Cross-border payments: a guide for your business
May 3, 2022
Exploring cross-border payments
History’s great explorers used the tools available to them to discover new worlds – sails and the stars helped them traverse the seas and map new worlds. Today the tools have evolved, but the concept remains the same. And now everyone is an explorer: people use smartphones and apps to navigate new countries and cities, businesses bury flags in new markets with adapted product offerings, partnerships, and payment methods.
The currency of traders and travellers has also advanced. In the past, the Romans used salt to pay for goods; Byzantine coins passed from hand to hand on the Silk Road. Now technology and legislation power cross-border commerce, with payment processors, neobanks, and other fintechs working to simplify money flows and make mastering new markets easier than ever before.
If you’re running a business, that means there’s a multitude of financial services that can help you venture into new geographies and win over new customers. And the treasures that await can be rich indeed – with experts predicting that direct-to-consumer cross-border sales will grow by 17% a year until 2026, when they will total around €2 trillion.
To take advantage of this, you need to understand the tools and processes that can help you excel in new markets. This article will guide you along the way, exploring how cross-border payments work, explaining international online payment processing and the options available, and sharing advice about some of the best payment methods for cross-border commerce.
What are cross-border payments?
Cross-border payments are transactions between banks, financial institutions, businesses, or individuals based in different countries.
Cross-border payments are usually made via bank transfers, credit card payments, and using alternative payment methods such as digital wallets and region-specific options (such as SEPA Bank Transfer in Europe).
There are two main types of cross-border payments. These are:
1. Cross-border retail payments: These payments are usually made between businesses and consumers. They also include remittances, the money that migrants send back to their home countries.
2. Cross-border wholesale payments: These payments are usually made between banks or other financial institutions. This includes borrowing and lending, foreign exchange, and equity and debt trading payments.
Governments and global businesses also use these payments for transactions related to importing and exporting goods and other financial trading.
Due to the complexity of cross-border payments, they can be costlier and slower than domestic payments. For businesses, they usually involve more risks and can be challenging to navigate.
Luckily, work is underway to make cross-border payments faster, cheaper, and more straightforward. In fact, in 2020 the G20 prioritised improving the global infrastructure that supports them, citing the widespread benefits that would have for people, businesses, and governments worldwide.
How cross-border payments work
If you want to sell products internationally or accept international payments, it’s good to understand how they work. After all, you wouldn’t set off on a journey without a map and the knowledge of how to use it (or, these days, Google Maps and a healthy phone battery). So, let’s dive into the international payment system.
To explain fully, let’s first look at the most straightforward cross-border transactions, which occur when sending money between two banks (both fictional and continuing our explorer theme) that have a direct relationship:
Here, Amundsen Bank sends a message to Baret Bank telling them to make a payment for their customer. Baret Bank then credits the end customer’s account with the funds.
As this is a cross-border payment, here’s where things get a little more complex:
- A currency change can be required
- Exchange rates need to be applied
- An international transaction fee must be paid
Luckily, banking systems, financial institutions and fintechs are usually on hand to manage these payment flows. When a payment is initiated, the banks and other financial firms send information to transfer the funds.
However, it’s good to remember that currencies usually only serve individual countries (though we have the Euro and SEPA in Europe to streamline this). That means that the money is not physically transferred overseas during cross-border payments. Instead, banks have accounts in other countries and provide accounts for banks from other countries. This way, they can make payments in different currencies.
Of course, banks don’t always have a direct relationship. In this case, they use an intermediary – a correspondent bank. When this occurs, it is known as correspondent banking. This type of money flow plays a crucial part in making sure international payments are processed correctly. There can be multiple correspondent banks involved in a single transaction, which can result in additional costs.
You can see how that looks here:
The cross-border ecommerce payment flow
To explain cross-border transactions in ecommerce, we’ll use an imaginary consumer – let’s call him Mike.
Mike is about to use his credit card to buy some new climbing gear from an online retailer who is located in another country. He checks out and clicks confirm.
His payment begins its voyage.
So, what happens next? First, the card information needs to be captured and encrypted. The payment gateway or payment service provider that the online retailer uses usually does this.
The gateway then sends the payment authorisation request and transaction information to the acquiring bank – or the financial institution processing the online retailer’s card payments.
The acquiring bank then sends a request to Mike’s bank – the issuing bank – via the card network to get approval for the transaction. The issuing bank approves the payment and informs the acquiring bank it has done so. The acquiring bank then authorises the transaction and the merchant’s website sends Mike to a confirmation page to tell him that the payment is complete.
All of this happens within an instant. Again, let’s see what that looks like:
But if you’re part of a business selling internationally (or that’s thinking about international ecommerce expansion), then there are some more things you need to bear in mind.
Accepting international payments – things to consider
The best way to accept international payments
You now hopefully understand cross-border payments better. But, if you’re looking at opportunities for selling internationally and how to accept payments online, there are things to consider. After all, every successful adventure starts with a step in the right direction.
First, think about the markets you might want to sell in. Or, more specifically, the customers you will be selling to in those markets. Think about:
- What are their preferred payment methods?
- What language do they speak?
