What is cross-border payment and how does it work?
Businesses, governments, and individuals rely heavily on cross-border payments in today's interconnected global landscape. These transactions involve the movement of funds between two distinct entities across international borders. Unlike local payments, they are more costly and require additional considerations.
According to Statista, consumer-initiated cross-border payments will grow nearly twice as fast as their B2B counterparts between 2023 and 2030, although they remain small. This aims to capture the full size of international payments, focusing primarily on business. It also estimates that the B2B cross-border payments market will increase by 43%, with B2B e-commerce being one of the main drivers within this segment.
What is cross-border payments?
Cross-border payments are transactions or transfers between individuals, businesses, or financial institutions in different countries. These payments involve money movement across national borders, typically using various financial instruments, such as wire transfers, credit card transactions, international money orders, or digital payment platforms.
Cross-border payments are essential for international trade, remittances sent by migrant workers to their home countries, foreign investments, and other global economic activities. However, they can be complex, including currency conversion, differing regulatory frameworks, transaction fees, and varying processing times, depending on the methods used and the countries involved.
To improve cross-border payment systems' efficiency, speed, and cost-effectiveness and to facilitate smoother and more accessible international transactions, technologies like blockchain and digital wallets are being explored to streamline these processes and reduce barriers in cross-border transactions.
What are cross-border payment methods?
Cross-border payment methods are the diverse means used for completing international payments across the globe. Several methods facilitate cross-border payments, each with its advantages, costs, and processing times. Some cross-border payment methods include:
Bank wire transfers: This conventional approach relies on banks to transfer funds across international borders from one account to another. The recipient typically receives the funds in their preferred currency. However, transaction limits in each country may vary, affecting the amount that can be transferred at once. While it's a reliable method, it's often associated with higher costs and can take several days to complete the transaction.
International money orders and bank drafts: These are paper-based payment methods issued by banks or postal services, allowing individuals to make payments internationally. They offer security but might involve fees and longer processing times.
SWIFT and SEPA: SWIFT (Society for Worldwide Interbank Financial Telecommunication) and SEPA (Single Euro Payments Area) are payment networks facilitating secure messaging and transactions between financial institutions, mainly in Europe and globally via SWIFT.
Credit and debit cards: Widely used for cross-border transactions, cards issued by financial institutions allow for purchases and withdrawals in different currencies. However, they might incur foreign transaction fees and less favorable exchange rates.
Klasha Wire: Offered as a feature within the Klasha Business Account, Klasha Wire enables Africans to pay international suppliers and business associates seamlessly in their local African currencies. Meanwhile, they receive the equivalent payout in EUR, CNY, USD, or any desired currency, benefitting from highly competitive exchange rates.
How does cross-border payment work?
The process of cross-border payments requires coordination between financial institutions and clearing systems and often involves multiple currencies. It starts with initiation and ends when the recipient receives the funds.
Initiation: The process begins when a sender (individual or business) initiates a payment to a recipient in another country. This can be for various reasons, such as remittances, business transactions, or trade.
Financial institutions: The sender's financial institution plays a crucial role. They facilitate the transfer, converting the sender's currency into the recipient's. If both parties use the same financial institution, the process can be simpler due to internal systems.
Correspondent banking: In cases where the sender and recipient use different financial institutions, correspondent banks act as intermediaries. These banks have relationships with various international banks and help facilitate funds transfer between different countries.
Clearing and settlement: The transaction moves through clearing and settlement systems, which involve verification, validation, and finalizing funds transfer. This process ensures the transaction's legitimacy and confirms that the funds are available for transfer.
Foreign exchange: Exchange rates play a crucial role in cross-border payments. Converting one currency into another involves currency exchange, and the rates can fluctuate, impacting the final amount received by the recipient.
Regulatory compliance: Cross-border transactions are subject to regulations and compliance requirements imposed by sending and receiving countries. These regulations aim to prevent money laundering, and terrorism financing while ensuring the security of the transaction.
Time and cost: Cross-border payments can take varying amounts, ranging from a few minutes to several days, depending on the financial institutions involved, the currencies being exchanged, and the specific transfer method. Additionally, fees associated with these transactions can vary, including currency conversion fees, transfer fees, and intermediary bank charges.
Technological advancements, such as blockchain and fintech solutions, have streamlined cross-border payments, reduced costs, improved transparency, and accelerated transaction times in this complex process.
What are the benefits of cross-border payments?
Cross-border payments offer numerous advantages for individuals, businesses, and economies, such as;
International trade: They enable businesses to engage in international trade by facilitating payments for imports and exports. This promotes economic growth by expanding market reach and fostering international commerce.
Remittances: For individuals, cross-border payments are crucial for sending money to family members or friends in different countries. They support livelihoods and contribute significantly to the economies of many developing nations.
Financial inclusion: They help connect individuals and businesses worldwide to the global financial system, fostering financial inclusion by providing access to banking and financial services.
Diversification of investment: Investors can diversify their portfolios by investing in assets or businesses in different countries facilitated by cross-border payment systems. For businesses, efficient cross-border payment systems offer a competitive advantage. They can optimize supply chains, expand into new markets, and collaborate with global partners seamlessly.
Efficient cross-border payment systems contribute significantly to global economic development, fostering international collaboration, trade, and financial stability while improving accessibility to financial services for individuals worldwide.
Cross-border payment with Klasha
Klasha provides cross-border payment solutions to individuals and businesses intending to carry out international payments to and from Africa. The Klasha Business Account offers seamless payment solutions such as;
International money transfer: Klasha Wire enables merchants and businesses to seamlessly wire funds from Africa in local African currencies to suppliers and business partners overseas within T+1-3 days. Recipients receive equivalent payouts in hard currencies such as EUR, USD, and more.
Pay-ins (Collection): Klasha facilitates global merchants in accepting online payments from customers in Africa using local African currencies through collection APIs. This empowers international merchants to expand their businesses into Africa, enabling them to collect payments in local African currencies and money methods while receiving payouts in their preferred currency.
Pay-out APIs: Through payout APIs, global merchants can effortlessly remunerate business partners in Africa using local African currencies. Regardless of the currency used for payment, recipients receive the equivalent amount in local African currencies deposited into their bank account or mobile money wallet.
USD virtual cards: From business subscriptions to one-time payments, Klasha enables merchants and individuals to spend internationally without limits through the Klasha virtual dollar cards.
If you're a business owner or merchant looking for a reliable cross-border payment solution to facilitate transactions to and from Africa, create a Klasha Business Account or speak to our sales team to get started with Klasha.