Understanding Cross-Border Payments: Challenges and Best Practices
Estimated to reach $290.2 trillion by 2030, the B2B sector alone will be $56 trillion, proving the cross-border market is incredibly attractive for merchants looking to grow their revenue.
However, as simple as it might seem, orchestrating the sending and receiving of funds internationally can be an extremely complicated undertaking.
Prone to constant transformation due to dynamic customer demands or legislative changes, unfortunately, the global market is ripe for disruption.
In this article, we’ll be taking a deep dive into the world of online cross-border transactions, exploring the hurdles of selling across borders, and sharing some insights on how to boost your profits while doing it.
- What Are Cross-Border Payments?
- Types of International Payments
- How Do Cross Border Payments Work?
- Cross-border Payment Method Examples
- The Benefits of Global Benefits
- 6 Challenges of Going Global
- Cross-Border Payments: Trends & Insights
- How Can PayPro Global Help?
What are Cross-Border Payments?
Cross border payments are financial transactions that take place between parties located in separate countries. Initiated by either individuals or businesses, they involve multiple currencies, payment methods and abide by specific taxation and compliance regulations.
Types Of Cross Border Payments
Within the cross border payments landscape, there are two transaction sections:
Wholesale Cross-Border Payments
Wholesale cross-border transactions take place between financial institutions, governments, corporations and other relevant international organisations, facilitating different purposes within the international trade sphere like:
Borrowing and lending
Trading in financial instruments
These transactions generally involve considerable amounts of money, which is why they require specialized expertise and an elaborate infrastructure to professionally cater to the complexities associated with large-scale global operations.
Retail Cross-Border Payments
These are international transactions that occur between individual consumers and businesses, located in different countries. These are generally regarded as small-scale online transactions, meant to cater to everyday needs or personal spending. Retail cross border payments are of several types:
Business-to-business (B2B): these are transactions that take part between two or more businesses.
Consumer-to-Business (C2B): in this scenario, the consumer is the provider of goods or services to the business.
Business-to-Consumer (B2C): in this case, the business is the provider of the good or service to the consumer.
Consumer-to-Consumer (C2C): these are person to person payments with no intermediary businesses involved.
How Do Cross-Border Payments Work?
At first glance, online cross-border transactions seem fairly simple, as they are not that different from domestic payments. Yes, your website still requires a checkout page, where your shoppers will provide the requested payment data.
However, on the backend, is where things get a bit more complicated, so to make sure that they work adequately, a lot of attention to detail and planning is required.
The best chance your business has to succeed internationally is working with a strong cross-border payments platform ready to sustain your growth efforts. But before we get into that, let’s take a look at the step-by-step process:
Step One: Checkout Page Visit
The customer decides to make a purchase on your website, so they head out to the checkout page.
Step Two: Transaction Initiation
The sender selects the right option from the cross-border payment methods offered and provides the required data. The tax amount associated with the purchase will be determined based on the merchant's and customer's location.
Step Three: Transaction Verification
The payment gateway transfers the customer data to the merchant’s payment processor (the acquiring or merchant bank), to verify if there are sufficient available funds. During this step, a number of global payment rules, including anti-money laundering regulations and various fraud verifications, are taken into consideration.
Step Four: Transaction Authorization
Next, an authorization request is sent to the credit card’s issuing bank for verification, and the response will then be forwarded back to the payment processor. As soon as this happens, the merchant and the customer are informed through a payment message if the transaction was successful.
Step Five: Transaction Conversion
If the customer's bank account has a different currency, this is when they are converted into the merchant’s currency.
Cross-border Payment Method Examples
Global payment options take many forms, due mostly to consumer preferences. The more varied your offer is, the better it is for your business.
Why? Because shoppers trust brands that accept funds through a payment method they are familiar with.
Here are a few popular payment methods:
International money transfers
Credit and debit cards
Global ACH payments
Buy Now, Pay Later
Electronic funds transfer
The Benefits of Global Payments
We live in a globalized world, so why wouldn’t commerce be borderless? Thanks to technological improvements and innovations within the payments industry, as well as an estimated 7.5% market growth rate, international expansion is no longer a unique concept, but a widespread practice.
As long as you have a solid strategy in place and a strong payment platform to partner with, your business will enjoy the following benefits:
Easy access to new markets
No longer confined to selling your products and services within your own market, cross-border transactions allow you to accept payments from customers located anywhere in the world and quickly expand your brand into new markets.
Diversified revenue streams
Not only are you gaining customers, but you are also expanding your revenue streams, which can come in handy in case of a market downturn. Establishing a solid presence in multiple countries instead of just one can help maintain business profitability.
While it’s true that within the global market, the level of competition is higher, which leads to a lot of pressure in maintaining the upper hand. Still, this translates into better services and products. And that is always a good thing.
Enhanced payment security
One of the challenges of the global payment system is the increased level of fraud, which makes businesses operating internationally to up their security measures and always stay vigilant in terms of potential threats.
