A cross-border payment refers to any transaction in which the payer and the payee are located in different countries; these transactions can take place between individuals, companies and banking institutions. The value of cross-border payments is expected to reach over $250 trillion by 2027, making it one of the fastest growing segments within the global payments ecosystem.
Why use cross-border payments?
Globalization, digitalization and the rise of eCommerce have changed the way consumers around the world shop, creating a truly global marketplace. In this environment, merchants have the opportunity to enter new markets and access new customer bases — but in order to take advantage of that opportunity, they must first understand the nuances and expectations of consumers in different regions.
For example, merchants who wish to grow their customer base in Europe would do well to offer SOFORT, an online payment system that acts as an intermediary between buyers and merchants. Owned and operated by Klarna, SOFORT is widely used throughout Germany, Austria, Belgium, the Netherlands, Poland, Italy, Spain and Switzerland. Merchants hoping to do business in Latin American will similarly want to support PayPal, which is one of the most popular payment methods in the region, as well as voucher-based payments such as Boleto in Brazil, OXXO in Mexico and Via Baloto in Colombia.
The entire purpose of cross-border payments is to help merchants adapt their global commerce strategy to local markets; by offering consumers in different regions payment options familiar to them, merchants can both enhance the customer experience and capitalize on new revenue streams.
What Are Some Examples of Cross-Border Payments?
Cross-border payments take many forms, including (but not limited to):
Bank transfers
International wire transfers
Electronic funds transfers
Credit card payments
Debit card payments
Prepaid debit card payments
Global ACH payments
Digital currencies
Digital wallets
Mobile wallets
Buy now, pay later
Blockchain-based payments
Voucher-based payments
Cash-based payments
Paper checks
Cross-border transactions can take place between businesses (B2B), between financial institutions (wholesale), between businesses and consumers (B2C or C2B) and between consumers (P2P).
The popularity of these payment types varies by region.
For example, mobile wallets are the fastest growing payment methods in Southeast Asia, where the total number of mobile wallets is expected to increase 311 percent from 2020 to almost 440 million by 2025. According to a J.P. Morgan report, in North America, credit cards are the preferred payment method and account for 47 percent of all eCommerce transactions. Though cash-based transactions — such as cash-on-delivery payments — remain the most popular payment method in Africa, mobile money transfer service M-Pesa has seen significant uptake, with a reported 48 million customers. Originally launched in Kenya, M-Pesa now operates in Tanzania, South Africa, Afghanistan, Lesotho, the Democratic Republic of Congo, Ghana, Mozambique, Egypt and Ethiopia.
Certain companies and platforms also have a stronger presence in some regions than others. For evidence of this, look no further than buy now, pay later (BNPL): While Klarna is the dominant BNPL service provider throughout Europe and the U.K., Afterpay drives the BNPL market in Australia and New Zealand and Affirm is an important player in North America. When developing a cross-border payments strategy to support global commerce, it’s imperative that merchants take these regional preferences into considerations.
How Do Cross-Border Payments Work?
The general concept behind cross-border payments is fairly simple: You set up a website with a checkout page and, on that checkout page, offer various payment options to customers. A customer making a purchase can select their preferred payment method and finish the transaction, often after completing some sort of identity authentication.
On the back end, the situation is far more complex:
Currency changes
International payment processing typically involves a change in currency, which means merchants have to navigate exchange rates, taxes, foreign transaction fees and bank accounts in each currency. If the consumer makes a payment using a credit or debit card, there are also interchange fees to contend with.
Payment methods
Merchants must also be pragmatic about which cross-border payment methods they configure and make available to customers. Naturally, they’ll want to select payment methods that appeal to their target market — for example, credit and debit cards for customers based in North America and Latin America, digital wallets for those in the Europe and Asia-Pacific regions and so on. Regardless which payment method(s) a merchant chooses to configure, they must be visible in the technical connection in the payments processing gateway.
Fraud protection
From there, merchants must decide whether to implement localized or global fraud prevention and authentication strategies and whether to create a single or multi-acquirer setup. Additionally, if a merchant wanted to use a local acquirer in a shopper’s country of origin, they would need to register as a local entity in that country.
In order to achieve all of this, merchants require a cross-border payments platform capable of recognizing the consumer’s origin source, applying the appropriate configuration to payment connectors, utilizing the appropriate authentication method and generating business analytics for payments optimization. This last item is especially important, as performance metrics are essential to merchants adapting their cross-border payments strategy for the future.
Cross-border payments in action
What is behind the push for cross-border payments?
We can attribute the unprecedented demand for cross-border payments to a variety of factors, including:
Technological innovation in the payments space, including blockchain, distributed ledger technology, mobile payments and digital and mobile wallets
Changes within the global regulatory landscape and the rise of open banking initiatives
Increased international trade due to globalization, global supply chains and the emergence of cross-border marketplaces
Demand from consumers for fast, convenient and transparent cross-border payments with competitive foreign exchange rates
Opportunities for merchants to expand into new markets and increase revenue by establishing customer bases in different regions
Cross-border payment options allow for a more personalized customer experience by enabling merchants to present consumers with their choice of popular regional payment methods.
