The ongoing growth in e-commerce—further fueled by the pandemic—has drawn a lot of attention to how the payment ecosystem is evolving, while also highlighting systemic inefficiencies. With cross-border transactions totaling trillions of dollars across the globe, the need for seamless cross-border payments at scale has never been greater.
To help organizations understand the in-depth processes involved in sending cross-border payments, below is an overview of the current global payment’s ecosystem along with some suggested best practices.
Understanding Cross-Border Payments
A cross-border payment is a transaction in which funds are sent from a payor in one country to a recipient in a different country. The payments can be sent between individuals and/or companies, and the delivery method tends to be shaped by who the recipient is, as rules differ between individual and organization-driven payments.
Each transaction contains various data points that need to be correct to ensure an accurate transaction. The data requirements, however, vary from one country to the next, even on standardized networks, meaning the more data the better to allow for validation of the payment. In addition, local networks have different value limitations on transactions that are sometimes not only per transaction (e.g., maximum $4,999.99 on Venmo) but also per time window limit (e.g., $6,999.99 weekly Venmo limit). In short, what may seem sufficient and reasonable for one payment may not be for another, resulting in different speeds, costs, and overall delivery.
Understanding the Payment Ecosystem
Every payment network is a combination of open and closed parts. Open payment networks such as SWIFT, Visa, and Mastercard have value that can be transferred from one person to another without a common or formal relationship. Closed loop payment networks such as PayPal and gift cards carry value that can be transferred from one entity to another, but only through a common or formal relationship where both parties are registered users on the same network. This is contrary to open networks. Unlike banks, these users do not need to be on the network.
When it comes to international payments, SWIFT is used to securely transmit information through a standardized system of messages where no two banks need a direct relationship to transfer funds, instead, relying on intermediaries to complete the transaction. As a widely accepted standard, SWIFT is used by more than 10,000 banks in nearly every country for transactions. This system, however, has rigid messaging with free form fields and can be heavy on overhead.
Global Payments Initiative (GPI), often referred to as SWIFT GPI, is a relatively new global payments initiative that modernizes the SWIFT system with a focus on speed and visibility. GPI allows companies or individuals to view payments as they happen. GPI provides better access to payment data and increases visibility, with preliminary results showing 40% of transactions completed in five minutes or less, and 95% of transactions delivered in under 24 hours.
Outside of SWIFT, local networks also exist in each region or country that allow businesses or individuals to transfer funds within that country. To leverage local networks for cross-border payments, one can use a non-bank payments company that has access to those networks. This is in contrast with banks since most focus on their domestic system and SWIFT only. It’s also worth noting that digital cryptocurrencies may play a larger role in cross-border payments in the future when they become more widely accepted in institutional-use cases.
Best Practices for Cross-Border Payments
An important principle to remember for managing payments is GIGO, which means garbage in, garbage out. If you put in bad information, you can expect to get bad results. To avoid such results, it’s important for businesses to focus on the following three principles:
- Validate the information: Validate as much data as your use case allows, depending on local standards, as well as the availability of information and validation support. Collecting as much data as possible for the transaction and utilizing a tool or solution that can help validate the data will help reduce the risk. This includes knowing whether the recipient is who they claim to be and the risk of whether the funds will be sent to the correct location. Valid data includes a verifiable name, address, and account number. The account number is considered the gold standard for identity confirmation. Unfortunately, you’re likely only able to validate an account number on closed networks, so it’s important to understand the network and what it allows. Most international bank account number (IBAN) validators allow to you check the structure and data in an IBAN but cannot identify the status of the account. It is much better than non-IBAN enabled countries, but it does have its limitations.
- Limit the number of freeform fields: Limiting the number of fields typed by a user reduces the margin for error and helps enrich the data as much as possible. Use standard fields to streamline the input of information. This is a straightforward principle to address data, but becomes much more nuanced for country-specific data requirements. India, for example, has a unique set of Purpose of Payment values.
- Use payment rail data: Use payment rail data that is returned when payment is initiated when available and store it, even if only for future use. Storing information received from the transaction may not seem important at the time but having this data on hand can prove quite helpful. SWIFT GPI provides a lot of data points as payments go through the network. Keeping this information can also be helpful for future payments as the data can be used to ensure the credentials provided for future transactions are accurate.
Bringing It All Together
While international payment processes have evolved over time, the task remains complex. As the pace of global transactions increase, the need for quick and seamless cross-border payments is becoming exceedingly more important.
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Corinne MacMillan is the SVP of Cambridge Global Payments product management and technical sales and Integration teams. She oversees the product strategy and execution of all product related activities, driving their product organization globally across the Global Payments and Currency Risk Management product lines.