Current Challenges in Cross-border Payments
One of the great weak spots in the global payments ecosystem is when money leaves one country and goes to another. As the economy becomes more global, the great issue that rings forth is whether a business can reasonably pay someone in another country, often with a different currency and banking system, in a fair and expedient manner. More importantly, there are areas in cross-border payments more susceptible to fraudulent activity by criminals. Addressing the major challenges in transactions between nations can help improve defenses against fraud.
The primary mechanism for international payments is the so-called correspondent bank model. In a local setting, a payer sends money from its bank account through the payment system to the payee’s account, a four-step process. When dealing with cross-border payments, the payer’s bank must send the money to a correspondent bank that can send the money across the border to another correspondent bank. That latter bank converts the money into the local currency, then processes it through the national payment system to the payee’s bank account.
The issue with using this model is that the two correspondents are often independent of the banks used by the entities involved in the transaction itself. They require payment for their services, often in the form of taking a cut of the money being sent, transaction fees and surcharges to pay for the currency conversion. For large enterprises, these extra costs are an acceptable headache. However, as Traxpay noted, many small-to-midsized businesses stand to lose a lot of money in ensuring their overseas customers get the exact amount they demanded for their products and services because of these extra charges. Payments blog The Paypers reported that the number of cross-border payments of low value – usually under $10,000 – continues to increase. More importantly, fraudsters have additional channels where they can exploit and defraud a customer.
A regulatory shift
Another major concern is economic shifts that make it more necessary to work with the local currency, according to payments expert Carsten Hills in a column for Banking Technology. Many governments around the world now feel more comfortable executing large local payments in the native currency over stronger fiat currencies such as the U.S. dollar or the euro. Such a system incentivizes businesses in developing countries to stick with their native currency instead of working with a more stable source. Hills cited data from the Boston Consulting Group suggesting that this form of payment will grow to nearly $55 trillion on 20.7 billion transactions annually. This isn’t something that banks can easily ignore.
There are also greater demands for transparency in cross-border transactions. This often means an increase in regulatory measures, both here in the U.S. and elsewhere. Paying close attention to how the regulations in each country work, especially in relation to cross-border rules, becomes essential. It also helps businesses understand where fraud is most likely to be prevalent, enabling a better degree of risk management to prevent criminal activity from undermining the bottom line.