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Cross-border payments make global trade possible in commerce, personal finance, charitable work, and investments. As digital payment adoption grows, cross-border transactions become more efficient and accessible.
What are cross-border payments?
Cross-border payments refer to the transfer of funds between parties in different countries. These transactions often occur through online payment platforms, banks, or credit card networks. They typically involve additional complexities such as currency conversion, international financial regulations, and compliance with the legal frameworks of multiple jurisdictions.
Types of cross-border payments
Cross-border transactions can be classified according to the nature of the payor and payee:
- Person to person (P2P): Transfer of funds across countries between two individuals (e.g.: remittances).
- Person to Business (B2C): Funds that transfer from a customer in one country to a business in a different country for a commercial transaction (example: retail e-commerce, online subscriptions).
- Business to business (B2B): Transfer of funds across countries between business organizations (example: wholesale e-commerce).
Cross-border payment methods
As with local transactions, there are different ways to process cross-border payments. You can choose from credit cards, wire transfers, electronic fund transfers (EFTs), and cryptocurrencies. To further explain, the table below compares each payment method.
| Type | Source of fund | Payment platform | Funding speed | Processing fee |
|---|---|---|---|---|
| Credit card | Credit line | E-commerce, digital wallets | Instant up to 2 business days | Low |
| Wire transfers | Bank deposits | Interbank system | 3-5 business days | High |
| EFTs (ex: e-checks, ACH) | Bank deposits | E-commerce, international ACH, digital wallets | 2-3 business days | Very low |
| Cryptocurrency | Crypto portfolio | Digital wallet, crypto, and e-commerce platforms | Instant | Low |
| Digital wallet | In-wallet funds (ex: PayPal balance) | E-commerce, digital wallets | Instant up to 2 business days | Low |
SEE: Best Online Payment Methods for Small Businesses
How do cross-border payments work?
Cross-border payments works similarly to local payments but with the added elements needed to move funds to a different country, such as financial intermediaries and currency conversion.
The following elements are needed to facilitate cross-border payments.
- Sender or payor: An individual or organization that sends funds for various purposes such as remittance, bill payments, retail or wholesale purchases, and more.
- Receiver or payee: An individual or organization that accepts the funds as a remittance or in exchange for goods or services.
- Sender and recipient banks: Where the source of funds originate on the part of the sender and will be held on the part of the recipient.
- Payment processor: The service that provides technology to securely share transaction data.
- Financial intermediaries: Networks that regulate the movements of funds across banks and countries. For card payments, these are the card networks and merchant acquirers. For bank transactions, these are global financial institutions such as Chase that partner with local banks worldwide.
Cross-border payment processing in 5 steps
Step 1: Sender initiates the transfer of funds by providing their payment details via a payment platform.
Step 2: The payment processor encrypts the payment details, creates a payment authorization request, and sends it to the sender’s bank.
Step 3: The sender’s bank confirms the availability of funds before approving the authorization request.
Step 4: Once the request is approved, the payment details are sent to the financial intermediaries to verify that the transaction meets various regulatory compliance and assess other factors such as exchange rates and conversion fees.
Step 5: The receiver’s bank accepts the cross-border payment proceeds in the receiver’s bank’s currency minus all the processing fees.
Note that depending on the payment method, the sender may be able to pay for the cost of processing cross-border transactions.
Cost of cross-border payments
Businesses that accept cross-border payments should take note of the various fees involved in completing each transaction.
- Cross-border fees from payment processors. Some payment processors charge up to 2% in cross-border fees when there is a high payment fraud risk in the sender’s country.
- International payment gateway fee. Using an international payment gateway to accept cross-border payments may incur an additional monthly cost.
- Country taxes. Fees are imposed based on the seller’s country’s current tax framework for sales and other activities where money is transferred.
- Currency exchange. If your business sources products from international suppliers or hires remote employees based in other countries, your payments will be subject to currency fluctuations.
SEE: Best International Payment Gateways
Benefits of cross-border payments
Businesses with access to cross-border payment processing, such as international retailers, wholesalers, professional consultants, subscription-based service providers, and charitable organizations, can:
- Grow their customer base by attracting sales from consumers around the world.
- Access supplier networks with more competitive pricing to reduce business costs.
- Choose and hire from a wider pool of potential employees with different skill sets to match your business needs.
- Generate additional income from conversion rates if the customer’s local currency valuation is higher than the seller’s currency.
Additionally, the right international payment processor would allow businesses to manage multiple currencies and make seamless cross-border payments with easy-to-use online platforms.
