A guide to cross-border payments

Despite fast growth in the cross-border payments market, there’s still plenty of confusion around the process itself.

What if your consultation business operates within the U.S. and hires design contractors overseas — are you supposed to pay in USD or local currency?

Or maybe you’re eager to onboard retailers from different countries to your marketplace, but how would that impact your finance team?

The need for B2B cross-border payments is only growing, so it’s essential to learn how they work and how they affect your business. In this guide, we break down cross-border payments so that you can take care of your vendors, contractors and partners — no matter where they are in the world.

Table of contents

• What are cross-border payments?

• Three trends changing the cross-border payments market

• Types of cross-border payments

• The cross-border payment process flow

• Challenges of cross-border payments

• How fintech is improving cross-border payments

• Sending cross-border payments with Routable

What are cross-border payments?

Cross-border payments are financial transactions that occur across geographical borders and jurisdictions. For a business, this could be payments made to freelancers and contractors as well as taxes owed to foreign governments or remittances for migratory workers. It’s estimated that cross-border payments will top $156 trillion USD this year with B2B payments accounting for $150 trillion USD of that total.

Suggested reading: What is payment remittance?

Unlike domestic payments that have a common currency, language and regulations, cross-border transactions are complex and nuanced, introducing variations that have traditionally led to slow settlement and drawn-out reconciliation. Each country has its own regulatory measures in place to ensure that secure and legal transactions are being made. Your business may also encounter language barriers, different time zones and unfamiliar holidays with foreign banks or finance teams. And then there’s the need to address currency — are you planning to pay in USD or a local currency? The choice you make there can have a big impact on cash flow.

Three trends changing the cross-border payments market

Legacy international payment methods like cash, check and wire transfer slow cross-border payments. Whereas a domestic payment can take anywhere from three to five days to settle, cross-border payments can take weeks before a payee receives funds. To address a massive push toward globalization in international business, the way that cross-border transactions are made and received has been evolving, and businesses are now experiencing those benefits: A recent study found that 83% of global businesses of all sizes now find it easier to make cross-border payments.

Here’s what’s driving changes in the cross-border payments market:

1. Faster payment expectations

These days, money moves from person to person with a few taps on our phones. Think of the peer-to-peer (P2P) and customer-to-business (C2B) payments made using apps like Venmo, CashApp and Apple Pay. Yet, the speed of B2B payments seems slow by comparison—even a 24-hour window feels like a lag in cash flow, especially for industries and small businesses that rely on fast invoice settlement to conduct day-to-day business.

The same people who are paying friends for their share of a dinner bill with a quick tap or swipe are also freelancers and contractors who want to see payment for their work turn around faster. Nearly all traditional B2B payment methods—wire transfer, check, cash — saw a decline between 2020 and 2021 in favor of online payment solutions like PayPal.

2. Online and mobile accessibility

To use digital payment methods, you need access to the internet and a device that has mobile banking options. Recent studies show that over two-thirds of the world’s population is both connected to the internet and owns a mobile device. Digital payment methods are faster and with more of the world connected, digital adoption is more widely used. The increased adaptation has produced the biggest changes in emerging economies like South Africa, Peru and Malaysia that all saw double-digit export growth between 2020 to 2021.

3. Growth of digital payments

The use of two or more digital payment methods grew from 45% in 2019 to 58% in 2020. Both expectations and accessibility are paving the way for faster, more secure payments. This includes the recent growth of Real-time Payments (RTP) options, which allow businesses and consumers to make payments instantly. PYMNTS’s research found that real-time disbursements accounted for 17% of all disbursements made in 2021, up from almost 6% 2020.

Types of cross-border payments

There are a number of options available when choosing how to pay vendors internationally. The processing speed, fees, security and transparency of a B2B cross-border payments method may be affected by the service you choose to help you manage them. For example, one payment platform may offer complete transparency of fees and currency conversion rates into your cross-border transaction, while another may not offer the same complete information.

Here are several cross-border payments examples to know about.

International wire transfers

One cross-border payments example is an international wire transfer. Wire transfers are used to electronically transfer money between different countries from one bank to another. Individual payments are directly deposited to a recipient’s account in local currency and are subject to high transaction fees for each payment.

How it works

To complete an international wire transfer, the sender provides the recipient’s name, address, contact information, amount as well as the recipient's bank account and routing information. The sender will also need to provide the receiving bank’s name, address and identifying information which may be a routing number or a SWIFT code.