Most cross-border payment platforms are mobile-enabled, so merchants can pay invoices for suppliers from any device and any location; intelligent scheduling also makes it so that merchants can schedule invoice payments. These capabilities enable merchants to expand their supplier and affiliate bases — in addition to their customer base — on a global scale.
Cross-border payment systems process domestic and international money transfers using a single platform, enhancing accounts payable efficiency and transparency.
Cross-border payment platforms enable merchants to connect to multiple acquirers, including local acquirers, which results in higher bank approval rates, lower interchange costs and greater risk diversification. In fact, merchants using multiple acquirers are found to have acceptance rates up to 16 percent higher than those using a single acquirer setup.
Cross-border payments increase merchants’ ability to customize authentication and fraud rules using configurable workflows and risk management options.
The impending global adoption of ISO 20022 will create international cross-border message standards and enhance cross-border payments efficiency.
Prepare for ISO 20022
With expert insight from payment experts across the globe, we’ve debunked some of the most common misconceptions to bring clarity to a complex topic.
Are there any challenges associated with cross-border payments?
Despite the benefits they offer, cross-border payments do come with a few drawbacks:
Cost complexity
Somemerchants find cross-border payments intimidating due to their perceived complexity and the fact that costs associated with them — foreign transaction fees, interchange fees, taxes and so on — can be high.
It can also be difficult to predict settlement times on cross-border payments and challenging to reconcile multiple currencies for revenue accounting. End consumers may find exchange rates confusing, which can deter them from completing a purchase, and merchants must ensure that they select the right payment methods for each market.
Merchants can mitigate some of this complexity by:
Consolidating payment providers
Leveraging multi-currency accounts
Optimizing currency conversion rates
Negotiating bulk discounts with payment processors
Automating payment flows
Keeping up to date with changes to fee structures
Regulatory requirements
There are a wide variety of laws and regulations pertaining to the transfer of financial data, including:
Regional regulations, such as APEC’s Cross-Border Privacy Rules (CBPR), a framework that facilitates international data transfers and privacy protection among participating economies, and Europe’s Payment Services Directive 2 (PSD2), which aims to enhance the security, innovation and competition in the payments industry while promoting consumer rights
National regulations, such as Germany’s Bundesdatenschutzgesetz (BDSG), which governs the handling and protection of personal data within the country, and the Commission nationale de l’informatique et des libertés (CNIL), France’s interpretation of the General Data Protection Regulation
Transaction-specific regulations, such as the Payment Card Industry Data Security Standard (PCI DSS), a set of policies and procedures designed to promote credit card payments security
Depending on which cross-border payment options they offer, and which markets they operate in, merchants need to be cognizant of various regulations in order to ensure that their international payment processing systems are compliant.
Fortunately, these compliance concerns — as well as concerns related to cost and complexity — can be resolved by choosing the right cross-border payments platform.
Lack of transparency
A common complaint with cross-border payments is a lack of transparency — that once a payment is initiated, those sending and receiving funds have no way to track it in real time. This visibility issue not only pertains to the status of payments in transit, but also to the foreign exchange fees tied to said payments, which — depending on the type of transaction — could come out of consumers’ pockets. There are a few ways merchants can increase transparency around cross-border payments, including:
Partnering with a financial institution or payments service provider that has a strong reputation for delivering transparent, efficient cross-border payment services
Investing in a payments platform that supports real-time payments tracking
Leveraging blockchain technology, which creates a tamper-proof ledger of cross-border transactions and reduces the cost of these transactions by avoiding traditional payment rails (which are often more expensive)
Security threats
Cross-border payments have become a popular target for fraud, as poor visibility into the status of funds in transit, decentralized payment networks and a lack of a centralized regulatory body to govern cross-border transactions all present vulnerabilities for fraudsters to exploit. And fraud isn’t the only type of threat that cross-border transactions face — they’ve also become a common vehicle for money laundering.
Although it will take international action to counter more widespread threats of fraud and money laundering activity in cross-border payments as a whole, businesses can take measures to secure their own transactions and those of their customers, including implementing strong fraud protection systems and complying with anti-money laundering (AML) and Know Your Customer (KYC) requirements.
How Does ACI Worldwide Support Cross-Border Payments?
ACI Worldwide offers global connectivity via a single API to payments orchestration based on customer journeys; this enables us to automatically convert transactions so that they align with local payment options, customs, acquirers, fraud strategy and authentication. We’re constantly adapting to changes in the market and supporting emerging payment types, such as BNPL and digital currencies, to help merchants take advantage of new technology, close payment gaps and seize new revenue growth opportunities. All of our solutions are tightly integrated, which means ACI customers are able to easily switch on new solutions as needed, enabling them to break into new global markets at speed.
Contact us today to learn more about ACI Worldwide’s cross-border payment processing solutions.
Paladin Payment Systems Vendor Report
Explore the benefits of a single, unified RESTful API, tokenization, cloud security measures and more offered by the ACI payments Orchestration Platform solution.
