Nowadays, many businesses are selling their products and services internationally. This is a significant advantage as it opens doors to more customers, leading to more sales and, eventually, more profit.
But how do international clients make payments to businesses without any difficulties? This is where cross-border payments come in. Below is a comprehensive guide on all there is to know about cross-border payments.
What Are Cross-Border Payments?
Cross-border payments are transactions where the payer and payee are in separate countries. These transactions can occur between businesses, individuals, a business and an individual, and banking institutions, to mention a few.
Examples of cross-border payments
How Does a Cross-Border Payment Work?
Cross-border payments work the same as local online payments. So, the business owner sets up a checkout section on their website with several payment methods. Then, when a customer makes a purchase, they can make their payment using their preferred payment method.
However, cross-border payments or international online payments go further than that. Cross-border payments have a much more complex payment processing procedure behind the scenes. Sites like ProsPay.co provide additional information so advise you to check with them.
For starters, there’s the corresponding bank added to the payment processing procedure. This financial institution acts as an intermediary between the client’s issuing bank and the merchant’s acquiring bank in international transactions. There are also additional fees to contend with since these payments involve a different currency.
It is important for merchants who are looking to sell their products and services internationally to take the necessary steps to make international online payments simple for their clients.
For starters, business owners should choose a payment service provider with a global payment gateway. This will act as a switch between the several entities involved in the payment processing procedure, enabling money to be securely transferred from the client accounts to the merchant accounts.
That said, here is an example of an international customer paying using a credit or debit card.
So, an international customer purchases a product or service from a merchant. The merchant’s website will lead them to the checkout section, where the customer will enter their card information and other details.
Once they enter their card information, the customer’s bank will transfer money from their bank account to the corresponding bank in the merchant’s country. Then, the funds will be transferred to the merchant’s bank and then to the merchant’s bank account.
Are There Fees Associated With Cross-Border Payments?
Several fees are associated with cross-border payments, making these transactions more costly for customers and merchants.
For starters, there is a cross-border fee. This is a fee that business owners pay when international customers use their cards to pay for their purchases. Usually, cross-border charges vary from one card network to another.
There is also the currency exchange rate. Since customers are purchasing products or services from a merchant in another country with a different currency, an currency exchange rate must apply on the customer’s part. Shipping fees also apply on the client’s part.
Another vital fee is tax. There are several taxes incurred during international purchases, such as sales tax, Value Added Tax (VAT), and customs duty tax when it comes to the shipment of the purchased goods to the customer, to mention a few. Keep in mind that every country has its tax system, so additional taxes may apply depending on the country where the merchant is located.
Challenges of Cross-Border Payments
As expected, cross-border payments come has their fair share of disadvantages.
High Costs
Cross-border payments incur numerous fees, especially on the merchant’s part. This is because more parties are involved in the payment processing procedure, or the involved parties have more responsibilities to make these transactions possible. And as expected, they want to be paid for their services.
With the merchants paying for most of these fees, they may be forced to increase the prices of their products or services for their international customers.
Slow Transactions
Since cross-border payments involve more parties in the payment processing procedure, it might take some time for the funds to be transferred to merchant accounts. This may be a disadvantage, especially for small businesses.
Security Issues
All online transactions are at risk of security breaches; however, international online payments are at a higher risk. Merchants selling their products or services to global customers are at a higher risk of being victims of fraud. What’s more, customers are also at risk of their confidential information landing in the wrong hands.
So, it’s crucial for businesses that sell their products to international customers to implement extra security features to protect their clients’ information.
Conclusion
Cross-border payments have enabled businesses to easily reach the international market by allowing customers from other countries to purchase their products without difficulties.
However, both parties (merchants and customers) need to understand everything there is to know about international online payments. Doing so will enable them to understand what goes on behind the scenes and the costs involved in these transactions.
