Given the volume of many external remittances, they are often taken seriously and several issues come into play, namely, cost, processing time, security, and legal concerns — among others.
1. Payment processing
Cross-border transactions can be a convoluted and time-consuming process, and can also be halted at any point — causing friction, delays and a suboptimal experience for all those involved. Often this is due to incomplete payment information, Anti-Money Laundering (AML) checks and other fraud screening measures. The transmission of international payments are not as digitised or standardised as other transactions, meaning that the solution is often manually intensive and can leave the payment in limbo for several weeks.
2. Legal issues
When companies expand across borders into foreign jurisdictions in order to achieve growth, the level of risk can increase due to the divergent legal systems in each country. Although most developed countries adhere to systems of civil law, these can vary wildly between different nations and as a result lead to drastically different interpretations in agreements for mergers and other B2B agreements. A notable example of this is intellectual property protection, which can diverge a great deal between foreign jurisdictions.
The language of the contract in question also leads to issues with enforceability, as either party may struggle to decide which interpretation should have authority in either domestic or international courts. Data protection laws also vary between different countries, resulting in both compliance issues but also the costs associated with seeking the relevant domestic or foreign counsel to interpret dense legislation and provide clarity.
3. Tax issues
As with legislation, taxation also differs between countries. A payment may have tax implications in its destination country, which requires the buyer or seller to consider which ones may apply and therefore affect the profitability or fairness of the deal. Taxation treaties have been devised throughout the years to avoid the scenario of double-taxation, but these tend to be specific to each country — meaning that recipients or payees may not be entirely exempt under those same terms.
4. Data protection
As we touched on already, the provision of data is regulated in most countries, but the specific laws vary. Banks must adhere strictly to these regulations, as, for instance, in some countries they are not permitted to share any personal or business information with their clients. In the UK and EU, General Data Protection Regulation (GDPR) applies to any company or financial institution that processes personal information for citizens, which has a serious impact on what data can or cannot be shared. Compared to the USA, for example, UK, Japan and EU member states have strict data privacy which incur severe penalties for the unlawful collection or disclosing of private information, and even prison time.
5. Operational systems
The conventional messaging format used to process cross-border payments — SWIFT MT103 — is rather limited in its capacity to transmit large amounts of information. For additional capacity, another non-automated messaging infrastructure (MT199) will communicate with the parties involved in the transaction. Processes like these are behind the majority of inefficiencies within the transaction.
The infrastructure of financial institutions can vary dramatically, but what compounds this issue is that often the legacy systems used are not compatible with changes in technology. This results in further delays for settlements and other obstacles that arise, for instance, from a lack of real-time monitoring, the reliance on batch processing and a low data processing capacity.
6. Fees & exchange rates
Payment systems that do not involve physical paper money usually incur additional costs of some kind. Payee entities (i.e. a business) often need to provide funds up front in order to access foreign currency and begin the transaction. The more entities involved in a cross-border payment, the more bank fees are charged. While a great deal of these will apply to merchant banks, they can be passed along to the purchaser as well. Many consumers will be familiar with credit card companies charging them for paying for goods in a foreign currency — the same principle as exchange rates.
The value difference between currencies is prone to fluctuate, affecting both buyer and seller who may encounter deficits if there is a rate change in the time between the initiation of the transaction and the settlement. For this reason, merchants allow buyers to use payment service providers that calculate the best exchange rate possible.
7. Compliance issues
Due to the various risks associated with cross-border transactions, there are numerous compliance checks involved to protect payer and recipient against financial crime, fraud, sanctions and others — many of which are time consuming. The rules and processes differ for each bank or payment gateway, and this in turn leads to unnecessarily declined payments — for something as simple as a customer sharing the name with another person who has a financial criminal record. Payments that pass through various domestic bank systems may also be subject to unique checks depending on the jurisdiction. This creates even more complications, without the payment having even reached an international border.