Know Your Options

International Business Payouts

The Bad, The Good, and The Ugly

As global trade expands and the rise of e-commerce continues, local small and medium-sized businesses are looking abroad to create new markets and grow their business. In a previous post, we discussed the financial barriers businesses of all sizes have to overcome to fully reap the benefits of going global. In this article, we take the time to explain the most popular methods businesses currently use to deal with the challenges of transferring value internationally. As you read, we challenge you to consider if the traditional cross-border payment methods still serve SMEs like yourself well. Or maybe, is it time to explore new players?

What Does it Mean to Make a Bank Transfer?


But first, let’s set the stage and discuss what it means to transfer money from one person to another. To transfer money, in the simplest definition, refers to the process of transferring value from one account to another. Using basic accounting concepts, this means debiting the sender’s account and crediting the receiver’s account by the same amount. When this happens, a payment has been made and the transfer of value is marked complete.


Within national jurisdictions, there exist banking systems, each with their own players, processes, and coding “schemes” to distinguish individuals’ accounts from one another. This system is standardized by one governing body, a central bank. In Canada, this is the Bank of Canada. In the US, this is the Federal Reserve; in the UK, the Bank of England; in the EU, the European Central Bank. For instance, to send money domestically in Canada, you provide a code made up of three digits, Recipient Bank ID; five digits, Branch number; seven digits, Account number. Canadian banks use their established relationships and send the money with almost no cost, typically through electronic funds transfers (EFT), which takes 1-2 business days to complete.


Transferring Money Internationally


Thinking globally, however, this is where the processes get fuzzy. Though the general banking systems in most jurisdictions are similar in nature, the discrepancies in details such as how a system structures its coding scheme can widely vary. 


With each national region built under different systems, they create their own methods of transferring funds. EFT as we mentioned earlier, is an example of this within Canada. Others such as ACH in the US, SEPA in the EU and Faster Payments (FPS) in the UK perform a similar task but within their own payment protocols. So, in other words, you can’t send an EFT to the States and you can’t use SEPA to receive payments in Canada. With the lack of standardization globally, we can see the complexity of sending money internationally. 


This is not something banks around the world just discovered. Back in 1973, a group of about 213 global banks banded together to solve the international transfer issue. They formed a cooperative utility called the Society for Worldwide Interbank Financial Telecommunication (SWIFT). It was essentially a messaging system made to communicate with banks from all around the world. Through this system, banks have been able to perform wire transfers with relative ease. However, even today, nearly the same system still exists, resulting in technology over 40 years old being the dominant player in the international payments industry. 


Using International Wire Transfers


International wire transfers are one of the most popular methods for businesses to use cross-border. The process is built on a method called correspondent banking. Two banks are correspondent when they have an established relationship with one another to help complete financial services, such as moving money. With the help of SWIFT messaging, the bank an individual wants to transfer money from organizes a chain of corresponding banks to connect to the bank in the foreign jurisdiction where the transfer is to be received. Through wire transfer services provided by financial institutions, businesses can request wire payments to other customers of other financial institutions. The sender and recipient do not have to be in the same country.


People regularly use this method to transfer funds due to their versatile nature. It allows you to make the transaction from nearly any corner of the world in real-time, requires limited effort, and the receiver can claim the funds in their local currency. As well, international regulations make wire transfers one of the safest ways to send and receive money. But, the wire may not be as perfect as popularity suggests. Often most businesses don’t realize the sometimes hefty fees tacked onto transactions. Sometimes businesses have to pay $30-$60 to send and $15-$30 to receive money, as well as paying on average a 2-3% commission for currency exchange. A single transfer could cost hundreds to tens of thousands depending on the amount being sent. Plus, long processing times can lead wires to be one of the more inconvenient methods of payment. With this said, it begs the question of other alternatives. The other two most popular methods are players that take you out of the banking ecosystem: Credit Card and Money Service Providers. They deserve some explanation as well.

Using Credit Card for International Payments


Another popular method of payment most businesses offer to their customers is Credit Card payment. Credit cards issued by MasterCard, Visa or other financial institutions provide an alternative way to transfer money internationally.


Regardless of the direction of the flow of money, both parties need to “subscribe” to the platform either in the form of applying and obtaining a credit card or contracting a card processor. Opting for Credit Card takes payments out of the traditional SWIFT ecosystem. In exchange, both parties can make payments around the world nearly instantly and can do it in person or online. Credit Card payment is also widely available through most businesses which add to the method’s convenience. Credit Card payments are a great option for businesses to provide for consumers.


