What are Cross-Border Payments?

What Are Cross-Border Payments?

Cross-border payments are financial transactions where the person or business making the payment is in one country and the person or business receiving the payment is in another. This covers everything from a tourist buying something abroad with their credit card, to a multinational corporation paying a supplier on the other side of the world, to a customer in Germany calling a company in the UK and paying for a service over the phone.

Cross-border payments are a fundamental part of global commerce, but they come with layers of complexity that domestic payments do not. Different currencies, different banking systems, different regulations, and different time zones all add friction, cost, and risk to international transactions.

How Cross-Border Payments Work

When money needs to move from one country to another, the transaction passes through several intermediaries, each of which takes a slice of the value and adds processing time.

The Card Payment Route

When a customer in France uses their French-issued Visa card to pay a UK merchant, the transaction follows this path:

• The payment is submitted through the merchant's payment gateway to their acquiring bank in the UK
• The UK acquirer sends the transaction through the Visa network to the card issuer in France
• The French issuer checks the customer's account, applies any currency conversion, and either approves or declines the transaction
• If approved, the funds flow back through the same chain -- from the French issuer through Visa to the UK acquirer and finally into the merchant's account
• Along the way, fees are deducted at each step: interchange fees, scheme fees, acquiring fees, and potentially currency conversion margins

This process typically takes two to three business days for the funds to reach the merchant, though authorisation happens in seconds.

Bank Transfer Route

International bank transfers (also known as wire transfers) use correspondent banking networks. The sending bank does not usually have a direct relationship with the receiving bank, so the payment passes through one or more intermediary banks. Each intermediary may charge a fee and apply its own exchange rate, and the transfer can take several days to complete.

Open Banking and Alternative Methods

Newer payment methods, including open banking and payment platforms like Wise (formerly TransferWise), are disrupting traditional cross-border payments by offering faster settlement, more transparent exchange rates, and lower fees. These services use technology to optimise the transfer route and reduce the number of intermediaries involved.

Why Cross-Border Payments Are More Expensive

Several factors contribute to the higher cost and complexity of international payments compared to domestic ones:

Currency Conversion

When a payment involves two currencies, someone needs to convert the money from one to the other. This conversion always involves a margin -- the difference between the wholesale exchange rate and the rate the customer or merchant actually receives. This margin is one of the biggest costs in cross-border payments, and it is often opaque. Banks and payment processors do not always make it clear how much of the exchange rate markup is their fee versus the interbank rate.

Higher Interchange Fees

Card networks charge higher interchange fees for cross-border transactions than for domestic ones. This reflects the additional risk, complexity, and processing involved. For the merchant, this means accepting a payment from an international card costs more than accepting one from a domestic card.

Regulatory Compliance

Cross-border payments must comply with regulations in both the sending and receiving countries. This can include anti-money laundering checks, sanctions screening, tax reporting requirements, and consumer protection rules. Meeting these requirements adds cost and processing time.

Fraud Risk

International transactions carry higher fraud risk than domestic ones, and banks apply stricter fraud screening accordingly. This means more transactions are declined, more manual reviews are required, and merchants may face higher chargeback rates on international payments.

Why Cross-Border Payments Matter for Businesses

Expanding Market Reach

If you only accept payments from domestic customers, you are limiting your potential market. Cross-border payment capabilities let you sell to customers anywhere in the world, opening up revenue streams that would otherwise be inaccessible.

Serving International Customers

Many businesses have customers in multiple countries without actively seeking them out. A hotel takes bookings from international travellers. A software company has users worldwide. A professional services firm advises clients across borders. Being able to process payments smoothly from these customers is essential to serving them well.

Managing Costs

Understanding the cost structure of cross-border payments helps businesses make informed decisions about pricing, processor selection, and which payment methods to offer international customers. Small differences in exchange rate margins or processing fees can have a significant impact at scale.

Cross-Border Payments and Telephone Payments

Telephone payments are particularly common in cross-border scenarios, for several reasons.

Language and Trust

International customers sometimes prefer to speak to a person rather than navigating a foreign-language website. A phone call provides reassurance, allows questions to be answered in real time, and builds trust in a way that a website alone may not. For high-value purchases or complex services, this personal interaction can be the difference between winning and losing the sale.

Card-Not-Present Challenges

Cross-border phone payments are card-not-present transactions, which already carry higher decline rates. When you add the cross-border element -- a foreign-issued card, a different currency, and potentially unfamiliar merchant details -- the decline rate increases further. Smart routing and processor selection become important tools for improving approval rates on international phone payments.

Currency Considerations

When taking a phone payment from an international customer, the business needs to decide whether to charge in their own currency or offer dynamic currency conversion so the customer can pay in theirs. This decision affects the customer experience, the cost of the transaction, and the exchange rate the customer receives.

Security and Compliance

Cross-border phone payments must meet the same PCI DSS requirements as domestic ones. Secure telephone payment solutions ensure that card data is protected regardless of where the customer is calling from. The agent never sees or hears the card details, and the data is processed through PCI-compliant channels.

Practical Considerations

Processor Selection

Choose payment processors that have strong international coverage and competitive rates for the countries your customers are in. Some processors specialise in specific regions and offer better approval rates and exchange rates for those markets.

Multi-Currency Pricing

Consider displaying prices in your customers' local currencies and accepting payments in those currencies. This reduces the surprise of currency conversion and can improve conversion rates. You will need a treasury strategy for managing the resulting multi-currency revenue.

Exchange Rate Transparency

Be transparent with customers about exchange rates and any fees associated with cross-border payments. Unexpected charges are a common source of complaints and chargebacks on international transactions.

Local Payment Methods

In some markets, cards are not the dominant payment method. Offering local payment methods -- such as iDEAL in the Netherlands, Bancontact in Belgium, or PIX in Brazil -- can significantly improve payment success rates for customers in those countries.