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Businesses of all sizes have become more engaged in global commerce, and it’s showing in the rising demand for cross-border payment solutions. The B2B cross-border payments market was around $44.1 trillion in 2023, its growth is very close to reaching $65 trillion in 2030. Such an increase within a short period showcases this sector's rapid boom.
In this article, we dig deep to tell you everything you need to know about B2B cross-border payments - what B2B cross-border payments are, the challenges involved in B2B cross-border payments, and more.
B2B cross-border payments are money transfers between two businesses from two different countries. These are an essential part of international trade since they help settle invoices, pay suppliers, or receive payments from international clients.
Unlike a domestic payment, a cross-border payment comes with a little complexity because it involves dealing with more than one currency and meeting the stipulated regulatory requirements on both sides. Change in exchange rates also forms part of the complexity. At times, intermediary establishments, like banks or payment gateways, are involved in performing cross-border payments, especially for B2B companies.
Main elements of B2B cross-border payment:
Currency conversion: Since businesses operate in different currencies, currency conversion is often necessary.
Payment Network: The SWIFT, SEPA, or real-time systems are used to transfer money from one country to another.
Intermediaries: Banks and other financial institutions act as safe and compliant intermediaries to transfer money between countries.
B2B cross-border payments take many forms, such as wire transfers, credit card payments, and modern digital payment solutions like Payoneer, Wise, and Karbon Forex. The cost, speed, and convenience of each vary, so businesses need to make the right choice according to their specific needs.
The cross-border payment ecosystem consists of a series of stakeholders involved in enabling an international transaction. Each of them plays a distinct role to make sure that the fund flows without issues and security among businesses from various countries. Let's have a look at key players below:
1. Sending and Receiving Businesses
At the heart of the ecosystem are businesses that execute cross-border transactions. These customers send or receive payments for goods, services, or other business purposes. Their choice of payment method, currency, and partners significantly impact a transaction's cost, speed, and complexity.
2. Banks
The most conventional cross-border payment intermediaries have been banks. They provide the services of wire transfer, currency exchange, and letters of credit, among others. Banks process these transactions based on established networks such as SWIFT. Although safe and secure, banks often charge more for their services and take a relatively longer time to process transactions.
3. PSPs - Payment Service Providers
Other types of payment service providers include cross-border payment facilitators like Payoneer, Wise, and Karbon Forex. These firms offer competitive fees, faster processing, and the possibility of a multi-currency account. They have been popular choices for businesses seeking to avoid traditional banking channels.
4. Foreign Exchange (Forex) Providers
Forex providers offer currency conversion to businesses, as they are able to pay or receive funds in foreign currency. Dedicated fx platforms usually achieve lower rates than banking institutions.
5. Central banks and regulators
Central banks enforce monetary policies together with regulatory schemes that govern cross-border transfers. They therefore ensure that each transaction adheres to AML and KYC regulations, in turn ensuring the safety and integrity of the system. Cross border payments in India are regulated by FEMA and RBI.
6. Payment Networks
Payment Networks such as SWIFT, SEPA, and RTGS, constitute the backbone on which global transactions are conducted ensuring safe communication channels between financial service providers. For example, SWIFT messaging protocols guarantee international wire transfers are processed accurately and safely.
7. Correspondent Banks
When two banks do not have a direct relationship, correspondent banks act as an intermediary to complete the transaction. While necessary for traditional banking systems, they can add layers of cost and complexity to the process.
8. Technology and API Providers
APIs and payment platforms are used by the businesses to embed cross-border payment solutions in business processes. Companies like Stripe or Razorpay provide tools that can be seamlessly integrated to enable smooth payment transactions.
All these players contribute to the smooth running of the cross-border payment ecosystem. Their roles make it possible for businesses to make informed decisions and optimize their payment strategies, which ensures that international regulations are followed. Collaboration among these players will continue to drive innovation and efficiency in global payments as the ecosystem evolves.
