Global trade has become a norm as opposed to an exception due in part to trade agreements between various countries. Although it has become easier than before to transact in a different country, sending and receiving payments remains a headache-inducing experience for many businesses. In fact, merchants are so concerned about the ability to transact payments as quickly across borders as they do locally with minimal impact to the bottom-line that it has stopped 39% of them from expanding into new and international markets.
Different countries have different requirements for banking formats and compliance requirements. Navigating through the various governing bodies can be quite challenging, requiring finance professionals to acquire an in-depth knowledge of global banking standards. There are galaxies of differences between sending a payment domestically versus internationally. These differences exist in setting up the facility to make international payments, in sending the payment, as well as in providing information to satisfy government requirements.
Understanding international requirements
When companies sign up for an international account with a bank or fintech, they will be asked questions regarding the currencies, volumes, and purpose of payment. This information forms the basis of the account monitoring, and depending on the currency, amount, and the country the payment is going to, additional questions may be asked before the payment is transmitted. Proactivity with the set-up of the account, on the part of the company, can oftentimes save days and weeks in the payment process. For instance, when a company’s business changes and they start transacting in a different country, it is imperative to inform the payment provider to avoid delays when sending payments.
From the perspective of the sending and receiving financial institution, they are faced with the challenge of managing the risk of suspicious transaction activity and accurately capturing information as set by government bodies and regulators. All government bodies have to be satisfied that the transaction is legitimate, and this may take time at the outset of the transaction. For sending and receiving financial institutions, the slower pace of B2B cross-border payments has not been an issue the way it has been in recent years. Due to the projected growth of B2B cross-border payments and changing customer expectations for agile, nimble payments, the quality of the customer service experience that financial institutions can provide for their customers will likely be impacted.
Getting the right beneficiary details
Navigating through the compliance requirements can be a time-consuming task but it can look easy in comparison to ensuring the correct banking instructions have been received. Just like sending a letter in the mail to a foreign country, it is imperative for companies to understand the beneficiary that they are addressing the payment to. Each country has different conventions and formats that must be adhered to in order for the payment to reach its destination on time. For example, an IBAN number is required for many European countries, and it is an alphanumeric account number that contains bank codes and account numbers. Alternatively, an IFSC code is required when sending money to India. To make matters more complicated, the information and formats required are not only different by country, but also by currency. A US Dollar payment may require additional details and a different format than a local currency. To add another layer of complexity, the payment type will also affect the beneficiary details. There can be a significant difference between sending a payment as a wire or as an ACH.
The majority of ‘problem’ payments are the result of invalid beneficiary details, such as an invalid account number and/or account name. With a domestic payment, companies know and understand what they are looking for in terms of banking details and can easily identify if and when there is an issue. This is not the case with international payments. By not providing the correct information, payments can be delayed, returned and cancelled. Returned wires generally take a disproportionate amount of time to resolve, as they require manual correction and correspondence back and forth between the various banks sending and receiving the payment. For businesses, the impact of delayed payments can be substantial to the bottom-line as it can lead to payroll not being paid, goods not being shipped and tuition not being paid as scheduled.
An investigation is launched when a payment does not reach its destination as anticipated. Not only are these investigations costly but also the time frame for resolution can vary from days to months. The length of time can vary due to contributing factors such as the length of time it takes to receive a response to an investigation request, the country of destination, the currency (e.g. Rate of Execution Currency (ROE), the beneficiary bank not being on the main SWIFT network, as well as the relationships between originating and destination banks.
Cutting to the core of the payments process
Fintech companies have realized that this knowledge gap is inefficient and unsustainable for long-term growth for businesses and financial institutions alike. There are exciting, innovative developments happening in this space with fintech companies creating tools that can help the customer simplify the complicated payment process. There are systems that have the ability to identify what information is required for an international account at the outset before a payment is sent so companies can simply collect the correct information. The benefits to an automated system is that it can identify all requirements before a payment begins to be transmitted, lowering the likelihood of returned payments and incurred costs for both the bank provider and the customer. Keep in mind that although technology companies can oftentimes convert a payments experience into a user-friendly platform that customers can directly access, they are still reliant on a bank to transmit a payment.
Larger banks have not led the charge when it comes to innovating the process of sending international payments on behalf of customers. Unfortunately, they have not been able to transfer their knowledge into a form their customers can easily interpret: while the information may be available, it requires the customer to do research as opposed to it being right at their fingertips when entering in payment details. Larger banks have competing priorities and international payments often constitute a small part of the solution that they offer to customers. The focus on innovating this product category has not been as clear or evident as in other areas. As a result, many large companies are migrating this portion of their business to fintech companies that can provide a solution to help make international payments more efficient.
As B2B cross-border payments continue to grow, financial institutions and companies stand to benefit from utilizing technology tools to cut down on costly expenses due to payment delays and improve the customer experience for both parties.
About Jason Mugford
Jason Mugford is the President and Chief Executive Officer at AscendantFX, a technology-based payments solutions provider. Learn more about AscendantFX here: http://www.ascendantfx.com.