Not too long ago, international business was limited to big multinational companies with the resources and infrastructure to trade globally. Today, technology has made doing business across borders far more accessible to businesses of all sizes.
Cross-border transactions play an increasingly important role in supporting the growth of business-to-business trade and commerce. In fact, it’s predicted that by 2024, the value of cross-border B2B payments will surpass $40 trillion, an increase from an estimated figure of $37 trillion in 2022.
What are cross-border payments & how do they work?
Cross-border payments are transactions between two businesses where each party is located in a different country. They work similarly to domestic payments but with some additional complexities. Typically, a company needing to make a cross-border payment must select a payment method and currency exchange rate first.
There are several options available, such as:
- Wire transfers
- Online payment platforms
- Foreign currency accounts
Once the payment method and exchange rate are selected, the business must provide the recipient’s bank account details and other necessary information. The payment will then be initiated, and the funds will be transferred to the recipient’s account.
However, there are often additional fees and delays associated with cross-border payments, such as currency conversion fees and longer processing times. Additionally, businesses must comply with various regulations and laws related to international payments, such as anti-money laundering laws and foreign exchange regulations. Regulators in most countries, including throughout the EU and UK, require companies to provide verification of their address, the purpose of the payment and the relationship between the sender and recipient. Companies must also provide documents such as contracts, invoices, and IDs.
When it comes to receiving cross-border transactions, merchants typically have several options.
- International Wire Transfer: The most common method of receiving payments is through international wire transfer, which involves transferring funds directly from the buyer’s bank account to the merchant’s bank account. This method can take a few days to process, and the buyer and seller may incur additional fees from their respective banks.
- Online Payment Platforms: Many online payment platforms allow merchants to receive payments from buyers in different countries. These platforms often offer multi-currency support, fraud protection, and faster payment processing times. However, merchants should be aware of the fees associated with using these platforms.
- Letter of Credit: A letter of credit is a financial document issued by a bank that guarantees payment to the merchant once certain conditions are met. This method can be more complex and time-consuming than other methods but offers more security for the seller.
- Bitcoin and Cryptocurrencies: Merchants can also receive payments in the form of cryptocurrencies like Bitcoin. This method offers fast, secure, and low-cost transactions. Still, it may only be suitable for some merchants due to the volatile nature of cryptocurrencies.
Ultimately, the best method for receiving payments in B2B cross-border transactions depends on various factors, such as the transaction size, the buyer and seller’s locations, and the level of security and speed required. Merchants should carefully evaluate their options and choose the best method for their business and customers’ needs.
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What’s driving the growth of cross-border payments?
Several factors are driving the growth of B2B cross-border payments:
Globalization: With businesses becoming increasingly globalized, cross-border transactions are becoming more common. Companies are expanding their operations overseas, sourcing materials and talent from different countries, and selling to customers worldwide. This has increased the need for cross-border payments.
E-commerce: The rise of B2B e-commerce has made it easier for businesses to sell their products and services globally. This has increased the need for cross-border payment solutions that are fast, secure, and cost-effective.
Digitalization: Digital technologies have made cross-border payments faster, more efficient, and more accessible. Advances in blockchain technology, for example, have enabled faster and more secure cross-border transactions.
Regulatory environment: Governments and regulators increasingly recognize the importance of cross-border payments and are working to create a more favorable regulatory environment. This has encouraged the development of new payment solutions and increased competition in the market.
Payment providers: Payment providers and new fintech players are investing heavily in cross-border payment solutions. They are developing new technologies, partnering with other providers, and expanding their global reach to meet the growing demand for cross-border payments.
What are the challenges of accepting cross-border payments?
Receiving and sending cross-border payments should be simple and straightforward. Yet, for many businesses, doing so is expensive and complex. Here are some of the key challenges businesses face when accepting cross-border payments:
Regulations: Rules governing cross-border payments vary by country, and merchants must comply with these regulations to avoid legal issues. Failure to comply can result in fines and legal action.
Currency conversion: Currency exchange rates can fluctuate, leading to uncertainty around the value of payments received. Merchants must also be aware of currency conversion fees charged by payment providers.
Fraud and chargebacks: Cross-border transactions are more susceptible to fraud, and chargeback disputes can be difficult to resolve across different legal jurisdictions.
Payment methods: Different countries have unique payment methods that may not be available in other regions. Merchants must understand and adapt to these local payment methods to cater to customers in different regions.
Take your business global
Cross-border payments are a crucial component of global trade and commerce. They enable businesses to send payments to employees and suppliers and receive payments from customers worldwide. While cross-border transactions can be complex and expensive, new solutions and technologies are making B2B cross-border payments increasingly accessible, speedy, and economical for businesses of all types and sizes. There’s never been a better time to take your business global!
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