At its core, a cross-border payment is simply the movement of money from one business to another across international borders. In fact, when businesses pay international partners, there is a rather sophisticated banking system behind it all.
The least complicated setup is when the two companies are using the same bank accounts. Given this, its process is uncomplicated - the bank simply transfers money from one account to another, even if this means converting currency. Because all such activities take place within the same institution, these transfers are usually faster and cheaper.
However, most cross-border business-to-business payments involve different banks of different countries and are, therefore, more complicated. This is where correspondent banking comes in. Correspondent banks act as conduits, and they help push money across the borders when business parties do not share the same bank. Banks maintain special relations and accounts with each other that enable them to facilitate international transfers.
These special accounts are called Nostro and Vostro accounts. A nostro account is the account a bank holds in a foreign currency, while a vostro account is held by a foreign bank in the local currency. Through this network of accounts, banks can move money internationally even without direct relationships between every bank in the world.
How do B2B cross-border payments work for businesses in India?
In India, businesses follow similar procedures but rely more specifically on SWIFT payments for international transfers. The SWIFT system requires the recipient's bank account details and postal address to process the payment. However, the requirements might be simpler for certain transactions, such as international e-commerce purchases, where full banking details aren't always necessary.
Domestic and cross-border payments differ in scope and complexity and are used for distinct purposes in the financial world. Domestic payments happen within one country, under the same currency, and with a similar banking system, hence are more rapid and economical. For example, a company in Mumbai making a payment to a supplier in Delhi may take a few hours to process using local systems such as UPI or NEFT. On the other hand, cross-border payments involve transactions between entities in different countries, which often require currency conversion. Such transactions rely on global networks like SWIFT, which add time and costs due to intermediary banks, forex fees, and regulatory checks.
Cross-border payments are more complicated in nature as it involves foreign currency exchange and also adherence to international standards, such as AML and KYC. The domestic payments, on the other hand, enjoy clear procedures and minimal costs, while cross-border payment encounters different rates of exchange, high costs, and security threats. Businesses should overcome these complexities for effective and secure cross-border payments through specialized platforms or services with low costs and less delay along with compliance.
Businesses need to understand the fees that are involved in cross-border payments to effectively manage their international transactions.
Transaction Fees:
The fees that are incurred for the processing of the payment are called transaction fees and they are charged by banks or payment providers. The fee can either be a flat fee or a percentage-based charge depending on the provider and the amount of the transaction.
Correspondent Fees (Intermediary Fees):
These are the fees incurred when there are intermediate banks or other intermediary financial institutions required to facilitate the money transfer.
Currency Conversion Fees:
The conversion fees on currency conversion include the margin on the exchange rate, which is the difference between the wholesale exchange rate and the rate given by banks to their customers.
Pay-in and Pay-out Fees:
Pay-in fees are charged when the sender initiates the payment, while pay-out fees are charged when the recipient receives the funds. These fees can vary depending on the payment method and the financial institution handling the transfer.
Regulatory and Compliance Fees:
Fees related to regulatory and compliance are also required to ensure that AML and KYC requirements are met. These vary with the countries involved and the regulatory demands imposed on international transactions.
Unseen Costs:
Some of the costs are not overt, like unfavorable exchange rates or additional intermediary bank charges. Such hidden costs may pile up and greatly influence the total cost of the transaction. Thus, businesses must consider all payment methods carefully.
Cross-Border Payment Method Fees:
Different methods of paying for a transfer, such as wire transfers, or online platforms like PayPal, charge different fees.
Every country has its set of laws and regulations that regulate the financial transactions within its borders, particularly with regard to international payments.
Compliance would start with learning about the nature of the rules governing such transactions specific to the participating countries. Generally, this comprises knowing the rules surrounding AML and CTF practices as well as KYC guidelines. Most countries demand that a business collect all information, such as company registration, identification documents, and the nature of the transaction before it is executed.
