When Time is Money: Understanding the Implications of Delays in Cross Border Payments

Time is money, especially when it comes to cross border payments. Delays in these transactions can have significant implications for businesses and individuals alike. In this Linkedin post, we will explore the impact of such delays and provide insights into how you can navigate the complex world of international payments more efficiently.

Introduction to Cross Border Payments

Cross border payments refer to any financial transaction that involves the transfer of money between two different countries. With globalization and the growth of international trade, cross border payments have become an essential part of conducting business on a global scale. These payments can either be done by individuals or businesses for various purposes such as purchasing goods and services, transferring funds to family members in different countries, or investing in foreign markets.

With the advancement of technology, there has been a significant improvement in the speed and efficiency of cross-border payments. However, several factors still contribute to delays in these transactions and these can create huge impact for both senders and recipients.

• Failure to comply with regulations - With multiple countries have multiple regulations for businesses and individuals, this is a very complex space
• Use of multiple intermediary banks - When making a payment from one country to another, the funds often pass through several intermediary banks before reaching their final destination. Differences in processing times and costs create a big problem to the participants
• Currency conversion - Whenever funds are sent from one country to another with a different currency denomination, it must go through an exchange process which includes additional fees and processing time. The lack of real-time currency exchange rates can further lead to fluctuations resulting in delayed delivery times.
• Payout channels: Another issue is recipient not able to receive money the way they want. Most transfers only support bank accounts and do not support cards, wallets, cash pick up etc creating a major issue for people without a bank account or are under-banked
• Government restrictions: Targeted sanctions and embargoes imposed by governments on specific countries or entities are yet another factor contributing to transaction delays. Compliance departments within financial institutions must check each transaction against these lists before proceeding with any transfers; this process could take several days until all necessary approvals are obtained.
• High transfer fees and hidden charges: These are common occurrences in cross-border payments that can significantly impact the overall cost and efficiency of international transactions. While it is understandable that financial institutions impose fees for facilitating money transfers across different countries, these added costs and undisclosed charges can become a burden for businesses and individuals alike.

Why are these issues a huge problem for businesses?

Cash flow blockage: One of the main reasons why timely payments are important in cross-border transactions is because it ensures smooth and efficient cash flow. In an increasingly globalized world, businesses often have clients or suppliers from different countries. With timely payments being made, both parties can receive and use their funds without any hindrances. This allows them to focus on their core activities rather than worrying about their financial transactions.

Supply chain delays: Moreover, delays in cross-border payments can have a domino effect on the entire supply chain. For instance, if a supplier does not receive timely payment for raw materials or products sold, it could impact the production process and ultimately delay delivery to the end customer. This can result in dissatisfied customers and potentially damage business relationships.

Lack of trust: Another critical aspect of timely payments is that they foster trust between trading partners. Businesses often enter into long-term partnerships with suppliers or buyers for mutual benefits. However, this relationship relies heavily on mutual trust built over time through consistent payments made on schedule. If there are delays in payment, it can strain this trust and put future collaborations at risk.

Economic loss: Timely payments also have a significant impact on the overall economy of a country. According to research by Deloitte Financial Advisory Services LLP (Deloitte), delayed cross-border payments can result in tens of billions of dollars lost globally each year due to added expenses such as interest charges and late fees incurred by businesses and individuals alike.

Solutions and Best Practices:

To mitigate the challenges of cross-border payments, businesses and individuals can consider the following strategies:

• Use of Digital Payment Platforms: Platforms like PayPal or TransferWise can offer faster and more transparent cross-border transactions with lower fees. However, some such platforms have weekend markups, surprise charges, account freezes, amount limits etc that can be a big problem especially for business payers.
• Negotiate Terms with Suppliers: Agree on payment terms that account for potential delays, such as extended delivery timelines or flexible payment schedules.
• Stay Informed: Keep abreast of currency exchange rates and regulatory changes that may affect your transactions.
• Consider Hedging: To protect against currency fluctuations, consider using financial instruments like forward contracts.

The emergence of new technologies such as blockchain has shown promise in reducing delays associated with traditional cross-border payment systems. Utilizing digital currencies like cryptocurrency eliminates intermediaries from the process while ensuring faster transaction speeds at lower costs. There are companies like Payall Payment Systems, Inc. providing efficient cross border banking as a service replacing the traditional correspondent banking service providing instant / near real time payments and financial transparency for banks. So, choosing banks with such effective solutions rather than correspondent banking can help manage such issues. As customers and businesses, this would need us to ask the right questions to bank when it comes to the terms, payment duration, FX rates and compliance.

Cross-border payments are a vital component of global commerce, but they come with their own set of challenges. By understanding these challenges and implementing effective strategies, businesses and individuals can navigate the complexities of international transactions more smoothly.