Optimising Cross-Border Retail Payments: Overcoming Challenges and Expanding Global Reach

With digitisation and the development of global e-commerce platforms, expanding business operations internationally has been easier than ever before. According to research, the value of global payments is set to reach $290 trillion by 2030, indicating significant prospects for companies planning to expand internationally.

However, before they take the leap, they must have a thorough understanding of cross-border payments, their benefits, challenges, etc.

Let’s dive deeper.   

Understanding Cross-Border Retail Payments

Cross-border retail payments are financial transactions between parties located in different countries. They can be individual-to-individual, individual-to-business, or business-to-business, involving a wide array of payment methods and often including currency conversions.

On the surface level, cross-border payments seem very simple. Suppose an individual in the US wishes to buy products from a merchant in the UK. He just has to visit the merchant’s website, add the items to his cart, provide the payment and delivery details, and then complete his payment. It’s that simple.

However, banks and other financial institutions cater to several complexities in the background. International banks provide accounts to each other to process payments in foreign currencies.

Now, often, the sender’s and receiver’s banks may not have a direct agreement with each other. The funds are routed via a correspondent or intermediary bank in such cases.

Also, for transfers involving currencies with lower payment volumes, a higher number of correspondent banks may be involved, increasing the transfer’s processing time and transaction charges.

Advantages of Cross-Border Retail Payments

Following are some of the major benefits of cross-border retail payments:

  • Enhanced Growth and Revenue Opportunities

By accepting cross-border payments, businesses can target customers from different markets around the world, resulting in the global expansion of their operations. This can significantly improve revenue, which can contribute to overall business growth.  

  • Options for Diversification

Such payment options also enable businesses to diversify their supplier, customer, and investment portfolios. Additionally, this prevents them from solely depending on their domestic markets, which can be highly beneficial in times of rapid shifts in consumer trends.

  • Flexibility

When it comes to offering flexibility in terms of payment methods, cross-border payments can be highly beneficial. Customers can choose their preferred payment methods, leading to fewer cart abandonments and increasing sales. 

Challenges Associated with Cross-Border Retail Payments

Beneficial as they are, cross-border retail payments can come with a plethora of challenges. Some of them are as follows:

  • Transfer Charges

Almost all cross-border payments come with a transfer charge, which includes fees like intermediary charges, regulatory costs, currency exchange costs, etc. They are usually levied based on the transaction amount, and their rates tend to differ across banks and other financial services institutions.

This makes international money transfers a costly affair, especially for businesses dealing with high foreign transaction volumes.  

  • Lack of Standardisation

Now, different countries have their own formats and regulations when it comes to cross-border payments. This makes processing such transactions very complicated even with the presence of numerous fintech companies, making them struggle with various issues like adhering to different KYC and AML guidelines in multiple countries, lack of wallet interoperability, etc.   

  • Fraud and Other Security Risks

Cross-border payments always present high fraud risks as they are very difficult to trace once they leave the sender’s country’s borders. Additionally, they are susceptible to money laundering and terrorist financing risks, making it essential for banks to monitor such payments closely.  

  • Liquidity

In the case of most international payments, pre-funding of accounts is crucial for their settlement. Thus, adequate liquidity is essential in the corresponding bank accounts to meet payment obligations within the cut-off deadlines.

Moreover, as international banks usually tend to operate in different time zones, effectively deploying funds and managing liquidity positions poses a major challenge for the involved financial institutions.

Current Trends of Cross-Border Retail Payment 

Listed below are the current trends in the field of cross-border retail payments:

  • Development of CBDCs

Several countries worldwide are developing Central Bank Digital Currencies (CBDCs) to resolve the intermediary problems associated with cross-border payments.

They can establish compatibility between various CBDCs by adhering to international standards, developing a common clearing mechanism, and integrating them into a single multilateral payment platform.

  • Cryptocurrencies

In recent years, several countries have started accepting cryptocurrencies as payment. They serve as reliable open-source payment solutions, enabling individuals and businesses to transfer funds to any part of the world in real-time, with low processing charges.

  • DLT in Cross-Border Remittances

Several payment platforms are experimenting with Distributed Ledger Technology (DLT) in their cross-border remittance services. DLT uses a model that leverages bidirectional messaging and settlement modules to help validate transactions using a decentralised database before initiating fund transfers.

If international payments using DLT become the norm, individuals and businesses will easily facilitate speedy, secure, and transparent cross-border remittances. 

The Future of Cross-Border Retail Payment

With increasing cross-border retail transaction volumes, businesses will be looking for solutions that can help them collect and disburse international payments across multiple currencies hassle-free.

In this regard, opting for API solutions from platforms like Stripe, PayPal, Amazon Pay, Decentro, etc., can be an ideal choice. They usually have partnerships with multiple international banks, which enable them to provide lower processing times, higher transaction security, and transfers across numerous currencies.