4 challenges with cross-border payments (and how to overcome them)

We live in a world where it is critical for consumers, businesses and financial institutions alike to be able to make frictionless international payments. But the cross-border payments ecosystem still suffers from significant challenges around efficiency and value. Fintechs and specialist payments providers are solving some of the key issues around cross-border payments, but there is more work to be done.

Challenge 1: Cost

Cross-border payments are notoriously expensive due to the number of intermediaries involved in each transaction, all of which charge a fee for their 'service'. Other factors that drive up the cost of sending money overseas include regulatory and currency exchange fees. Today, the average cost for sending money across international borders still averages around 6.4 percent of the total transaction amount.
Source: World Bank Remittance Prices, World Bank Database

The high costs of cross-border transactions pose challenges for individuals, businesses and other financial institutions with multi-jurisdictional payment needs. One way to minimise how much you pay away in fees and exchange rate margin is to use a dedicated money transfer provider for your cross-border payments rather than your bank.

Banks tend to be among the most expansive options when it comes to international payments, and generally don't let you know the currency conversion rate until after your transfer is processed. International money transfer providers show you the total costs upfront, giving you a better idea of what you will pay. Shopping around to compare providers, taking into account the exchange rate margin, as well as the transaction fees, will ensure that you are getting the best deal on your transfer.

Challenge 2: Speed

When you use your bank for international transfers funds can take between 2-5 days to arrive. In an age where domestic payments often happen in real-time, this seems like an especially slow turnaround time. The issue goes back to the number of intermediaries involved. For example, if someone in the Philippines needed to send money to Sri Lanka, the funds might need to pass through intermediary banks in Malaysia and India before it arrived. Banks' reliance on correspondent institutions in different countries to move money overseas ultimately adds time to funds delivery speeds.

Unlike the banks' clunky, slow and antiquated messaging system, new payment service providers use API-powered infrastructure to move money from A to B. Often they utilise local payment rails or have local payment providers who can facilitate faster funds distribution versus a traditional bank.

Challenge 3: Transparency

One of the biggest complaints about cross-border payments is the lack of available funds tracking. When sending a payment via the bank, it 'disappears' into the abyss of the correspondent banking network, with zero visibility into where it is in its payments journey. In such a system, failed payments are late in being identified, making it difficult for businesses to manage their cash flows or pay suppliers on-time.

Alternative payment service providers are answering the call for greater transparency by offering 24/7 funds tracking. This is helping businesses providers offer better services to their customers, but the data also improves internal processes by helping them understand and correct errors that could be hurting their profitability.

Challenge 4: Security and payment fraud

It is a given that consumers and businesses demand some certainty over the security of their funds when sending them across borders. But unfortunately, cross-border payments suffer from a higher level of payment fraud and security issues than domestic payments. One reason is that different countries have different regulatory requirements for their banks and payments providers, meaning that the stringency of the controls may vary between countries. Another consideration is the level of cybersecurity in use for funds and data.

One way to minimise the risks with your cross-border payments is choosing a provider that is licensed and regulated. A providers' security measures should be readily available on their website, so read-up to see whether they use top-level encryption data to prevent security breaches.