Why are cross-border payments more difficult than you think?

June, 2021


Many of us would like to live in a world without borders, where the free movement of goods, people and funds is a core principle. And while we might get too enamored with this utopia at times, reality is different, and businesses thinking of going global need to face the fact that red tape is more common than red carpet. In this short article, I’ll try to explain why cross-border payments are a tad more complicated than they might seem, and what pitfalls SMEs should be ready to face.

Bursting the “payments bubble”

People take good things for granted. This maxim can easily be applied to businesses operating in the borders of a single payments system, be it a country like Canada or a supra-national borderless entity like the EU. It’s easy to pay for services or products, and transactions get cleared nearly instantly, without the business owner or head accountant having to worry about the funds never reaching the recipient. And, depending on your banking plan and volume, you might even find yourself paying close to nothing to the bank or alternative financial services provider for handling your transactions. As I said, it’s easy to take things for granted. But, as I’ve already touched upon in my previous article, things might take a 180 turn once your business starts working with clients, contractors and suppliers from outside your cosy “payments bubble”.

Introducing the bank chain

What’s the difference between banks and Lego pieces? Lego pieces, the ones my child likes to play for instance, always fit perfectly together, no matter what piece comes first, and what piece comes last. With banks, it’s a whole different story. You might have a German bank that has a perfect “fit” with 80% of banks in China… just not the one your client is using. Sure, you might try to throw a Hail Mary, close your eyes and hope that your money reaches the other party on time. But if that Hail Mary is, let’s say, €30,000, you might want to think twice. So, making sure your transaction goes as planned might involve creating a chain of transactions, with intermediary “stops” in your destination country.

This model, reminiscent of a relay race, is quite common, but setting up oneself might be tricky, especially if you’re new to this. And playing the relay race on your own might also mean, as you’ve probably guessed it, opening more bank accounts. What’s no big deal for a huge corporate, might become a real bottle-neck for a smaller enterprise. And as AML procedures change from country to country, and from bank to bank, the chances of your transfers being flagged, reverted or blocked increase with every link you add to the bank chain.

Charged and charged again

Those used to transactions in what I call “payments bubbles” have one less headache to think about. Yes, I’m talking about foreign exchange rates. Not that long ago, the European Central Bank had published a research paper stating that banks charge small- and medium-sized businesses FX rates that can be as much as 25 times (you’ve read that correctly, times, not percentage points) higher than what they would charge a multi-million dollar corporation.

And while Fintech companies like Revolut, TransferWise and the inevitable army of their clones, seem to have successfully solved the FX problem in the retail market, this low-fee option comes with a catch. Namely, how likely are you to trust an alternative payments company, even a well-established one, with amounts of money that could make or break your business? I’m not here to point fingers, but horror stories of people waiting 3 weeks for an answer (and not necessarily a positive one) regarding funds lost in transit are far too common.

The human touch

Trust is probably one of those few important factors in business, and especially in finance, that can’t be automated. Don’t take me wrong, at PayAlly, we are no Luddites, and we implement every safe and trusted automation solution that fits our line of work. However, when it comes to building transaction chains and making sure our clients get the best FX rate, we are as hands-on as possible. People often talk about the human factor, but rarely mention that it’s the human touch that can make a huge difference. And of course, this comes at a premium, but shaving a fraction of a percent from your margin is worth the ability to sleep sound at night.