CROSS BORDER TRANSACTION

A cross-border transaction refers to any business or financial transaction that takes place between parties in different countries. These transactions can involve the exchange of goods, services, or capital across international borders. Cross-border transactions are common in international trade, foreign investment, and global financial markets.

The cross-border payments ecosystem includes B2B, B2P, P2B and P2P merchants. Processing of cross-border remittances takes place through various legacy channels such as SWIFT/correspondent banking, post, Rupee Drawing Arrangement (RDA) and Money Transfer Service Scheme (MTSS).

Despite the availability of conventional modes, transaction fees and excessive regulatory and documentation requirements make small-value transactions unattractive. The cost and speed of delivery strongly influence the customer’s final selection of payment mode. Recently, FinTech's have leveraged technology and captured the white space in cross-border payments left unaddressed by legacy models.

BASIC STEPS INVOLVED IN CROSS-BORDER PAYMENT PROCESS FLOW.

1. Initiation: The sender (payer) begins the payment process, providing the necessary details, like the recipient’s information, the amount, and the purpose of the payment.
2. Bank or Payment Service: The sender’s bank or a specialized payment service handles the transfer. International payment systems like SWIFT (Society for Worldwide Interbank Financial Telecommunication) are often employed to establish communication between the sender’s and recipient’s banks.
3. Currency Conversion: If the sender and recipient use different currencies, the payment needs to be converted into the recipient country’s currency at the prevailing exchange rate, which may include fees or a margin.
4. Intermediary Banks: In some cases, the transactions are processed through intermediaries that facilitate the transfer across borders, potentially increasing the processing time and cost.
5. Recipient’s Bank: The recipient’s bank receives the funds, converts the currency if needed, and credits the recipient’s account. They might deduct fees associated with obtaining such cross-border payments.
6. Processing Time and Fees: The entire process can take several business days, depending on the banks, payment systems, and the complexity of the transfer. Fees can vary based on the institutions involved, the amount transferred, and the urgency of the transfer.

TYPES OF CROSS-BORDER PAYMENTS.

1. International Wire Transfers: Such payments involve transferring funds from one bank account in a specific country to another in a different country.
2. International Payment Platforms: Utilizing digital payment platforms and services like PayPal, TransferWise (now Wise), and others facilitate international money transfers to individuals or businesses located in other countries. This mode is appropriate for transferring small amounts and has low transfer charges and exchange rates.
3. Card Transactions: International credit and debit cards are globally recognized payment methods used by customers who purchase foreign products to make payments in different currencies. However, banks apply certain currency conversion fee charges on such transfers.
4. Cryptocurrencies: The decentralized digital currencies like Bitcoin, Litecoin, and Ethereum to immediately make payments for international retail transactions. It is a widely accepted payment mode by many retailers worldwide. However, some countries still need to recognize it as a legal tender.
5. International Money Orders: It is an old-school method suitable for small transactions whereby the payer buys an international money order from the bank or other financial institution by depositing money and sending it through mail or via a third party to the payee in another nation.
6. Electronic Funds Transfers (EFTs): E-checks or electronic bank transfers are digital payment modes that allow sending money from one bank account to another. In contrast, both banks are located in different nations. It is one of the fastest, easiest, and hassle-free modes of cross-border payments.

BENEFITS OF CROSS-BORDER PAYMENTS.

• Facilitates Global Trade: Cross-border payments are crucial in international trade, enabling businesses to exchange goods and services across national boundaries.
• Boosts Economic Growth: These transactions contribute to economic growth by granting countries access to foreign markets and the ability to attract foreign investments.
• Enhances Financial Inclusion: International payments can help foster financial inclusion by linking individuals and businesses in less advanced or underdeveloped regions to the broader global economy.
• Encourages Diversification: Businesses can diversify their customer base, reducing dependence on domestic markets and mitigating risks while fostering stability.
• Drives Innovation: Cross-border payment solutions often contribute to fintech development and innovation, developing improved technologies and services.
• Initiates Remittances: Many people working in foreign nations rely on such payments to send remittances for financial support to their family members in their hometowns or countries.
• Competitive Advantage: Efficient management of cross-border payments gives firms a competitive edge in the international marketplace.
• Access to Global Resources: Cross-border payment systems aid the companies to avail global resources such as raw materials or specialized services that may not be available domestically.
• Promotes Cultural Exchange: International payments encourage cultural exchange and collaboration between countries, fostering a better understanding of diverse cultures and societies.

CHALLENGES OF CROSS-BORDER PAYMENTS.

• Complexity: The intricacies of managing diverse currencies, adhering to various regulations, and navigating different financial systems complicate cross-border payments.
• Costly Affair: Elevated fees, exchange rate fluctuations, and involvement of intermediary banks contribute to the high cost of international transactions for individuals and enterprises.
• Delays: These transactions often experience prolonged processing due to intermediary entities, time zone disparities, and mandatory regulatory checks.
• Excessive Regulatory Compliance: Different countries have varying regulations like anti-money laundering (AML) and know-your-customer (KYC) rules, posing a challenge to the parties engaged in the transaction.
• Fraud and Security Issues: The global nature of cross-border transactions exposes them to vulnerabilities such as fraud, cyberattacks, and security breaches, necessitating robust measures to safeguard sensitive financial information.
• Foreign Exchange Risk: The instability of exchange rates exposes participants to unanticipated foreign exchange risk, affecting the ultimate amount received or disbursed.
• Lacks Transparency: Tracking the progress of cross-border transactions can be challenging, resulting in uncertainties for both senders and recipients.
• Limited Accessibility: Certain regions may lack access to modern financial infrastructure and payment facilities, hampering their participation in cross-border transactions.
• Prone to Inefficiencies: Multiple financial intermediaries contribute to inefficiencies, raising costs and increasing the possibilities of errors.