Key challenges with cross-border payments
Unlike accepting local payments, cross-border transactions present unique challenges driven by the varying economic standing, political climate, and financial regulations in every country worldwide. These challenges limit interoperability and increase the cost of cross-border transactions.
Exchange rate fluctuations
Cross-border payments are affected heavily by unequal currency valuations, and fluctuations in exchange rates can either result in a gain or loss to your business. These exchange rate fluctuations are often unpredictable, and international companies can only manage their interest in part by keeping up-to-date with foreign exchange trends.
Varying financial regulations that limit available payment methods
Each country operates under its unique financial regulations. What may be considered a risky practice in the merchant’s home country might be entirely acceptable where the customer is located. This results in merchants being unable to support a customer’s popular local payment method and losing a sale.
Slow funding due to inaccessible financial data
Banking secrecy laws protect a consumer’s right to privacy, but because of this, most cross-border payment methods are slow. Banks take time to share financial information with other banks, and each transaction is scrutinized to ensure compliance. So, unless you or your customer use a global bank like Chase or US Bank, fast funding is impossible.
Growing threat of high-tech payment fraud
E-commerce and other online payment platforms continue to be targets of malicious attacks to gain access to financial data. Hackers are now mimicking online user behavior to bypass fraud detection tools, which has resulted in high-profile breaches such as Dell’s data breach in May of this year.
International money transfer regulations
International payments are subject to a long list of regulatory compliance to minimize the risk of loss due to fraud. Top examples include:
- Anti-Money Laundering (AML): Guidelines to prevent money laundering, which include establishing protocols for verifying customer identity and flagging suspicious transactions
- Know Your Customer (KYC): Businesses are expected to implement industry-standard processes to verify customer information
- Data privacy: Each country observes its own data privacy laws that affect the processing time for cross-border payments.
Cross-border payment solutions to consider
Nowadays, businesses use fintech payment software to process cross-border payments. Even commercial banks partner with payment processors to provide customers with banking apps to facilitate banking transactions, including cross-border money transfers.
To get access to these services, you will need an international merchant account. Consider our recommendations below, which make cross-border payments easy and cost-effective.
| Best for | Funding speed | Platforms | Fees | |
|---|---|---|---|---|
| Stripe | Customizing payment platforms | Instant w/fee | Digital wallet, e-commerce, invoice | Competitive |
| Chase Payment Solutions | Free and fast funding | Instant | Digital wallet, e-commerce, invoice | Competitive |
| PayPal | P2P cross-border PayPal payments | Instant | Digital wallet, e-commerce, invoice | Complex |
| Braintree | Cross-border donations to nonprofits | 1-5 business days | Digital wallet, e-commerce, invoice | Competitive |
SEE: Best International Merchant Account Solutions
Latest innovations in cross-border payment solutions
The latest advancements in cross-border payment solutions focus on managing the key challenges with the help of fintech. This includes improving software platforms and refining regulations to improve interoperability across financial intermediaries.
Open banking
Open banking is the free sharing of financial information among banking institutions and payment processors. It answers delayed funding for cross-border payments, making instant payments possible through account-to-account transactions (A2A). Open banking is now operational in most European countries, with A2A transactions reaching US $13.6 billion in 2023.
SEE: Best ACH Payment Processors
Payment orchestration
Payment orchestration is an online payment services platform that combines access to multiple payment processors with smart routing tools. It allows businesses to connect with local payment methods in other countries, such as buy now, pay later (BNPL) and digital wallets, resulting in a simplified cross-border payment system. As of this year alone, global transactions processed through payment orchestration platforms have reached US $2.53 billion.
SEE: Best Payment Processing Companies
Banking apps
With the growing popularity of digital wallets, digital banking through banking apps is now a reality. Banking apps offer a seamless remote banking experience, including paying bills and transferring funds to other banks. One significant upgrade is the QR code feature, which allows users to scan or generate QR codes to send money to other banks and digital wallets.
Digital currencies
Digital wallets and crypto payment gateways are two fintech strategies for improving cross-border payments.
- Stablecoins (e.g., PayPal USD) are a type of cryptocurrency backed by fiat money, precious metals, and other cryptocurrencies. Their value is more stable, making them a prime alternative to traditional foreign exchange transactions. Card network Visa now offers crypto-connected cards for use on 50 crypto platforms.
- Central bank digital currencies (CBDC) are the digital representation of fiat currencies. CBDCs are now fully adopted in three countries, and 20 others, including the U.S., are in the planning stage.