In global trade, local preferences rank first, which means the businesses struggling to succeed need to constantly track data on a multitude of areas, from payments to pricing or expansion strategies.
But these insights give them the tools to constantly upgrade their services and roll out products that are very much customer-driven, which ultimately translates into greater revenue.
6 Challenges of Going Global
While global trade is currently the land of opportunities for brands looking to expand, there are also pitfalls you might stumble upon that might cost you your business. Before deciding whether or not to go global, it would be wise to be aware of the problems you might face along the way.
Complex Compliance and Tax Regulations
As a merchant, you need to determine, collect, and file the tax when starting to sell worldwide. However, with the growth of international trade came not only profit for entrepreneurs but significant changes in tax and compliance legislation. In the US alone, there are now over 11,000 sales jurisdictions.
Errors, missed deadlines, and misinterpreted tax collection and reporting guidelines are all valid reasons for tax collectors to apply hefty fines, thereby putting your global growth at risk.
Even if it seems the obvious solution to overcoming this cross border payments market challenge is to have a dedicated in-house department to handle taxation and compliance, we’re here to tell you it’s actually not the answer.
Be warned: The operational work associated with selling products online is such a heavy burden that it could seriously affect both business performance and profitability.
Payment Methods and Currencies
Going global means staying local. An ambiguous concept, but very true, nonetheless. However, plenty of businesses fail to understand the importance of payment preferences and put into place the one-model-fits-all approach. By doing so, they have made a big mistake and then failed miserably at delivering what is expected.
Whether they find offering multiple payment options complicated, unnecessary, or believe the transaction fees are too high, the truth is that a lack of a flexible offer will significantly undermine their global growth efforts.
Slow Processing Times
Even though cross border payment systems have benefited from numerous innovations, we’re still seeing a common hurdle among brands wishing to expand internationally.
Slow payment processing is a serious issue for shoppers because they have zero tolerance for order delays. Risk of system overload, customer frustration, increased wait times, higher cross-border transaction costs, and declined payments, are all likely due to a weak processing system.
And with funds taking forever to move between financial institutions, eCommerce brands are losing good business and ultimately stalling their expansion.
Increased Fraud and Chargebacks
While an open international market is the driver of greater revenue, it is also the proper environment for risk and fraud to grow.
Areas like Venezuela, Brazil, and Indonesia have among the highest eCommerce fraud rates, making businesses decide not to enter these markets for security reasons.
Without a strong global fraud prevention strategy, you are liable for chargebacks. Once labeled as high-risk, you could expose your business to serious consequences such as significant fines, account termination, or even permanent blacklisting.
High Transaction Costs
While international payments bring about widespread benefits, they can also bring to your business additional operational costs.
Managing global transactions can be a costly endeavor due to certain factors, such as:
Currency exchange fees
Intermediary bank fees
Local payment methods ( some payment methods can have additional fees)
Increased costs to transfer funds
Little to No Customer Support
The cross-border payment process is notoriously known for causing friction and frustration among shoppers, who expect payments to be fast and easy.
Having a comprehensive customer support and assistance framework goes a long way in mitigating this type of frustration among shoppers. Unfortunately, this is something the majority of businesses overlook.
Needless to say, poor support in the customer’s language or, worse, the complete lack of it can permanently damage a company’s reputation, causing significant revenue losses.
Cross-Border Payments: Trends & Insights
Global eCommerce is a dynamic framework. Therefore, to improve cross-border payments efficiency, one must first look at the trends that are shaping this ecosystem.
The 3 Essential Cross-Border Trends
Evolving Consumer Preferences
Through their swiftly evolving preferences, shoppers are wielding the power to transform the cross-border industry.
Aware of the varied number of alternative payment methods and channels while growing less inclined to settle for traditional payment services, consumers now expect user-friendliness, swiftness, and above all else, security.
It is imperative that eCommerce businesses find faster and more transparent cross-border payment services to maintain a competitive edge within emerging markets.
Focus On Emerging Markets
Cross-border transactions are no longer a primary driver of economic growth in established markets like the United States. Changes in taxation rules and political tensions have made the focus shift towards emerging markets like Africa or Latin America.
Brands looking to expand internationally need to increase their payment method offer and bring forward options trusted by the audiences that make up these markets.
AI In Fraud Detection and Prevention
It was only a matter of time before payment systems would harness AI’s impressive data analysis and pattern recognition capabilities.
AI-based systems have proven to be specifically effective in terms of identifying and mitigating fraud through anomaly detection, machine learning models, behavioral biometrics, NLP, external data integration, and so on.
The One Tip To Enhancing Cross-Border Payments
Growing your global revenue on your own without the support of one of the many payment providers out there is not only difficult. It is impossible.
So, if your goal is to enhance cross-border payments, we have only one piece of advice for you.
Join forces with a Merchant of Record, the all-in-one growth partner that lets you tap into an existing payments infrastructure and takes the operational frustrations away. And here is why:
Ongoing Tax And Compliance Management
Taxation and compliance are two areas that are constantly evolving.. Keeping track of the changes taking place is not only recommended, but absolutely necessary. Unfortunately, this is not something you can easily do on your own, as the operational workload involved is huge, and the expertise needed is likely beyond the scope of your team.
