Top Challenges in Cross-Border Payments and How to Overcome Them

Cross-border payments play an important role in international trade. In fact, they are expected to reach $250 trillion by 2027. But unfortunately, cross-border payments are not as simple as domestic payments. Businesses still need to deal with challenges like:

• High costs
• Tax issues
• Regulatory complexities and a host of other challenges.

In this article, we'll understand how cross-border payments work, some common challenges you might face, and how to overcome them.

Cross-border payments are money transfers between people or businesses in different countries. Simply put, it means sending or receiving money across borders. This can be for personal reasons or business needs.

But cross-border payments are not just limited to buying something from an overseas website. They also include:

• Retail transactions: These include sending money to family, shopping online, using cards, or using digital wallets.
• Wholesale transactions: These are big payments between banks for currency exchange, loans, or trading.
• Government and corporate transactions: These are large deals, imports and exports, and financial settlements.

Since cross-border payments involve multiple currencies, banking systems, and rules, they can be more complex than domestic payments.

A cross-border money transfer is when money moves from a buyer's account to a seller in another country. The process has several steps: the purchase, routing and processing, verification, confirmation, and finally, settlement.

Here's a closer look:

• Purchase: The customer buys a product or a service and proceeds to pay.
• Routing and processing: The payment details travel through different banks and networks.
• Verification: The transaction is authenticated to prevent fraud.
• Confirmation and settlement: The money reaches the merchant after the settlement period.

But while the process does sound simple, it can quickly get complicated. Here's why:

Currency conversion

When the buyer and seller use different currencies, the payment has to be converted first. This adds exchange rate margins and conversion fees, lowering your profits.

Additional charges

You may also have to bear foreign transaction fees and intermediary bank charges.

Multiple players

The process often involves multiple players, delaying payments. Think domestic banks, international banks, and payment networks.

When a customer from a different country pays you, there's no physical cash that moves from their country to yours. Instead, the process happens through account adjustments. The customer's account is debited in their country, and you receive the money in your Indian account.

Banks make this happen through two key steps:

• They rely on correspondent banking relationships or interbank networks.
• In some cases, a payment provider is also involved in the middle to route the transaction between the two banks.

In the end, it all comes down to using a system of linked accounts and trusted relationships. For example, a bank in one country can keep money in a partner bank overseas. This makes it possible to send and receive payments safely, even with different currencies and countries involved.

Cross-border payments take a few days to process. But the actual time depends on the payment method, the destination, and how many banks are involved.

Here's the standard settlement time for different methods:

• Credit card payments: Processed almost instantly.
• International wire transfers: Take up to 2 business days.
• eWallet transfers: Usually processed within 2 to 3 business days.
• Traditional bank transfers: Can take anywhere from 3 to 5 business days.

These timelines can be delayed if multiple banks or financial networks are involved, or the transfer needs to be processed across different time zones and regulations.

Accepting payments from international customers can be a bit tricky. You may face challenges like complicated compliance requirements, liquidity management, poor transparency & tracking, high FX markup, and a lack of payment interoperability.

Here are some common cross-border payment challenges and solutions.

1. Complicated compliance requirements

Cross-border payments operate within a complicated set of regulations that differ from country to country. You need to comply with rules around AML/KYC/Compliance, foreign exchange controls, and sanctions screening.

But the problem is that these requirements are rarely uniform. For example, a KYC check acceptable in one country may not be valid in another. This can cause delays and increase costs.

On top of that, manual verification can slow down transactions and increase operational risks. And if you don't meet these regulatory requirements, you can end up with penalties and reputational damage.

Solution:

• Use automation tools to handle AML and KYC checks in different countries.
• Try RegTech tools to keep compliance in check in real time.
• Work with payment providers that are licensed in multiple regions.

2. Liquidity management

Another major cross-border payment challenge is managing financial liquidity. You see, you need to have enough money to send payments on time and be flexible enough to receive funds in different currencies. But dealing with multiple accounts in different countries can make this harder.

If you don't have enough liquidity, sending payments on time can be difficult. At the same time, properly converting incoming payments in foreign currencies is key to managing your cash flow.

Solution:

• Use tools to track balances across all accounts and currencies in real-time.
• Partner with providers that support multi-currency accounts.
• Plan for big payments to avoid shortages or idle cash.

3. Poor transparency & tracking

One of the biggest frustrations with cross-border payments is not knowing what's happening. Most of the time, you don't know where the money is, what fees have been deducted, or which exchange rates were applied. This creates not one but three problems:

• Without a detailed breakdown, it becomes difficult to reconcile transactions.
• Hidden charges can make it challenging to predict actual costs.
• If you receive less money than expected, it can lower your profit margins.