The downfall, however, is that credit cards, while they can be owned by a business, are not designed for B2B transactions. Due to the nature of most B2B transactions, credit card usage for businesses is usually restricted to protect against fraudulent activity. Most credit cards have a transaction limit, which often doesn’t suit vendor purchasing needs. On top of that, the general complaint with using and accepting credit card payment is the high fees. For businesses to use the card internationally, they will have to fork over about 3% every transaction in foreign exchange fees. Plus, if the balance of the card isn’t paid in time, a business can pay 20% in interest on the amount owing. While one of the most convenient methods, credit card payment is not the most economical for many businesses. However, it is often suitable as a solution for sending and receiving money internationally.

Using Money Service Providers For International Payments


In a market not fully satisfied, money service providers entered the payment stage sometime in the late 90s with the establishment of PayPal. From here, many providers from prepaid cards, mobile payments to digital wallets began to pop up. All these new players have popularized a branch of FinTech called PayTech. Most of their models include creating their own ecosystem where members can enjoy, frankly, incredibly efficient, instant and simple payments to all areas of the world. As well, with new technology being leveraged every day, the safety and security of these transactions are especially solid. These alternatives to traditional bank transfers have gained traction as more significant players have entered the payments ecosystem. In 2019, payment methods were expected to account for nearly 55% of global e-commerce transactions. The money service provider category helps in the process to send money internationally, whether that be actually transferring the money, converting currencies, holding money digitally or a combination of multiple services. With research, PayTechs can fit into nearly any business’s set of needs.


But one of the biggest sore points seems to be the inconvenience of adopting a platform like PayPal. In order to be able to use the payment service, both parties in a transaction need to be “subscribed” to the ecosystem. In PayPal’s case, this means both parties need to have registered an account, have extracted funds from their respective bank accounts and have injected them into their PayPal account. From there, the members can reap the benefits of the platform. However, if they wanted to use the money they received, for example, they would have to “cash-out” (transfer money to their bank account) of the ecosystem. This adds a layer of inconvenience as now there are accounts other than their bank account that need to be monitored and the transfer from Paypal still has to take place for funds to be available to the business.


Other major complaints include that of high cost, and the existence of minimum amounts and maximum limits. As seen when using services like PayPal, digital providers tend to charge high fees, sometimes 3%+. They also may have a certain minimum amount you must transfer for the transaction to take place. Some platforms even have around a $10,000 limit of the transfer. Depending on the need, this may not help a business paying a vendor. Adopting the PayTech platforms requires a fair bit of research and matching to your business’s needs. 

Ultimately, it isn’t about the players being unable to provide a perfect solution more than it is about the worldwide “payment system” being so fragmented. In an ideal world, every country would transfer money under the same regulations, standards, and schemes. It would be as easy to send money internationally as it is to send domestically. Unfortunately, this is not the reality and banks, among other players, have all offered their ways to deal with the fragmentation. 


It’s true that most businesses do settle with any of the three options here, seemingly without much notable strain because they all solve the problem of the international transfer of value. Underneath the surface, however, it is worth noting that the current solutions are costing Canadian businesses more than many can imagine. As highlighted in EY and Payments Canada’s 2018 Business Impact Report, the current payment procedures are costing Canadian businesses $3 to $6.5 billion per year due to processing fees and exchange costs.  A large portion of these fees is related to international transactions.


There are also costs outside of the financial drain that comes with using the current solutions. In all the solutions we discussed, there was some kind of logistical drawback related to use, whether it be transaction limits, tedious issuance or lengthy processing times. These drawbacks are costing international Canadian SMEs countless dollars, man-hours, and headaches. Instead of empowering SMEs to succeed, these players are creating barriers between a business doing well and business truly succeeding.


Examining the traditional methods of cross-border payments challenges SMEs to consider which ecosystem should earn their devotion if any deserve it at all. It leaves businesses in a fragmented world where we have to move through various ecosystems to wholly fit our needs. For this reason, it is important to explore new solutions and ecosystems that can be a better fit for a business. At Lean Payments, we want to shed light on these new players. It is our goal to empower SMEs to succeed globally and to do this requires everyone to challenge the status quo.

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