Over the last few decades, technology has brought drastic changes in financial industries and adopted digital payment methods. However, these transformations have played a significant role in turning international transactions much quicker, cheaper, and more convenient than before.
It is anticipated that the amount of cross border transactions will grow to $39.9 Trillion by 2026, which is crucial in the global economy. Yet, with the evolving compliance ecosystem, companies desperately seek faster and more affordable methods to get compliant and diminish the burden of KYC demands.
Nonetheless, becoming cross border KYC compliant is a delicate task which needs high-end compliance from the corporation. There are yet numerous solutions and these enterprises must struggle to meet these standards to operate globally.
Some contemporary startups generally face various challenges in cross border transactions and look for solutions to reduce these threats for making the payment processes easier, secure, and faster.
If you’re also questing these challenges and want to adopt some means to resolve them, then this guide is a must-have for your reading lists.
What are Cross Border Transactions?
Cross border transactions are financial payments, where the financier and the recipient are located in different countries and cover both retail and wholesale transactions along with money orders. Cross border payments can be made in multiple methods such as credit card payments, bank transfers, and other alternative ways including mobile payments and e-money wallets.
When it comes to cross border payments, they have two types:
Retail Cross Border Transactions
These types of payments usually lie between businesses and persons, which involve person-to-person, business-to-business, and person-to-business transactions. These cross border payments mostly include remittances, which are the money transferred by immigrants to their home countries.
Wholesale Cross Border Transactions
On the other hand, wholesale cross border payments cover financial organisations, to assist their customers’ activities or its own cross border movements. However, these types of cross border transactions typically involve foreign exchange, lending and borrowing, debt, equity and debt trading, and securities. Wholesale cross border payments are made by government institutions and large enterprises to make big transactions such as import and export or trading in financial markets.
4 Major Challenges in Cross Border Transactions
Usually, people consider cross border payments pretty easy, but they are not as they seem. As compared to domestic payments, customers have to experience excessive costs, a lack of speed and translucency, and more security challenges. Not only this, there are a number of possible challenges that you may encounter in cross border transactions.
i. Low Transaction Speed
In conventional banks, customers have to wait for plenty of days in order to make cross border transactions. Thus, low speed is one of the major challenges in cross border payment processes. Clients are required to wait for at least five days to get their payment done. Moreover, several third parties are also involved in a single transaction process.
For instance, a business owner in China who wants to make a payment to a supplier in Germany may have to navigate multiple currency conversions and financial institution regulations. This can make the process time-consuming and may lead to unexpected delays.
It is also important to consider that most banks currently use the SWIFT network to execute cross border transactions. With this network, global payment initiative transactions can be made within a day, even within several hours.
Although this technology helps to get these processes quickly, there are some regions that do not have the SWIFT network. Thus, it is one of the downfalls of using this network.
ii. Security Challenges
According to a 2021 report by Global B2B Payments Playbook, almost 60% of the UK and the US businesses encounter security challenges while executing cross border transactions. The reason behind this is the lack of coordination amongst different financial organisations globally. Increased digitisation of services, and sharing data with peripheral parties. These things may lead to an increase in new opportunities for cyberattackers to commit financial fraud.
Since global rules for cybersecurity are not universally acquired, payments become more prone to cyberattacks when they are transferred to countries with inadequate access policies or weak cybersecurity regulations.
iii. High Costs
Another one of the major challenges in cross border transactions is its excessive costs. In order to make transactions from one country to another, banks need to collaborate with third-party agents, who demand high costs.
However, banks have different setups on their backend, which determine how to receive, convey, and transfer money across borders. For instance, the value of a commodity may fluctuate between the moment of purchase and the moment of delivery, resulting in a loss for the buyer or a gain for the seller.
When a user makes cross border payments, most of them are unable to track their transactions. Ultimately, they have to wait for a few days until they are notified. Well, as per a survey conducted by EuroFinancy and SWIFT, 47% of cross border clients want these processes to have better transparency. On the other hand, 64% of firms anticipate payment tracking features.
Making cross border payment processes transparent ensures customers that there are no hidden charges. Besides, it helps financial organisations to recognise errors that might affect their revenue.
For instance, analysing customer complaints and identifying common issues can help a company improve its products or services and increase customer satisfaction, ultimately leading to increased revenue and cost savings.
4 Ways to Overcome Cross Border Transactions Challenges
The fintech industry has adopted some technologies to resolve the threats and challenges encountered during the cross border payments, which help these payment procedures become more transparent, secure, and faster.
i. Enhanced Payment Speed
Cross-border payments are known to be a time-consuming process, taking anywhere from one to five business days to complete. The involvement of intermediaries can further slow down the process, making it difficult to effectively manage cash flow.
However, various advancements in fintech and the development of digital money transfer software have provided a solution, allowing for same-day user-friendly payments. This technology enables businesses to more easily manage their cash flow and maintain a variety of currencies for fast payments.
ii. Cutting Costs
Businesses must closely monitor their cash flow and the costs associated with cross-border payments, as they can be costly to incur. To address this, businesses should look to reduce their reliance on banks for international transactions and explore alternative options available in the market.
Fintech companies have begun to incorporate features such as cross-border payments into their online payment solutions, making them a viable alternative for small and medium enterprises. This can help businesses to better manage and reduce costs associated with cross-border payments.
iii. Fraud Prevention
Due to the involvement of multiple parties, international transactions are more susceptible to digital payment fraud and cyberattacks than domestic ones. Nonetheless, by implementing security measures such as ISO 27001 certification, strong passwords, two-factor authentication, monitoring and blocking systems, secure coding practices, and data encryption, fintech startups can effectively combat these risks and safeguard against fraud.
iv. Better Transparency
The presence of multiple intermediaries in international transactions can make it difficult to track information such as payments, timing, fees, and receipt. This lack of transparency can also lead to unexpected costs. Fintech companies can offer greater transparency in pricing and fees, and their international money transfer software can provide tracking and history of payments.
Additionally, many small and medium-sized enterprises can benefit from setting up an international account with a multi-currency IBAN in their company's name, as this allows them to view market data, statistics, and payment history through a single platform.
Cross border transactions face a lot of challenges for conventional banks. These challenges include extensive processing time, high costs, lack of transparency, and security. Yet, several financial institutions adopt numerous means to resolve these threats.
These solutions may include separating payment networks or improving current solutions to make the cross border payment processes faster, securer, cheaper, and more transparent. Meanwhile, the implementation of Artificial Intelligence and Machine Learning in financial transactions can provide valuable insights and greatly enhance the effectiveness of fraud detection.