Solution:

• Use platforms with real-time tracking through APIs, so both you and the customer can monitor the payment at every stage.
• Opt for providers that show all fees and exchange rates upfront.
• Implement automated status updates to reduce manual follow-ups.

4. High FX markup

When you're converting a foreign currency to INR, the bank or payment provider adds a FX markup or a currency conversion charge. But the problem is that exchange rates are constantly changing. This means you end up paying a high markup over the actual market rate when converting currencies.

On top of this, you also need to account for transaction risk. This means the exchange rate can move between the time a deal is agreed and when the payment is made. All of this can add uncertainty to pricing and profit margins.

Solution:

• Open a multi-currency business account that lets you accept, hold, and send money in different currencies.
• Settle payments when the exchange rate is more favorable to reduce losses.
• Partner with a payment platform that offers mid-market FX rates.

5. A lack of payment interoperability

Another major cross-border payment challenge is that different payment systems might not work well together. You see, many national systems were designed decades ago for domestic use, not global connectivity. They can lead to poor market access/fragmentation, which can slow down payments.

Plus, there are no common standards. Without universal formats like ISO 20022, you risk data mismatches. Not to mention the data privacy and financial regulations that vary by country. All of this can create friction, making cross-border transactions complicated.

Solution:

• Use global standards like ISO 20022.
• Partner with payment platforms that run on a modern infrastructure.
• Accept payments through digital wallets and stablecoins to boost MSMEs and financial inclusion.

Cross-border payments can be used across different industries, especially e-commerce, freelancing, and international trade.

1. E-commerce

Online shops can sell to customers anywhere in the world. Payments can happen in the customer's own currency, and the merchant receives the money safely.

2. Freelancing

Freelancers work with clients in different countries. They need to get paid on time without losing money to high exchange fees. Cross-border payments help them manage income and keep projects moving.

3. International trade

Businesses that import or export goods rely on cross-border payments. They can pay suppliers abroad and receive money from customers in other countries without any trouble.

You can overcome cross-border payment challenges by following best practices like choosing a reliable payment provider, managing multiple currencies smartly, keeping FX fees under control, staying on top of local regulations, and checking for hidden costs.

1. Choose a reliable payment provider

Choose a payment provider with a wide global network. Make sure they process payments quickly and show all fees clearly. This will help you avoid delays and surprise charges.

2. Manage multiple currencies smartly

Set up business accounts that support multiple currencies. This is a smart way to avoid constant conversions and lower exposure to fluctuating rates.

3. Keep FX fees under control

Track exchange rates regularly and pick payment partners offering competitive rates. Make sure they have a low FX markup so you don't lose money on conversions.

4. Stay on top of local regulations

Every country has its own rules for taxes and legal compliance. Knowing these regulations is important to avoid fines and payment delays.

5. Check for hidden costs

Check all the fees before choosing a payment platform. Pay attention to currency conversion costs and any middleman charges to avoid unexpected surprises.

Managing international payments doesn't have to be complicated. Payment platforms like Xflow eliminate the challenges of high costs, compliance hassles, and delayed settlements by offering a suite of features like:

• No SWIFT fees

Xflow eliminates hefty intermediary charges that traditional systems often impose.

• Transparent FX rates

You get clear, upfront exchange rates without hidden markups.

• Next-day settlements

Get payments the very next day and enjoy improved cash flow.

• Automated compliance

The platform simplifies KYC and regulatory checks, taking away administrative burden.

Connecting cross-border payments with ERP, payroll, and treasury systems gives you a clear picture of your finances. You can track exchange rates, deductions, and payment status in real time. This way, you don't need to switch between different platforms to manage transactions.

Integrating these systems lets you:

• Monitor all payments from one dashboard.
• Maintain better visibility over cash flow.

International payments often come with hidden charges, long delays, and endless compliance paperwork. Xflow changes that experience completely. It gives you full transparency on exchange rates and fees right from the start, so there are no surprises later.

With Xflow, you can:

• See the exact INR amount you'll receive even before you initiate the transaction.
• Receive payments in just one business day.
• Get 100% peace of mind in terms of security and compliance. Xflow powers all transactions through JP Morgan Chase and is ISO 27001 and SOC 2 certified.
• Get eFIRA in a single click.
• Collect large payments in a single invoice without breaking them up. No transaction limits whatsoever.