Cross-border payments are monetary transactions made between two people or entities in different countries, requiring the payment to “cross borders” in order to be completed.
Key Takeaways
- Wire transfers, remittances, electronic payments, and international money orders can be types of cross-border payments.
- Cross-border payments are useful for both consumers and businesses to send money abroad.
- Cryptocurrencies have become a cheap way to conduct transactions across borders.
- Currency exchange rates may affect the transaction amount and how much is received.
- Consider fees, restrictions, and risks before choosing a payment method.
How Does Cross-Border Payment Work?
The process for cross-border payments depends on how and where the money is being sent and received. However, there are a few general steps that are required by most cross-border payments.
A typical international payment between banks could look something like this:
- The sender provides their bank with the transfer details, including the recipient’s name, account number, amount to be transferred, and currency.
- The sender’s bank initiates the transfer, accounting for fees.
- The sender’s bank contacts the recipient’s bank, and payment is initiated.
- The payment is passed through an intermediary bank to facilitate the transaction and convert the currency if needed.
- The recipient’s bank receives the money and credits the recipient’s account minus fees.
- The recipient is notified by their bank that the funds are available in their account.
Things to Consider Before Choosing a Cross-Border Payment Method
- How much will the payment cost?
- Is there a fee for currency conversion?
- How long will the payment take?
- What are the risks?
- Is the payment private?
Types of Cross-Border Payments
Cross-Border Payments Methods
Remittance services
Companies like Western Union or MoneyGram that specialize in remittances allow you to send money across borders quite easily. These companies are often referred to as money transfer operators (MTOs), and offer competitive exchange rates and a wide range of services to send money to friends and family in other locations.
Foreign exchange services
A foreign exchange service can convert currencies, allowing you to send the appropriate currency to someone in another country. Some exchange providers do offer services for international business that make it easier for companies to send money.
Online payment platforms
Fintech companies like PayPal, Wise, and Revolut provide ways to send and receive cross-border payments. One benefit of these online platforms is that many support multi-currency wallets, allowing you to manage money in various currencies all in one platform.
Credit and debit cards
Today, most credit and debit card issuers will allow you to use your card internationally. While this makes it extremely easy to spend money abroad, you’ll likely pay a hefty fee for this type of cross-border payment.
Cross-Border Payments Uses
How to Send Cross-Border Payments
To send a cross-border payment with a bank or financial institution, you’ll need the name and account number of the recipient, along with other details of your payment.
Online platforms may allow you to complete a transfer with just the recipient’s email address. Meanwhile, cryptocurrency transactions can be sent to anyone as long as you provide the recipient’s wallet address.
How to Save Money with Cross-Border Payments
The method you use to pay for and receive a cross-border payment matters a great deal in the cost of these transactions. Depending on the method you use, a cross-border payment can be costly or relatively inexpensive.
For example, international wire transfers can be costly, but if you conduct a cryptocurrency transaction, it can be relatively cheap.
Always do your research to see which cross-border payment method will be the cheapest for you.
Cross-Border Payments Pros and Cons
Pros
- Allows you to conduct business around the world
- Can be cheap depending on the payment method
- Can send money to family and friends who are in need
Cons:
- Can take several days to complete
- Can be subject to regulatory and compliance restrictions
- May include fees for transfer and currency conversion
Cross-Border Payments Challenges
- Your bank can restrict payment to countries based on regulatory compliance restrictions.
- International payments can take longer than domestic payments to settle and may require multiple banking intermediaries to complete.
- Transaction fees may make it not economical to send small amounts of money to family and friends abroad.
- Currency exchange rates fluctuate regularly and can affect the final amount received.
- Cross-border transactions can be subject to fraud, identity theft, and phishing attacks by cybercriminals.
The Bottom Line
Whether you’re a business looking to transact overseas or an individual trying to send money to family in another country, exploring cross-border payments meaning can help you with your next international transfer.
Fortunately, technology has made it easier than ever to send money anywhere in the world, cheaper and safer than ever before.
