Cross-Border Payments: Small Business Guide

Cross-border payments, which involve international transfers of funds between individuals, businesses, and financial institutions, are now essential in today’s global economy. The surging popularity of these transactions can be attributed to the increased interconnectedness of businesses worldwide. Small businesses, in particular, are embracing cross-border payments due to the benefits they offer, such as expanded market reach and the potential for growth.

However, these financial interactions also present a set of unique challenges, ranging from exchange rate fluctuations to intricate regulatory compliance.

It is important for small business owners to understand the intricacies of cross-border payments carefully to help them harness the advantages while navigating the obstacles.

What Are Cross-border Payments?

Cross-border payments are financial transactions that occur between parties in different countries. These transactions involve the movement of funds or assets from one country to another and can be initiated by individuals, businesses, or financial institutions.

They encompass both everyday retail transactions and larger-scale wholesale dealings, bridging international borders and facilitating global commerce. The wide range of business types that use cross-border payments include ecommerce, freelancers, import/export companies, service providers, and multinational corporations.

Common Methods of Cross-border Payments

There are a variety of methods of cross-border payments to suit the diverse needs of individuals and businesses engaged in international transactions. Here are some of the most common methods for moving funds across borders:

• Wire Transfers: Wire transfers, also known as bank transfers, are a traditional and trusted means of sending money across borders. This method involves the direct electronic transfer of funds from one bank to another. Wire transfers are often favored for larger transactions, such as business deals or real estate purchases, due to their reliability and security.
• Credit Card Transactions: Credit cards have become a popular choice for cross-border payments, especially for online shopping. They offer convenience and ease of use, allowing consumers to make purchases in foreign currencies. However, it’s important to be aware of potential foreign transaction fees and currency conversion charges associated with this method.
• EFTs (Electronic Funds Transfers): EFTs are electronic transfers of funds, typically used for domestic and international payments. They are known for their speed and efficiency, making them suitable for both small and large transactions. Businesses often use EFTs for international payroll and supplier payments.
• International Money Orders: International money orders provide a secure option for cross-border payments, particularly for smaller transactions. They are essentially a financial promise to pay a specified amount to the recipient, ensuring that the funds are delivered reliably and safely.
• Online Payment Platforms: Online payment platforms like PayPal, Wise, and Payoneer have gained popularity for cross-border transactions. These platforms offer a convenient way to send and receive money across borders, often with competitive exchange rates and lower fees compared to traditional banks.
• Cryptocurrency: Cryptocurrency has disrupted the cross-border payment landscape. It allows for fast and often cheaper international transactions compared to traditional banking methods. Cryptocurrencies are decentralized, making them resistant to government regulations and border restrictions. However, their volatile nature and complexity require users to exercise caution and understanding. There are quite a number of crypto payment gateways that can be used for accepting cryptocurrency payments. Check our list of the best crypto payment gateways for small businesses.

How Do Cross-border Payments Work?

Cross-border payments involve a series of steps and financial intermediaries to ensure that funds or assets move seamlessly between different countries. The specific process depends on the chosen cross-border payment method, but the key steps can be summarized in the simplified breakdown below:

1. Buyer intends to purchase goods or services from a seller in another country

The process begins when a buyer in one country intends to purchase goods or services from a seller located in another country. This could be anything from buying products online to paying for professional services.

2. Payment method is chosen

The buyer selects a payment method, which can vary depending on convenience, cost, and the specific requirements of the transaction. Some businesses may only have a few methods available and the buyer is limited to the options provided.

3. Financial intermediaries process the necessary transactions, including currency conversion

Once the payment method is chosen, a series of financial intermediaries, often including banks and payment processors, come into play. They facilitate the transfer of funds from the buyer’s account to the seller’s account in the recipient country. This process can involve:

• Currency conversion, with exchange rates determining the amount received in the recipient’s currency.
• Correspondent banks in each country, which would be a minimum of two banks or one in each country.
• Card networks, such as Visa and Mastercard.
• Electronic payment networks, such as the following:
  • ACH – Automated Clearing House, the electronic payment network in the US
  • SEPA – Single Euro Payments Area, the electronic payment network in the European Union
  • BACS – Bankers’ Automated Clearing System, the electronic payment network in the UK
  • BECS – Bulk Electronic Clearing System, the electronic payment network in Australia and New Zealand

4. Business receives the payment minus fees

After navigating the intricacies of international banking and currency exchange, the business or individual in the recipient country receives the payment. However, it’s important to note that various fees, including currency conversion fees and transaction charges, may apply, resulting in the final payment being less than the initial purchase amount.