Working with a Merchant of Record will give you the freedom to stay focused on what matters most to you because your partner will professionally handle everything related to global taxation and compliance.
Ensure Payment Security
Payment security is a priority. SSL certificates, 3DS2, and tokenization are just some of the ways you can effectively fight fraud. But there is also the need to continuously monitor the landscape and quickly identify triggers.
A Merchant of Record (MOR) has the technology, manpower, and knowledge to safeguard your business against different forms of cyber threats.
The Right Mix Of Payment Methods
In an effort to boost global revenue, many eCommerce businesses believe that having a wide range of alternative payment methods is wise. But sadly, this can significantly increase your operational costs.
In reality, what you want is a smart mix of payment methods, meaning those options that are cost-effective and popular amongst your shoppers. Without an in-depth knowledge of the world of global payment methods, it would be very difficult to create the right offer.
The right Merchant of Record can help connect your business to an infrastructure that has all the necessary ingredients to grow your business overseas.
Coupled with payment fraud, chargebacks have the potential to ruin your business and your reputation. But if handled correctly, following the required procedures, and providing customers with support and assistance, you can professionally manage this part of your business and not allow it to affect your bottom line.
Still, it is a labor-intensive part of managing your business and a rather complex undertaking. Luckily, an MOR will handle refunds, chargebacks, and payment reconciliation, so customers remain well cared for and satisfied.
We said it before, and we will say it again. To go global, you must stay local. This means speaking the same language as your audience. Through currencies, local billing, regional pricing, checkout pages, and support in the shopper’s language, you gain the trust of your audience.
But this means counting on an existing ecosystem, ready to quickly answer payment preferences. And that is exactly what a Merchant of Record offers.
PayPro Global takes away the headache of selling your products worldwide. From local payment methods to simplified subscription handling and tax management, we give you the eCommerce tools you need to scale your business smoothly into the global market.
How Can PayPro Global Help?
PayPro Global’s unique Merchant of Record model has been specifically designed to simplify the global growth of SaaS, software, video games, and digital goods businesses.
With years of experience in the payments industry and servicing thousands of clients around the globe, you can always count on a platform ready to answer your business’s needs.
Through high-performing localization tools and payment technology, having more than 70 payment methods, with over 110 currencies, and 28 supported languages, PayPro Global can help grow your brand anywhere in the world. Additionally, you can rely on our team of experts when it comes to global tax and compliance management.
As a PCI DSS Level 1 certified partner with AI-powered comprehensive fraud detection and prevention mechanisms, PayPro Global will significantly enhance payment security, lowering the number of cyber threats and protecting your reputation.
Through frictionless, branded checkout pages, subscription management, and billing, as well as exceptional customer support, PayPro Global helps deliver personalized shopping experiences while increasing your conversion rates.
Get in touch with us to investigate our strengths and how they may fit your needs in obtaining a unified eCommerce payment solution.
The shifting world of cross border payments is, without a doubt, a goldmine of great growth opportunities that newcomers and established players are eager to take hold of. Not only that, but it is also supporting economic growth at a global level. However, as simple as that might sound, cross border activities are not without challenges.
Even though the gates toward international trade are wide open, it takes a perfect blend of meticulous growth strategies, industry dynamics, and a deep understanding of local markets and payment habits to enter it.
What are Cross-Border Payments?
Cross-border transactions are financial payments taking place between parties located in separate countries. Since different financial markets are involved, the cross border markets include various payment methods, currencies, tax, and compliance regulations.
What types of Cross Border Payments are there?
There are two main types of cross border payments:
- Wholesale Cross-Border Transactions, which take place between governments, corporations, and financial institutions, involve operations like investments, borrowing, or foreign exchange.
- Retail Cross-Border Payments, on the other hand, involve individual consumers and consumers and can be B2B, C2B, B2C, and C2C transactions.
How Do Online Cross-Border Payments Work?
Online cross-border payments involve several steps:
- The customer visits the checkout page.
- The customer initiates the transactions by selecting a payment method and providing the necessary data. The tax amount for the purchase is calculated based on the customer’s and merchant’s location.
- The payment gateway verifies if funds are available, and different compliance and fraud verifications are involved.
- An authorization request is sent to the issuing bank.
- The transaction may involve foreign exchange conversion if needed.
What are Some Examples of Cross-Border Payment Methods?
Some of the most popular cross-border payment methods are:
- International wire transfers
- Bank transfers
- Credit or debit cards
- Global ACH payment
- Mobile payments
- Buy Now, Pay Later
How Can a Merchant of Record Boost Cross-Border Payments?
A Merchant of Record (MOR) can enhance cross-border payments by:
- Managing global tax and compliance
- Ensuring payment security through robust fraud detection and prevention technologies
- Providing the right mix of payment methods
- Managing dispute resolution, refunds, and chargebacks
- Offering strong localization tools, including complete customer support and assistance for global audiences.
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