Suggested reading: How SWIFT payment works

Some background to SWIFT cross-border paymentsThe Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a standardized payment messaging system that doesn’t process funds in and of itself but does help by coordinating banks and financial institutions while they exchange funds. The system facilitates efficient communication and safer cross-border transactions. Not all international banks are a part of SWIFT.

International ACH

Also known as Global Automated Clearing House, international ACH payments are made directly to a recipient’s bank account through a clearing system. Payments can be completed in batches rather than individually through a network of banks.

In the U.S., the clearing system is the National Automated Clearing House Network (Nacha). In non-U.S. areas, the governing Clearing House may be different. For example, the Single Euro Payments Area (SEPA) is managed by the European Commission, and the European Central Bank (ECB) is the central bank of the 19 European Union countries.

How it works

Your bank will help you process an international ACH payment. (First, confirm that they offer this service.) To complete the payment, the payee (your international vendor or contractor) will need to provide you with their local banking information, including the bank account number and routing number or the international equivalent. International ACH payments can take anywhere from two to five business days and carry low transaction fees that differ depending on destination and delivery speed preference.

Prepaid debit cards

A more secure solution than cash payments, prepaid cards present a prepaid dollar value and can be used pretty much anywhere a credit card can be used. Prepaid debit cards may also be referred to as stored-value cards or pay-as-you-go cards. Unlike a regular debit card that’s connected to a checking account, a prepaid card represents a set amount of money similar to a gift card. Prepaid cards are a low-barrier payment option because you don’t need a bank account to use the funds on the card.

How it works

Many prepaid cards include fees that eat away at the balance on the card. Many major credit card companies offer prepaid debit cards that you can get through your bank, and they can also be found at retail locations. Prepaid cards are not connected to a bank account and do not generally have online banking services associated with them. It will not affect your credit score since it is not a credit card.

PayPal

For a more all-encompassing cross-border payment option, many businesses turn to a payment platform solution like PayPal. It offers a secure experience that mitigates sharing of sensitive bank account information. Sending and receiving invoices, tracking payments, automated messages sent to vendors and contractors — PayPal users are able to navigate the finance landscape within a secure cloud-based platform that links directly to a bank account. PayPal does have a few drawbacks and can get expensive, especially for businesses processing more than thousands of payments a month to contractors and vendors. Learn more about making a PayPal switch.

How it works

To make payments with PayPal, connect your bank account to the PayPal platform and you’re all set. You make and receive payments directly from the PayPal platform. There are many tiered options and features that range from business financing for SMBs to innovative data analytics for enterprises.

Paper checks

Checks are an older B2B cross-border payments method, but they’re still used. While checks have been significantly phased out over the last few years as faster payment solutions have become available, some businesses remain cautious of the modernization of B2B payments and prefer to be paid with a check.

How it works

The payment amount and recipient name are printed onto a physical check and sent via mail to the recipient. To mail the check, you just need the vendor or contractor’s name and address. Paper checks aren’t the most secure B2B cross-border payment option because they can easily get lost in transit to the recipient. They’re also susceptible to fraudulent activity if sent to the wrong address.

The cross-border payment process flow (and how cross-border payments work)

The cross-border payment process flow isn’t that different from making a domestic payment, but there are some unique details along the way to consider. Here’s how cross-border payments work.

Step 1: Identify

Just like a domestic payment, accounts payable (AP) tracks incoming invoices and identifies that a payment is coming due for an overseas vendor. Tax documentation should be collected before a vendor is deemed payable. Having these documents on hand before the first invoice arrives helps make the following steps easier since they include identifying information you need to complete payments.

Related reading: Tax documents W-8BEN-E Form and Form 1042-S

Step 2: Route

Once approvals for the payment are met, the payment can continue. You’ll need important identifying information from your vendor when you’re routing an international payment. If you’re sending a check or prepaid card, your vendor’s name and address will suffice. However, if you’re making a wire transfer or international ACH, you need a bank account number and/or an international routing number. Have your vendor’s International Bank Account Number (IBAN) handy as well.

Suggested reading: What’s an IBAN?

Step 3: Approve or decline

Your financial institution takes over processing the payment transfer. If there’s an error with your bank communicating to a foreign financial institution, the payment will be stopped or declined. A number of reasons affect approval for international payments, including incorrect banking information. There may also be more than just two financial institutions involved in the transfer depending on where your vendor is located, which can further slow the process.

Step 4: Settle

If all goes well, your payment will be approved. At this time, a foreign financial institution takes over and settles the final transfer of payment to your vendor. The amount of time that it takes for a payment to settle depends on the regulations in place by the local bank. Fees may be assessed at this stage of the process depending on currency conversion and the payment method used.