The entire process can vary in complexity, depending on the payment method chosen, the countries involved, and the financial institutions or payment service providers facilitating the transaction. Innovations in the financial industry, such as digital wallets and online payment platforms, have streamlined this process for many, making cross-border payments more efficient and cost-effective.

How Much Do Cross-Border Payments Cost?

Understanding the cost of cross-border payments is essential for businesses looking to optimize their international transactions. Costs can vary depending on the payment method, currency exchange rates, fees assessed by card networks, and more. Let’s delve into the key cost factors:

• Currency Conversion Fees: One of the major components of cross-border payment costs is the currency conversion fee. This fee arises when the sender and receiver use different currencies. A common benchmark for these fees is around 1% of the transaction amount. It’s worth noting that the actual fees may differ depending on your service provider, the specific currencies involved, and the exchange rates at the time of the transaction.
• Fees Assessed by Card Networks: When credit card transactions are used for cross-border payments, card networks (such as Visa and Mastercard) may impose additional fees. These fees can vary but are typically a percentage of the transaction amount.

Benefits of Cross-border Payments

Small businesses gain essential advantages from cross-border payments, including reaching more customers globally, exploring new markets, accessing diverse talent, managing different currencies effectively, and saving money on transaction costs. These benefits empower small enterprises to expand, thrive, and compete in the international marketplace.

Wider market reach

Small businesses can significantly benefit from the ability to access international markets. Cross-border payments enable them to extend their customer base beyond domestic borders, tapping into a more extensive and diverse clientele. This expanded reach offers the potential for increased sales and revenue.

A survey showed that 46% of the top 50 ecommerce websites offer four or more languages and 16 of these top 50 brands attract more than 20% of website traffic from external countries.

Business growth

Entering international markets helps small businesses diversify and reduce dependence on a single market, which not only supports long-term growth and resilience but also positions them to adapt more effectively to shifting economic conditions and evolving consumer preferences.

According to a PYMNTS report, 81% of merchants who used online cross-border payment methods say that these have helped their business grow.

Global talent

Small businesses may sometimes need specialized skills and expertise to thrive. Cross-border payments enable them to hire and pay international employees, freelancers, or contractors, allowing access to a global talent pool. This flexibility in talent acquisition empowers small businesses to secure the right skills to meet their specific needs, ultimately enhancing their competitiveness.

A recent survey of 500 SMBs in the US found that 75% of them plan to hire more overseas employees. Among the reasons cited are to manage costs (86%), shortage of available US employees (58%), and to help them expand overseas (51%).

Currency management

A good cross-border payment service provider allows merchants to hold multiple currencies. Dealing with multiple currencies can help small businesses make the most of exchange rates, minimize losses due to currency fluctuations, and maximize profits. It provides opportunities to optimize finances by capitalizing on favorable exchange rates and managing currency risks. Small businesses can minimize potential losses due to currency fluctuations while maximizing gains, which is crucial for maintaining healthy profit margins. This also allows merchants to offer prices in the buyer’s local currency which makes them more likely to purchase and improves conversion rates.

According to a report, 92% of shoppers prefer to make purchases in their local currency.

Challenges of Cross-border Payments

While cross-border payments offer significant advantages, they also present a set of unique challenges that individuals and businesses must navigate. Here are some of the key challenges associated with cross-border payments:

Exchange Rate Fluctuations

Currency exchange rates can be highly volatile, affecting the value of cross-border transactions. Small changes in exchange rates can lead to significant differences in the final amount received, which can have a significant impact, especially on small businesses.

Regulatory Compliance

Navigating the regulatory requirements and compliance standards of different countries can be complex. Businesses engaging in cross-border payments should be aware of various regulations and laws, which can vary by country and region. Some of the key regulations and laws that commonly affect cross-border payments include:

