Cross-Border Payment Challenges and How FinTech Can Overcome Them

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A cross-border transaction allows payment transfer between two parties based in different countries. While these payments transmit challenges like delays and high costs, FinTechs aim to transform these issues with advanced digital technologies.

Cross-border payments pose various challenges. Fintech helps businesses overcome them by offering an international money transfer system to process cross-border transactions seamlessly. Here are a few cross-border payment challenges and ways how Fintech aids to overcome them.

Challenges of Cross-border Payments

In a fast-paced economy, the need for international payments has accelerated. While cross-border payments are financial inclusion, it brings its pool of challenges like-

Legal and Tax Issues

Organizations expand into foreign jurisdictions to achieve growth. However, the risk level is maximum due to disparate legal systems in each country. At the same time, civil laws vary in multiple nations resulting in numerous interpretations in mergers and other B2B agreements. Additionally, the language of the contracts also leads to enforceability issues since the parties might find it challenging to decide which interpretation should have authority in international or domestic courts. Compliance issues might arise as data protection laws vary from country to country, increasing relevant domestic or foreign counsel costs that offer transparency and legislation.

Furthermore, a cross-border payment may have tax implications in the destination country. This necessitates the buyer or seller to consider the factors that affect the deal’s profitability. Devised taxation treaties demand the prevention of double taxation specific to each country. This means the payees or recipients might not be wholly exempted under these planned conditions.

Operation Systems

SWIFT MT103 is a traditional messaging format utilized to process cross-border payments. Due to its minimal capacity, it fails to transmit large amounts of data. For extra power, a non-automated messaging infrastructure like MT199 is used for communicating with parties taking part in the transactions. These traditional processes tend to raise inefficiencies within the trade.

Simultaneously, the financial organization’s infrastructure can vary. Utilizing incompatible legacy systems that do not resonate with the latest technology is a significant disadvantage. Legacy systems delay the settlements and obstruct batch and low-data processing activities.

Exchange Rates

Businesses often need to offer funds to access foreign currency to begin the transactions. The charging fees primarily apply to merchant banks; purchasers can also use these. The value difference between currencies fluctuates and affects sellers and buyers. They will likely encounter deficits due to transaction initiation and settlement rate changes. Due to this scenario, merchants often prompt buyers to utilize a payment service that provides the best exchange rates.

Elevated Costs

Cross-border payments consist of numerous intermediaries like the payer, payment service provider, and the corresponding bank to reach the end payee successfully. These intermediaries charge fees that make cross-border payments costly. In addition to intermediary costs, there are compliance, currency exchange, and regulatory costs. This makes it challenging for banks and financial organizations to retain customers unless they offer a competitive rate to individual and business customers.

Decelerated Transactions and Transparency

A cross-border payment transfer is generally prolonged since the transfer takes one to five business days. At the same time, a reason for decelerated transactions is the involvement of multiple intermediaries affecting the transaction’s turnaround time. As a result, businesses experience a cash flow burden that can adversely affect their survival in the market. Additionally, this process remains static and slow due to the lack of automation and standardization amongst payment infrastructures and banking networks. Another scenario contributing to slow and vague transactions is the absence of a border payment system (CHIPS) in both countries involved. All these factors give rise to a slower transaction process.

Furthermore, cross-border payments tend to have transparency issues with these many intermediaries involved. Companies tend to experience a lack of transparency concerning payment arrivals, costs, and speed while dealing with multiple intermediaries. Transparency issues make payment tracking difficult, and identifying hidden fees severely affects business profits.

Security Risks

Many businesses and financial organizations expect a secured digital cross-border transaction. However, there is always a cyberattack risk in international payments. Vulnerabilities in any country involved in the transaction can be leveraged to steal money way before it enters the payee country. These vulnerabilities can arise due to differences in regulations and security standards.

A transaction will likely suffer a high-security breach if the country’s bank network has weaker security measures leading to huge losses.

How Fintech Helps Overcome These Challenges

Fintech strives to progress on advanced payment systems. These technologies offer speed, security, and transparency during cross-border payments. Here are a few ways how Fintech can help overcome cross-border challenges.

Cuts Down Costs

Businesses must control the cash flow management and the costs that arise during cross-border payments. To cut costs, financial organizations must minimize their reliance on banks that conduct international transactions. Utilizing adequate financial technologies can be a suitable alternative as they tightly incorporate all the updated features into the online payment solutions and offer efficient cross-border payments. This allows businesses to manage better and minimize costs.

Offers Quick Setup and Effective Fraud Protection

The international bank account setup takes longer, and the process might prolong for businesses with minimal resources. Cross-border payments necessitate multiple bank accounts for each country or currency. When this function silos, data sharing is limited, hindering business growth and flexibility. With the help of Fintech’s advanced money transfer applications, the setup process can be sped up. Numerous bank account creations for multiple countries or currencies can be avoided as Fintech offers a consolidated view of the complete cash flow and payment processes.

Furthermore, international transactions often fall prey to cyber-attacks due to the involvement of multiple parties. Fintech offers standardized security like the ISO 27001 Certificate, two-factor authentication, secured coding, and infrastructure security that can combat security risks and offer protection against potential fraudulent activity.

Accelerates Payment Speed and Offers Better Transparency

Cash flow management is hindered as cross-border payments take up a long period and can be even more when multiple intermediaries are involved. Practical digital money transfer applications offer a user-friendly payment method that can be completed quickly without any hindrances. FinTechs help businesses manage cash flow and maintain storage of numerous for speedy payments.

As discussed, many intermediaries affect cross-border transactions by blocking the payments, time, and fees information transparency, giving rise to hidden costs. Interestingly, Fintech provides adequate transparency on fees and pricing. Using international money transfer software, it can track payments and their history. Businesses can view the market data, history, and statistics by setting up their international account with a multi-currency International Bank Account Number (IBAN).

Also Read: Efficiencies and Pitfalls of Mobile Point of Sale (mPoS) in Financial Services

Amidst multiple challenges in cross-border payments, Fintech has made transactions more straightforward, effective, and efficient by leveraging AI and ML-integrated solutions and robust infrastructure. As per a recent report by BCC Research, “Cross-border Payments: Global Market Trends and Forecast (2022-2027)”, the cross-border payment market size is anticipated to reach $238.9 billion globally in 2027 with a CAGR of 5.3%. The immensely growing market necessitates adopting tech-friendly solutions provided by the FinTech industry; banks and PSPs can overcome the significant challenges and will help them retain customers.

Apoorva Kasam
Apoorva Kasam
Apoorva Kasam is a Global News Correspondent with TalkCMO. She has done her master's in Bioinformatics and has 18 months of experience in clinical and preclinical data management. She is a content-writing enthusiast, and this is her first stint writing articles on business technology. She specializes in marketing technology, data-driven marketing. Her ideal and digestible writing style displays the current trends, efficiencies, challenges, and relevant mitigation strategies businesses can look forward to. She is looking forward to exploring more technology insights in-depth.

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