Companies that export goods and services across borders are statistically outperforming companies that limit their business operations to domestic territories. However, cross-border payments are still not handled in the most effective way. Therefore, businesses dealing with international trade often suffer from payment inefficiencies. To what extent are they able to hinder business growth?
Main Cross-Border Payment Inefficiencies
Payments are constantly evolving to reflect changing customer needs and expectations. However, some industry segments are harder to reform than others. Cross-border transactions are one of them. Some of the main issues affecting the efficiency of international payments are:
High Cost
Traditional payment systems often involve several intermediaries. All of them require some fees for their services. Plus, cross-border transactions face currency conversion fees and exchange rates imposed by banks or intermediaries that are often unfavourable. All these costs accumulate, reducing profit margins for businesses involved and their end customers.
Slow Processing
International payments are often not instant. They can take several days to clear, depending on the financial infrastructure available in the region. Payment delays disrupt cash flow and decrease businesses’ liquidity. Merchants, especially the small ones, may find it difficult to pay suppliers or employees in time, or to reinvest in growth opportunities.
Limited Transparency
Delivery tracking across borders is more challenging as it involves many intermediaries. The same applies to international payments. It is harder to determine why delays occur. Furthermore, limited visibility into the various fees applied by different banks and intermediaries may hinder businesses from accurately forecasting their operational costs.
Low Interoperability
Businesses face many challenges in integrating across multiple markets and systems as they may lack interoperability. Different countries have various financial infrastructures, which cannot always seamlessly cooperate, thus preventing firms from establishing seamless payment solutions globally. Limitations in local financial systems can restrict a company’s ability to tap into new markets or customer bases, tying down its growth potential.
Increased Risks
Involvement of multiple intermediaries increases the potential for communication gaps between jurisdictions and non-compliance with some of the local data privacy laws. Managing compliance and standardisation across multiple jurisdictions is a persisting industry challenge. Some of the intermediaries might have a fragmented understanding of the overall process, limited channels through which service providers can share and evaluate the credit status of cross-border transactions, and insufficient protection measures in place.
Negative Impact on Business Growth
As businesses gradually expand their international footprint, the majority of firms display confidence in their cross-border payment capabilities. However, as the fresh survey of payment leaders by Thunes and Visa showed, nearly 40% of respondents have lost a business deal due to a cross-border payments challenge.
Integration Issues Prevent Business Expansion
The integration of popular payment methods remains impeded by security issues, payment tracking, and processing speeds.
Bank accounts are by far the easiest method to facilitate cross-border payments, followed by global cards (Visa), e-wallets (e.g. PayPal), cash and local card schemes. Digital wallets are currently ranked as the most problematic endpoint for cross-border payments, though their adoption keeps growing and is forecast to reach 60% by 2026.
Complexities of cross-border payments are especially challenging for small businesses that might not have enough resources to integrate a variety of payment methods. Thus, nearly half (49%) of SMBs, surveyed within a new research commissioned by Wise, cite complex international payments as a significant obstacle to global expansion. Inflation, taxes, and regulatory barriers are seen as smaller nuisances on this path.
High Costs and Hidden Fees Lead to Profit Loss
The main reason why small businesses resent international payments is because of hidden fees and inflated exchange rates. By rough estimations, SMBs lost almost $800 million in hidden fees when sending money internationally in 2023. It is no wonder that the vast majority of business leaders (82%) either don’t believe that their bank or financial provider is transparent about the costs of cross-border payments or aren’t sure about its transparency.
Even if the costs of cross-border payments are not hidden, they might still be too high, especially for SMBs. It is estimated that businesses could save up to 80% on foreign exchange fees, with the use of innovative technology such as distributive ledger (DLT) and blockchain.
Compliance Grows More Challenging
Another problem with international payments is the increased number of legislations to comply with. Over 80% of businesses around the world surveyed by Avalara indicated that cross-border compliance complexity impacts their decision to sell into new markets. Compliance is especially painful for high-growth, high turnover businesses. Thus, 49% of businesses with turnovers of £100,000-£999,999 cite customs duty and import calculation as a challenge, while it is a problem only for 27% of businesses with turnovers under £100,000.
Cross-Border Payment Complexity Adds Customer Frustration
While only 40% of businesses believe shipping costs are a critical business factor, 55% of consumers cite them as the top reason they abandon their cart. Lengthy delivery times, and final costs, with all the duties and taxes, not properly displayed at checkout are also on the customer frustration list.
As 30% of businesses surveyed by Avalara use payment methods that leave customers responsible for customs clearance, duties, and taxes, 58% of consumers report unexpected and even “shocking” customs duties charges upon delivery.
As a result, 75% of surveyed shoppers reconsidered future purchases from a business after such an experience, and nearly half (49%) refused the package altogether upon delivery.
This way, businesses that decide to expand internationally and deal with non-transparent payment methods still lose a significant part of their prospective clientele. They may not reach planned sales targets and fail to enrich the customer experience.
What Can Be Done About That?
While inefficiencies do cause a lot of trouble to merchants and payment providers alike, it’s not a reason to avoid or limit cross-border transactions. On the contrary, demand often boosts a variety of solutions and increases efficiency due to competition. To not lose customer trust and improve the payment service quality for international transactions, several strategies would be helpful.
Adopt Blockchain for Transparency
Blockchain and distributed ledger technology (DLT) have in-built mechanisms that help one see the exact details of all the transactions, track them in real-time, and understand the associated costs.
Blockchain also allows for real-time settlement, reducing the time typically required for cross-border payments from days to minutes. Besides, this technology removes the intermediaries from the process, thus lowering the costs.
Choose Reliable Fintech Partners
It is vital to select trusted partners for your payment routine, especially if you deal with international trade where intermediaries play an important role. Many fintech companies such as Ripple, PayPal, and Wise specialise in cross-border payments. Firms like that leverage innovative technology to provide faster, cheaper, and more transparent services than legacy banks. Therefore, many banks partner with reliable fintechs providing merchants access to their services through APIs to improve the customer experience.
Optimise the Payment Network
Traditional cross-border payments rely on correspondent banking, where multiple banks act as intermediaries. However, some financial institutions can perform multiple functions as well as certain networks may interlink to simplify international payments. For instance, the EU, some African and ASEAN countries are making efforts to facilitate cross-border payments with a single system. Streamlining and reducing the number of intermediaries in the payment network required for a cross-border transaction can cut costs and improve transfer speed.
Use AI and Cloud Technologies
Innovations are a force to be reckoned with. Artificial intelligence (AI), machine learning (ML), cloud computing, and other parts of the modern tech stack should be in the payment service provider’s arsenal. AI and ML can help in fraud detection, compliance checks, and even optimising currency exchange rates, while cloud technology enables more scalable and flexible infrastructure. Together, these technologies can facilitate cross-border transactions and boost their efficiency.
Mitigate Currency Fluctuations
Foreign exchange (FX) fluctuations are a major issue for cross-border transactions. The money might not transfer for a few days, facing FX changes that might bring potential financial losses to one of the parties. Some payment platforms integrate multi-currency wallets or smart FX systems to optimise conversion rates and minimise delays in currency exchange. Other businesses employ hedging strategies like currency options or swaps, cross-currency netting, etc. to mitigate the impact of currency fluctuations on the cost of transactions.