Another important thing is the accurate records of all transactions for compliance reasons. A company should keep track of all the details of cross-border payments such as the transaction amount, date, recipient's information, and any purpose that the transfer is made for. The authorities may demand this information during the process of audit or investigation. Keeping these records safe through secure systems is necessary because the records can be produced as evidence of compliance during review by regulatory authorities.
Understanding the relevant regulations, choosing compliant payment providers, maintaining thorough records, and staying updated on changes in financial laws can minimize risks and allow businesses to conduct international transactions with confidence. Being compliant not only helps avoid legal issues but also builds trust with international partners, contributing to smoother and more efficient global business operations.
As global commerce continues to expand, businesses need faster, more secure, and cost-effective methods to conduct international transactions. The future of B2B cross-border payments will likely involve greater automation, integration of blockchain technology, enhanced transparency, and an increasing shift towards digital currencies.
Blockchain Technology Integration:
Blockchain technology could transform B2B cross-border payments by eliminating several intermediaries and increasing speed. With distributed ledger technology, transactions can be performed directly between peer-to-peer users without involving various banks or a payment processor, which can potentially reduce transaction cost, delay, and increase security with an efficient, cost-effective system for cross-border payments.
Artificial Intelligence and Automation:
AI and machine learning are now being used to automate payments, making the process more efficient as well as secure. AI can help in the real-time detection of fraud while providing a risk assessment of transactions and verification against regulatory requirements. This automation reduces human error, accelerates payment processing, and saves operational expenses for businesses, making cross-border payments less likely to be delayed or lost in transit.
Fintech platforms and digital payment solutions:
A rapidly growing fintech company is now changing the way cross-border payments are made. Fintech companies offer more efficient and lower-cost alternatives than the traditional banks in making cross-border payments. Better accessibility, higher customer experience, and competitive prices make fintech solutions enable businesses to make seamless cross-border payments with greater flexibility.
CBDCs:
In addition, governments are finding the means of implementing Central Bank Digital Currencies (CBDCs) to secure and drive efficient cross-border payments. Businesses will be able to make international transactions without utilizing traditional financial systems, thereby reducing costs and eliminating risks faced through currency exchange. CBDCs might also bring about streamlined compliance with regulatory standards, providing a safe and stable means of conducting global transactions.
Regulatory Harmonization
With cross-border transactions becoming increasingly common and complicated, regulatory authorities are trying to standardize financial regulations among countries. The compliance costs and complexities associated with business activities will decrease significantly as it would become easier to cross multiple legal systems when executing cross-border transactions. The coordination of regulators will also lead to smooth and transparent cross-border payments.
India greatly influences the shifting dynamics of international payment. In past years, India has emerged has the largest recipient for international remittances. The Indian diaspora is dispersed around the world, and significant sums of money are remitted home each year to support the Indian economy.
Fintech solutions like Paytm, PhonePe, and other payment aggregators have made cross-border transactions much more efficient for individuals and small businesses looking to send or receive payments globally.
Besides remittances, India's export sector also plays a vital role in cross-border payments. The country is among the top producers of goods and services in international trade, leading sectors including IT, pharmaceutical, textiles, and machinery.
India is also leading the way in the development of Central Bank Digital Currencies (CBDCs) and blockchain technology for cross-border payments. The RBI has released the digital rupee to facilitate smoother and more secure international transactions.
As India strengthens its position as both a recipient and sender of cross-border payments, its influence in global financial networks will only expand.
Choosing the right B2B cross-border payment partner is a crucial step for businesses looking to expand internationally. Understanding the ins and outs of how B2B cross-border payments work can significantly influence your decision. When assessing a partner, there are several key factors to consider: fees, transfer times, regulatory approvals, and customer support.
Karbon Forex was specifically designed with Indian businesses in mind, aiming to streamline the process of making B2B cross-border payments. We offer the lowest charges, faster transaction processing, and compliance with global regulations. Karbon Forex simplifies international payments for businesses. To learn more, get in touch with us today!