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How To Navigate The Global Payment Environment

18 June 2024 | 0 comments | Posted by Imtiaz Butt in Money Talks

Global payment environment

Cross-border trade is a vital sector in the world economy as globalisation intensifies daily.

Therefore, when one is aware of cross-border transactions, it becomes easier to be happy as a businessperson acquiring goods from another country or just as a person sending money to family members in a foreign country.

Let's learn about how cross-border transactions work in the modern day.

Cross-border transactions: what are they?

Cross-border transactions are generally defined as any business activity or financial transaction involving entities in two nations. This can include transferring cash to a foreign account, buying equities, or purchasing goods and services from a provider in a different country.

The challenges of cross-border transactions

Despite the fact that cross-border transactions have become very relevant and common in our current society, they are bound to face some challenges.

They present a number of obstacles that people and companies face to avoid disruptions, delays, and inefficiencies in their daily functioning and business activities. Let's examine these issues in more detail: 

Currency risk

Fluctuations in currency value lead to currency risk, a significant issue related to international business. For example, if the euro is appreciating relative to the US dollar during the transaction, the costs can go up for a US company purchasing goods from Europe.

Forward and futures contracts and options control the risks associated with the foreign currency, but small-scale traders or people involved in small-scale businesses like exports or imports may not be able to incur such costs. 

Rising expenses

In general, it is important to note that international transactions are more costly than domestic transactions.

There are multiple reasons for these increased costs:

  1. Currency Exchange Fees: TA conversion must be made if a transaction involves two different currencies. For this service, banks and other financial institutions often demand a certain fee for the service they provide to the parties, thus making the transaction more expensive.
  2. Regulatory Costs: In cross-border transactions, it is common and important to recognise the diverse forms of regulatory framework in negotiating. Compliance with these regulations can cause extra expenses, such as hiring lawyers or other officials. 
  3. Intermediary Charges: Usually, several third parties will be involved in cross-border transactions, and each  may impose fees. Payment and settlement banks, for example, correspondents, and clearing and settlement entities will be some examples of such intermediaries.   

Complexity of regulations

The laws that control cross-border transactions are unique to each nation.

A clear example of these regulations is those that counter money laundering and fraud, though they result in more complicated and longer cross-border transaction procedures.

Therefore, businesses and individuals must ensure they meet these requirements to avoid penalties, which can further complicate the process.

Time Delays

While transactions are processed more quickly for cross-border currencies than intra-currency transactions, they are still slower than for local currencies.

This is partially attributable to the additional checks and processes that the bank requires to conduct to guarantee the transaction is compliant with international regulations.

These delays can be troublesome for businesses dependent on fast and regular release of funds.

Cross-border transactions' future

Notwithstanding these challenges, the benefits of engaging in cross-border transactions mostly outweigh the drawbacks.

All in all, one is hopeful for the prospects of cross-border transactions in the future as the world is increasingly integrated.

Let's examine the factors that have led to this outgrowth and what can be expected in upcoming years. 

Emerging trends in Cross-border transactions

The market reports cross-border B2B payments would be worth more than $40 trillion worldwide by 2024, up from $37 trillion in 2022.

It means that with increasing frequency and constantly expanding volumes, there is a well-founded need for efficient, secure, and fast cross-border transactions.

The increase in the cross-border transaction volume is witnessed in the B2B exchanges and is noticeable in individual remittances and e-commerce.

Impact of financial technology

Fintech innovation also plays a crucial role in the increase in cross-border transactions. They are introducing new innovative solutions that are bringing improvements to cross-border payments, making them quicker, safer, and more efficient. Blockchain and cryptocurrencies can potentially reduce cost and time in cross-border payments.

Digital payment platforms are making conventional payment methods easier by continuously introducing new features to facilitate cross-border transactions.

Given problems such as currency risk and regulatory oversights, fintech companies are also creating tools for risk mitigation and compliance support.

Globalisations and E-commerce

The increased popularity of e-commerce and the globalisation of various businesses are some of the main factors that have led to the rise of cross-border operations. 

There is an increasing need for effective cross-border payment systems as companies extend their reach internationally.

It is evident that e-commerce plays a central role in this need as companies from all over the globe in the fashion, electronic, and E-digital content industries move their products online.

Cross-border payment solutions

Cross-border payment has several possible options that may be used to make the payment process more efficient. Among them are:   

  1. Correspondent Banking: This is a conventional approach to sending money across borders, whereby a bank in one country and another bank in the host country partner in executing the transfer.
  2. Alternative Payment Methods: These include digital payment platforms like PayPal, Wise, Revolut, Stripe, and Alipay, which allow customers to transact smoothly cross-border.
  3. Blockchain Technology: By creating a secure and efficient environment for money transfer, blockchain can substantially impact reshaping cross-border payments. Stablecoins like USDT have grown to over $100 billion in market cap and continue to clear billions in cross-border payments every day.

Remittance in a global marketplace

International sales and purchases have become a significant and increasingly prevalent part of the global economy.

Understanding the various payment methods, optimising processes, and focusing on customer service can help businesses and individuals navigate this complex landscape.

On the same note, with advancing technology and an increase in Internet use, more solutions offer assurance of improving cross-border transactions.  

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Recommended reading

If you enjoyed this post and have the time to spend diving deeper down the rabbit hole, then we suggest you check out the following posts about improving your finances in South Africa.

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