How To Mitigate The Risks Of Managing Cross Border Payments

PUBLISHED ON : August 10, 2021

BY Nium Content Team

70 years ago, international money transfers were no easy undertaking.

Transfers would often take weeks, mark ups were high, and more often than not, bank transfers were simply not possible. Many people resorted to simply taking cash out in one country, travelling to the other country and converting to the local currency.

At the end of the 20th century, things looked a little different. In 1973, the SWIFT network offered a standard way for international banks to communicate, and by the end of the century Paypal allowed consumers around the world to make fast transfers through the internet.

Today, all international transfers are done electronically and businesses are looking towards more innovative payment technologies such as cryptocurrencies, APIs and Open Banking to complete payments. Having said that, the global payments network is still incredibly complex, with the Bank for International Settlements (BIS) describing cross border retail payments as expensive, slow and opaque; consider the fact that the international payments still cost 10 times more than domestic payments.

With global eCommerce reaching 3.4 billion users in 2020 and revenues predicted to reach $2.7 trillion in 2021, the demand for easier global money movement is high – and therefore more companies than ever are looking for easier and more efficient solutions to move money around the world.

What is a global payments platform?

A global payment takes place when the issuing and acquiring bank are in different countries.

In order to make a payment happen, payment processors work as mediators between these two parties by handling and analysing transactions as well as mitigating fraud and chargebacks.

When a company needs to process global payments regularly, it often needs to consult with payment experts and set up a legal entity in that country. If this is kept to just one country, then the upfront work might be worthwhile.

But what happens when a company needs to manage payments in several different countries? Whether it’s with customers, employees or suppliers, globalisation means that most companies will find themselves transferring payments in more than one country.

This is what a global payments platform does: enable easy, secure and fast international payments between several countries – all on one platform. The payments platform will usually have its own payments experts and relationship with regulators, and is equipped with everything a company needs to complete cross border transactions. The platform is also responsible for remaining informed on country-specific regulations and currency exchange rates, so the company doesn’t have to.

Platforms are, without question, a much more efficient alternative to completing international payments. For this reason, many companies decide to launch their own global payments platform, or partner up with one.

Although this is often a better alternative to setting up separate entities in each country, the complex nature of payment platforms means there are certain risks with each approach.

The risks of not having an appropriate global payments platform

Business risk

One of the main business risks of maintaining a global payments platform is managing compliance and keeping up to date with local regulations. In order to function appropriately, payment messages must be encrypted as well as PCI DSS compliant. Mitigating fraud requires real time transaction monitoring along with early warning detection.

Companies that want to set up their own payment platform will still need to establish a legal entity in each country they operate in. In order to avoid penalties or fees, they will need to set up an entire team to keep pace with local laws and regulations.

Many businesses will often partner with a payment platform. Although this is a step in the right direction, it is still very important to partner with a platform that has the right payment rails, licenses or network – otherwise this can cause a lot of issues down the road such as unexpected fines, higher fees than predicted or an increase in fraud.

Friction due to complexity

Although we are no longer having to haul bags of cash from one airport to another, moving money around the world is still a decentralised and complex endeavour.

For example, managing currency conversion fees and reconciling payments is still a manual process. The lack of transparency means payments can often require multiple wire transfers in order to reach their destination.

Another point of friction is speed. Domestic transfers are quick and instant, but international transfers usually are not. Different countries will process payments at different speeds: one may take two days, whereas another may require three. For the accountants who are balancing and reconciling funds, this becomes challenging with regard to reconciliation and cash flow.

Costs of getting a program up and running

In addition to the various risks a business takes on when setting up a payments platform, the entire venture is expensive and takes up a lot of resources.

There are additional costs such as hiring the correct payments experts, training new hires on regulations, and unforeseen regulatory expenses. It can also take up to a year to establish a legal entity in a new country, which often means sacrificing more resources in order to continue operating.

Why it’s important to partner with an embedded finance platform

Let’s be honest: most businesses do not dream of setting up their own payment platform. Most businesses want to focus on carrying out their value proposition and growing the company, not the intricacies of global money movement.

And that’s why it’s important to partner with an embedded finance platform: the complexity and associated risks are often not worth getting into. It’s usually best to trust the complex requirement of cross border payments to an expert.

The experts are usually fintech companies that specialise in payment programmes, and therefore have a lot more flexibility when it comes to managing global payments and controlling risk.

They handle the business risk by specialising in a payment platform and holding all the right payment licenses, networks and rails. They also reduce friction by combining all payments through one platform, making it easy for businesses to track and manage cash flow. Finally, their expertise and know-how means they are a lot more affordable than the alternative of setting up an in-house payment programme.

By partnering with an embedded financial services platform, businesses have more control over the payment processes and integrations, sustaining cheaper pricing and lower risk. These platforms offer an opportunity for companies to increase revenue lines while remaining competitive.

At Nium, we help companies manage global payments through our embedded finance platform. We currently enable cross border payments across 100+ countries, with 65 real-time payments corridors. By partnering with Nium, your business can tap into new markets and accept payments from all around the world – all while the focus remains on growing your business.