• Anti-Money Laundering (AML) Regulations: AML laws require businesses to implement measures to prevent money laundering, including verifying the identity of customers and monitoring financial transactions for suspicious activity.
• Know Your Customer (KYC) Requirements: KYC regulations mandate that businesses collect and verify customer information, including identity, address, and legal status, to ensure compliance with AML regulations.
• Payment Services Directive (PSD2) in the European Union: This regulation affects businesses operating in the EU, particularly in the financial services sector, and introduces requirements for payment security, authentication, and customer rights.
• Foreign Exchange Regulations: Different countries may have specific regulations governing foreign exchange transactions, such as reporting requirements, transaction limits, or restrictions on certain currencies.
• Data Privacy Laws: Businesses must comply with data protection regulations, such as the European Union’s General Data Protection Regulation (GDPR), when handling personal information in cross-border payments.
• Sanctions Laws: Be aware of international sanctions imposed by various governments. Transactions involving countries, entities, or individuals subject to sanctions may be prohibited or require special licenses.
• Export and Import Regulations: When dealing with cross-border trade, businesses must adhere to export and import regulations, including licenses and restrictions on certain goods.
• Consumer Protection Laws: These laws aim to protect consumers making cross-border payments and may include provisions for dispute resolution, chargebacks, and refund policies.
• Tax Regulations: Cross-border payments can have tax implications, including withholding taxes, VAT, or sales tax requirements that businesses must adhere to.
• Financial Licensing and Regulatory Authorities: Depending on the nature of the business and the countries involved, businesses may need to obtain licenses or approvals from financial regulatory authorities in different jurisdictions.

Understanding and complying with these regulations and laws is crucial to conducting cross-border payments legally and securely. Consider consulting with legal and financial experts who specialize in international transactions to ensure you are meeting all applicable requirements to do cross-border transactions.

Costs and Fees

Cross-border payments can incur various fees, including currency conversion charges and intermediary bank fees. These costs can erode the value of the transaction, making it crucial to understand the fee structure and explore cost-effective payment methods.

When choosing a provider for facilitating cross-border payments, make sure to learn all the fees that will be incurred in cross-border transactions. Ensure the provider is transparent about the fees and how currency exchange is handled.

Transaction Delays

International payments can take longer to process than domestic ones due to multiple intermediaries, time zone differences, and regulatory checks. Delays can affect business operations and cash flow.

Security & Fraud Risks

The cross-border nature of these transactions can expose payers and recipients to security risks, such as fraudulent activities and cyberattacks. It’s essential to employ robust security measures and choose reliable payment providers to mitigate these risks.

For small businesses, securing cross-border payments is essential. Protect your online accounts with strong passwords, stay updated on security practices, verify your partners’ security, and educate your team to create a secure business environment. Our ecommerce payment security best practices also apply to cross-border payments.

Limited Payment Methods

Some regions may have limited access to certain payment methods, making it challenging for businesses to accommodate the payment preferences of their international customers. Choose a merchant account provider that offers different ways for you to get paid. Most payment providers make it easy to accept credit cards online even from international customers.

Cross-border Payment Providers

Not exactly what you need? Find more options in our list of the best merchant services.

How to Start Accepting Cross-border Payments

Expanding your business by accepting cross-border payments is a strategic move that can bring new growth opportunities. Here is a quick guide to help you prepare your business to accept cross-border payments:

1. Choose your payment methods: Choose the right payment methods that align with your business and international customers, such as credit cards, online platforms, or digital currencies.
2. Fulfill legal compliance: Research on what you need to transact in the countries you plan to tap. Ensure your business adheres to all relevant laws and regulations, including AML, KYC, and tax requirements.
3. Select a payment provider: Opt for reliable payment service providers or gateways that offer cross-border solutions, considering fees, security, and customer support. Check our list of the best international merchant accounts for small businesses.
4. Integrate and test your system: Integrate selected payment gateways into your system and rigorously test the process to identify and rectify any issues.
5. Market your products or services to your target international market: Inform your customers about the availability of cross-border payments through marketing and clear communication channels.

Frequently Asked Questions (FAQs)

Click through the sections below to learn more about the most common questions we get about cross-border payments.

How can cross-border transaction fees be minimized?

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How long do cross-border payments take to process?

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What is the difference between cross-border payment and remittance?

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Bottom Line

Cross-border payments are a vital part of the global economy, allowing people and businesses to make international transactions. Small businesses can benefit by reaching new markets, growing, hiring global talent, managing multiple currencies, and saving on costs. However, challenges like currency fluctuations, regulations, fees, delays, and security risks can make it difficult for small businesses to handle cross-border payments. To succeed, small businesses should pick the right payment methods, follow the rules, choose trustworthy payment providers, and ensure their systems are secure and transparent.

Cross-border payments may sound complex, but they offer big benefits for small businesses. With the right approach, SMBs can make the most of these transactions and achieve steady growth and success.