. When you have a platform automating invoices and global payments, you can reduce AP headcount or redirect those employees toward other pertinent operational tasks.
The invoice automation benefit provided by a cross-border payments platform also reduces overhead expenses and leads to money-saving opportunities by streamlining the end-to-end AP workflow. Manual activities that are normally handled by the AP team can be automated, turning them into “touchless” tasks. The automation software does the heavy lifting for you using intelligent technology to verify and route each invoice correctly. It also pinpoints potential issues and mitigates human error. Faster invoice processing gives you a better view of where early discount pricing opportunities exist, and it serves as a solid foundation for scaling your AP processes.
The built-in optical character recognition (OCR) scanning feature available through invoice automation software identifies pertinent payee information and records it for future use. Override changes are intelligently identified and then applied to future invoices. After OCR scanning takes place, a second layer of verification is performed to maintain optimal data extraction accuracy. With greater accuracy comes improved invoice processing and reconciliation, which saves money and reduces the AP workload.
A global payments platform also saves money on cross-border payments by allowing you to send money internationally using various payment methods other than a wire transfer. This is of tremendous value when sending payments to countries where wire transfers are not supported. And if preferred, you can set payments so that the payee absorbs the transaction fees. Since a global payments platform offers reduced fees, a payee is more likely to absorb them, especially when you point out that you’re sending payments via a method that doesn’t require a wire transfer.
Corporate Benefits of Cross-Border Payments
If you’re looking for ways that international payments can benefit your company, you won’t have to look far.
Whether you’re an established corporation or a small start-up, globalization will impact your bottom line. With cross-border payments, you can pay suppliers from your smartphone and other mobile devices. This means that, even when you’re away from the office, you can pay an invoice.
You can use your global payments platform to intelligently schedule every payment for you, allowing you to focus on your core operational tasks, rather than concerning yourself with hundreds or thousands of invoices.
Cross-border payments also increase the number of suppliers and affiliates you can connect with. For example: You recruit an amazing freelancer who can create content for your website at a great price. The freelancer is located in a different country and only accepts payment in his local currency. Without cross-border payments, you won’t be able to secure this relationship. With global payables software, freelancers can go through a simple onboarding process whereby they add their payment information. They can send you invoices each month and reconciliation will be automatic.
Probably the most notable benefit of making cross-border payments is the convenience they provide, especially when using a global payments platform. All payee information is uploaded during the onboarding process and an online portal makes it simple for payees to update their information as necessary.
Tips for Choosing a Global Payments Platform
To get the most out of cross-border payments, make sure to choose a global payments platform that supports mass payment processing. You’ll be able to schedule thousands of payments according to multiple payment methods. Also, choose one like Tipalti that supports payments to 190 countries and in 120 different currencies. Imagine being able to partner with any supplier or overseas affiliate and pay them in their local currency. This type of payment processing is at the heart of enterprise scalability.
No matter the platform you choose, ensure it integrates the 26,000-plus banking rules when processing payments. This will ensure payments are processed quickly and without error. It should also feature advanced payment configuration options through which you can split transaction fees between you and the payee. Additionally, payment threshold features can give you the ability to hold payments until a predetermined margin is reached, optimizing your margins on transactions and improving your cash flow.
A global payments platform worth partnering with will guarantee complete OFAC compliance. Regulatory screening can be a headache, but it must be performed once suppliers provide you with their banking details. With a global payments platform, there is no need to conduct a manual query on SDN and OFAC databases. Instead, the global payments platform can do the screening for you and check all payees against blacklists. This reduces the risk of fraudulent payment activities and stops losses caused by payment errors. It also keeps you from criminal liability in regards to doing business with a supplier who is on the OFAC’s blacklist.
Benefits of Automating Cross-Border Payments
Automating cross-border payments saves time and money. It communicates respect for your international affiliates by showing them that you want to pay them quickly, effectively, and in their own currency. Automation with the right services provider also reduces currency conversion fees, which is favorable to suppliers. Namely, you can customize the automation software to create an international payment system that optimizes the entire cross-border payment process.
Cross-border payment automation gives you a single platform to make both domestic and international money transfers. This streamlines the AP workflow and providers better AP transparency. You’ll also be able to view payments in real time, including those that have been reconciled and those that are still due.
Lastly, using global payments automation through a services provider like Tipalti gives you the ability to leverage a payment system that is built to scale. You don’t have to burden your software team with development or maintenance tasks. You’ll have access to a platform that eliminates financial and compliance risks, reduces payment reconciliation times, improves supplier relationships, and most importantly, increases the ROI on your AP processes.