Introduction
Are international payments truly more expensive than domestic ones? The difference may seem like paying for the difference in the currency rates. However, the actual cost runs deeper–from exchange rate markups and intermediary bank charges to processing fees. Businesses often pay far more than they realize for international transactions.
Unlike domestic transactions, which are typically straightforward, international payments are processed across multiple networks or systems, each imposing fees and regulations. This process inflates costs and introduces delays that can disrupt cash flow, hinder supplier relationships, and create financial uncertainty.
Cross-border payment challenges impact small businesses significantly. According to a study1, “The average remittance transfer fee is around 6%, with some corridors reaching as high as 10%.”
What are the different types of fees in international payments?
When it comes to international payments, fees can be broadly categorized into two types: visible fees and hidden charges. The first are the costs that businesses can see upfront—transfer fees and currency conversion charges.
The hidden charges are where things become blurry. A few of the common hidden charges include:
Commission on inward remittance
When businesses in India receive funds from abroad, the bank may charge a fee for processing these inward remittances, ranging from ₹200 to ₹1,000 (approximately $2.50 to $12.50). Businesses may incur fees for currency conversion and processing services, including the issuance of Foreign Inward Remittance Certificates (FIRC) and Bank Realisation Certificates (BRC), which serve as proof of international transactions.
GST charges
GST on cross-border transactions can be charged in two situations:
- GST on foreign currency conversion
When converting foreign currency into INR, GST is charged based on the transaction value. The rates are tiered:
- For transactions up to ₹1,00,000: 1% of the gross amount exchanged, with a minimum of ₹250
- For amounts between ₹1,00,001 and ₹10,00,000: ₹1,000 plus 0.5% of the amount exceeding ₹1,00,000
- For amounts above ₹10,00,000: ₹5,500 plus 0.1% of the amount exceeding ₹10,00,000, capped at ₹60,000
2. GST on commission for inward remittance
While inward remittances themselves are exempt from GST, the associated banking services do attract GST charges. Financial institutions could charge currency conversion costs and documentation charges for issuing essential paperwork like Foreign Inward Remittance Certificates (FIRC) and Bank Realisation Certificates (BRC) - documents that verify your receipt of international payments. For example, if your bank charges a commission for converting USD to INR or a processing fee for handling the international transfer, these service charges will be subject to GST. This shifts the GST responsibility to international clients, simplifying invoicing for Indian service providers.
The hidden cost of currency conversion
Hidden fees can make a large chunk of the cost factor in international payments, impacting the recipient's final amount or the sender's cost. These additional costs can sometimes make global payments more expensive than anticipated, whether it's currency exchange charges, processing fees, or intermediary bank costs. Understanding these potential costs is crucial to making informed decisions when sending or receiving money across borders. Here's a breakdown of such costs:
Exchange rate markups
Indian businesses often lose money due to banks' exchange rate markups. When receiving international payments, the exchange rates offered by banks are typically higher than the actual interbank rates, effectively creating an invisible tax on foreign income.
A real-world example demonstrates this: assume an Indian exporter receives $50,000 from a US client. With an interbank rate of ₹82/USD, the total amount should be ₹41,00,000. If their bank applies a 1% markup, the effective rate becomes ₹81.18/USD, lowering the amount received to ₹40,599,000, which results in a loss of ₹41,000 because of the markup.
Correspondent bank fees
International wire transfers frequently include several correspondent banks or middlemen, each of which has the right to charge fees. For instance, intermediate banks may impose correspondent bank fees of $200 or more upon receiving a $10,000 payment. These fees, which often range from $15 to $50 for every transaction, could vary significantly.
What is the impact of international fees?
High costs significantly impact cross-border payments in India, affecting businesses, consumers, and the broader economy. Key areas of concern include:
1. Increased operational costs
- Transaction fees & currency fluctuations
SMEs relying on cross-border transactions often encounter elevated payment fees and unfavorable exchange rates. These expenses can significantly cut into profit margins, making it harder for smaller businesses to manage daily operations and plan for growth.
- Cash flow constraints
Delays in settlement or unexpected fee hikes can tie up working capital, directly impacting an SME’s ability to meet immediate obligations such as payroll, inventory restocking, or loan repayments.
2. Reduced global competitiveness
- Price Pressures
When SMEs absorb high fees, their profit margins shrink. If they pass those costs on to international customers, products and services may become less competitively priced, jeopardizing market share in global markets.
- Limited expansion opportunities
The financial strain of cross-border fees can discourage SMEs from exploring new markets or engaging in larger trade deals, ultimately capping their revenue potential and inhibiting long-term scalability.
3. Regulatory and compliance hurdles
- Complex requirements
Meeting know-your-customer (KYC) and anti-money laundering (AML) regulations add layers of complexity and cost. For SMEs that lack dedicated compliance teams, navigating these regulations can be both time-consuming and expensive.
- Fragmented global frameworks
Varying rules across different jurisdictions can further complicate international transactions, leading to slow processing times and additional administrative overhead.
4. Barriers to financial inclusion
- Dependence on alternative channels
When fees are prohibitively high, some SMEs may resort to less formal payment methods that can be more prone to security risks. Such alternatives can leave businesses vulnerable to fraud while also restricting the ability to establish robust financial histories.
- Uneven access to digital tools
Modern digital payment solutions offer cost-saving advantages, but SMEs without sufficient digital infrastructure—or in regions lacking reliable internet connectivity—may struggle to adopt these platforms effectively.
5. Technological and infrastructure limitations
- Outdated banking systems
Traditional banking channels can be slow and costly for cross-border transfers, especially if multiple intermediaries are involved. This inefficiency undermines the agility SMEs need to operate in fast-paced global markets.
- Slowed innovation
High fees and regulatory uncertainties can discourage the development or adoption of FinTech solutions designed for small businesses, limiting access to innovative tools that streamline international payments.
How can exporters minimize international payments costs?
Businesses can use several strategies to successfully reduce hidden costs associated with international payments:
- Compare service providers
Evaluate banks and fintech solutions to identify those offering competitive exchange rates and transparent fee structures. Remember, many banks hide costs in exchange rate markups, so always verify rates against those listed online.
- Negotiate rates
High-volume clients can often negotiate for better rates or lower commissions from their service providers.
- Leverage modern solutions
According to an Accenture study2, “About 92% of businesses still rely on banks as their primary cross-border payment providers, despite more than half of banking and payments executives confirming that their organizations struggle with legacy tech stacks, unable to provide real-time payment solutions.”
Conclusion
While international payments enable global expansion, businesses often underestimate the hidden costs involved. Exchange rate markups, bank fees, and compliance costs can significantly impact revenue. By adopting fintech-driven solutions, streamlining payment structures, and leveraging cost-calculator tools like the one provided by Xflow, businesses can gain better control over their finances. A strategic approach to cross-border transactions ensures not just efficiency but long-term profitability.
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