- Which currency do they use?
- What regulations apply in that country?
When you’re selling to a new market, you need to offer international customers their preferred payment methods, display prices in their chosen currency, and ensure that your checkout pages are in their language.
By doing all of this, you will be doing everything possible to guide them through the checkout process and make them feel confident to complete their purchase.
If this all sounds complex, then you might consider partnering with a payment service provider (PSP) to help. The best international payment providers can help you cross borders with ease. As well as offering information about different international markets and their consumers’ preferences, they can offer a range of features to make cross-border payments (and growth) simple.
A good PSP will help you accept online payments on your website, offering the correct payment methods, language, and currency that your customers prefer when they go to checkout. Their international payment processing services should also help you remain fully compliant with the regulations in any market you operate in. But what payment methods do you need to offer?
Popular cross-border payment methods
The most popular cross-border payment methods include:
Credit card payments
Credit cards remain the world’s most popular payment method. They’re also widely used to make international payments. Consumers see them as a safe and secure way to pay, and only have to enter their card details to start a transaction.
Digital wallets provide a digital way for people to store funds. One type is pass-through wallets, which people use as electronic cards for online transactions. Apple Pay is a popular global pass-through wallet.
E-wallets are another type of digital wallet. Customers can load their e-wallets with funds via bank transfer, card, or cash. They can then use the wallet to make payments. PayPal can be used as an e-wallet.
Many digital wallets support multiple currencies and allow people to make cross-border payments.
Alternative online payment methods
As ecommerce expands and borders become obsolete, offering localised payment methods when selling in other countries is vital. In Europe, for example, every country has their preferred ways to pay: In Germany, consumers love SOFORT Banking; in France, Cartes Bancaires is the most widely used payment method. Offering the correct options at checkout is vital to converting your shoppers. In fact, studies show that companies using localised payment methods boost revenue by 69%.
Snag – a localisation success story
Let’s quickly look at sustainable fashion brand Snag, which has driven ecommerce growth throughout Europe by localising the customer experience. By introducing local languages to their checkout, they doubled their conversion rate from 4% to 8%. They then added local payment methods, which increased it to 10%.
A great way to help convert shoppers is to only display the relevant payment methods for your market. A good PSP should help you choose the payment methods you offer on the checkout page for each market, increasing conversion and checkout speed.
Payment approval and why cross-border payments fail
When an issuing bank decides to approve or deny a payment during a cross-border payment, they don’t just consider whether a consumer has the available funds to pay. In fact, they base their decision on several factors, including the location and type of business. They also consider some payment-related information, including:
- Available funds: The consumer must have the available funds to pay for a purchase
- Currencies used: The transaction is more likely to be declined when the transaction currency used differs from the issuing bank’s currency.
- Transaction value: Issuing banks are more likely to approve lower payment amounts as they see them as lower-risk.
If you use a PSP to accept international payments online, they should offer intelligent routing to send transactions between the banks that are more likely to approve them – helping your business to avoid payments failing incorrectly. They should also have agreements with acquiring banks in the markets that you operate in to further lower the chance that a payment fails.
Cross-border payments fees
If you’re selling internationally, you will often have to pay a cross-border fee when an international customer buys one of your products using a card scheme. This is because it’s almost certain that the card’s issuing bank is not located in the same country as your merchant account (or the account you use to receive payments).
The cost varies depending on the card type used, and the largest portion of this transaction cost is the interchange fee. Interchange fees apply to all card transactions (domestic and cross-border), but sometimes you might have to pay an additional cross-border interchange fee when selling internationally.
A range of fees can apply for other payment types used in cross-border transactions. In Europe, the Single Euro Payments Area (SEPA) allows streamlined bank transfers from any checking account to any other checking account in countries with SEPA membership. This helps reduce the fees for SEPA payments made across borders.
Multi-currency payouts and foreign exchange fees
You might also have to pay foreign exchange fees on payments that you accept from international customers. This is because the banks or other fintechs involved in the payment have to convert the currency your customer uses to the one you want to be paid out in. If you’re working with a PSP, they should let your customers pay in their preferred currency and pay you out in the one you prefer.
Sending and receiving payments in multiple currencies can become complex and costly for international businesses with only a single bank account in their home country. A PSP can help you have additional balances in the markets you operate in, meaning that you can hold money and send and receive payments in different currencies. To do this, you will also need to have a merchant account in that country, but it can help you to save money by avoiding currency conversion fees.
Ready to explore?
Cross-border payments can seem challenging to navigate, and there’s lots to think about when you’re looking to expand internationally – payment types, money flows, currency conversion, fees. But like all great explorers, arming yourself with the right tools and partners should make conquering new markets and finding the right solutions for your business and customers smooth sailing.
Grow your way with Mollie
Here at Mollie, we aim to help all businesses to grow. We do that with an effortless payments solution that offers leading and local European payment methods and a seamless checkout experience that displays your customers’ preferred currency and language. We also help international businesses to accept payments in more than 25 currencies and receive payouts in 8 currencies. All this comes with easy onboarding, no lock-in contracts, and transparent pricing. Find out more about payments with Mollie.