Step 5: Track

Just like a domestic payment, once a cross-border payment has been made and processed, your finance team will need to track whether the payment has been approved and settled. Unfortunately, two-way communication between payer and payee via their financial institutions is not always available. The payer may be informed that a payment is declined while the payee isn’t notified. If there are delays or hidden fees, both finance teams may spend time retracing the steps of the process to resolve the issue.

Challenges of cross-border payments

While it’s exciting to work with international teams, making payments across borders brings about its own set of challenges. Here are the top four as identified by the Financial Stability Board (FSB).

1. High fees

Cross-border payments are subject to different fees along the way. Banks assess risk mitigation fees as well as fees for currency conversion and different payment methods. Wire transfers initiated in the U.S. can run upward to $50 per payment, for example, a number that can quickly add up depending on how many vendors and contractors you have overseas.

Suggested reading: Learn how to pay international contractors

2. Slow speed

While it’s true that digital payment options are making B2B cross-border payments faster, legacy methods still slow down the payment process. Checks, for example, leave vendors waiting for the mail to receive their payments and there’s additional time for the payment to settle until they can make it to their bank. With bank transfers, the lead times can stretch for days depending on how many financial infrastructures a payment needs to go through.

3. Limited access

The reality is that not all borders and jurisdictions have access to cross-border payment channels and some remain very limited. Maybe a local currency isn’t recognized or their local banks don’t participate in SWIFT. While there are options available for many B2B cross border payment methods, access is still limited for SMBs that encounter financial barriers within the finance landscape.

4. Lack of transparency

A major limitation of traditional cross-border payments is the lack of transparency from start to finish into fees, tracking and currency conversion rates. This challenge really ties into the previous three challenges — fees and transfer times are not known from the moment the payment is initiated. Finance teams tend to have a harder time tracking down where payments are when there are delays.

How fintech is improving cross-border payments

Cross-border transactions compound the number of variables involved in a payment cycle, requiring AP teams to be knowledgeable of international regulations and restrictions as well as currencies and overseas banking schedules. Fintech is changing the way businesses approach cross-border payments, implementing advanced technologies to enhance the experience on both ends of payments.

APIs

Application Programming Interface (API) is an intermediary between two software components. Logging into an online banking interface is an example of an API. The API is the intermediary that connects your computer or phone to the bank’s server so that you can access your account information. Historically, the only way to access this information was to physically go to a bank location and request these details from a teller or ATM.

The applications of APIs are seemingly infinite and there was a 133% increase in fintech APIs from 2019 to 2020. The more that APIs are implemented, the more versatile the financial ecosystem can become. APIs eliminate the need for finance teams to memorize international policies or track currency conversion rates, their fintech software is already doing it for them faster and with more accuracy.

Enhanced visibility

As mentioned earlier, one of the biggest hurdles that businesses need to overcome is two-way visibility in the cross-border payment cycle. Payment method fees, transfer fees, currency conversion and settlement lead times: each of these pieces in a payment puzzle need to be communicated to both parties to avoid friction in the vendor-to-buyer relationship.

Fintech aids in this transfer of information by acting as the intermediary between financial institutions, communicating at each end of the infrastructure and funneling the information back to the buyer and sender in real-time. This not only enhances confidence in the payment cycle but also eliminates guesswork and the need to chase down information from a foreign bank.

Virtual accounts

Instead of going to a bank to open an account, businesses can now open virtual accounts — or bank accounts that can be opened online without ever having to step into a building. The ability to open an account remotely improves accessibility to underserved markets and industries. This eliminates the need for businesses to manage local bank accounts in order to facilitate and monitor currency conversion.

User experience

A recent study by EY found that 51% of Gen Z and 49% of millennials favor a fintech company as their most trusted financial brand. Fintech adopts a digitally native experience to business needs, emphasizing mobile interface that can be accessed and utilized for myriad purposes from the comfort of a living room couch, the convenience of a bus stop bench or the versatility of, say, a gondola in Venice. As long as the user has access to the internet — or data on their mobile device — they can send and receive payments from anywhere.

Sending cross-border payments with Routable

Looking for cross-border payments companies to help pay your international vendors and contractors? Routable offers the simplest way to send cross-border payments while addressing common challenges that pop up for businesses throughout the process.

Choose convenient payment methods and processing speeds, rely on an easy-to-scale API and establish preferred controls in AP workflows, all while providing a user-friendly vendor experience. Plus, you’ll  have complete transparency into currency conversion rates and fees so you know how your money is moving internationally.

Learn more about making cross-border payments with Routable.