Insights 21 April 2022

The ultimate guide to cross border transactions

The increase in online shopping and eCommerce for B2C and B2B markets is fuelling growth in cross-border transactions. Over 25% of eCommerce in Europe is cross-border, and globally, the B2B market spent $34 billion in 2021. That’s millions of payment transactions crossing borders every day.

While each transaction may be welcome because it signals a sale, they can cost merchants and vendors thousands of dollars annually. The cost of cross-border transactions add up with losses due to unfavourable foreign exchange rates and delays in receiving the payment in a bank account. Multiply all of that by thousands of transactions, and it’s easy to understand why some merchants don’t offer cross-border shopping.

Merchants wanting to keep cross-border shoppers engaged and reduce processing costs must find new ways to optimise cross-border transactions. Frictionless and localised shopping experiences help build customer loyalty and increase sales. Optimised cross-border payment processes and lower transaction costs help ensure merchants can continue to do business internationally.

That’s why we created this ultimate guide to cross-border transactions. In it, we’ll cover the basics of cross-border transactions, how they work, and why they matter. We’ll also explain the challenges most companies and merchants face with cross-border transactions and offer some solutions that will save time and money, increase sales, and decrease payment costs.

What are cross-border transactions?

A cross-border transaction is a financial transaction where the payer and recipient are based in separate countries. It includes both wholesale and retail payments and can be as simple as a consumer purchase of a single item or as complex as a B2B investment from one country to another with complex service and distribution agreements.

Cross-border transactions include several different types, including retail transactions, wholesale transactions, B2C, and B2B transactions.

  • Retail cross-border transactions are typically person-to-person, person-to-business, and business-to-business. These include eCommerce purchases, bank transfers, card payments, alternative payment methods (digital wallets and mobile payments,) and remittances.
  • Wholesale cross-border transactions typically occur between financial institutions to support their customers’ or their own cross-border activities, such as borrowing and lending, foreign exchange, and securities trading.
  • Governments and large non-financial companies use wholesale transactions to pay for the large-scale import and export of goods and services, or when trading in financial markets.

Why do cross-border transactions matter?

The explosion of online shopping by consumers and businesses means that money is moving across borders more than ever. The value of cross-border transactions is forecast to reach over $250 trillion by 2027, increasing over $100 trillion in just a decade. Why are we spending more internationally?

There are several factors impacting the growth in cross-border transactions, including:

  • International trade and eCommerce
  • Manufacturers expanding their supply chains across borders
  • Truly global investment and asset management
  • Remote workers accepting salaries across borders
  • An international workforce sending money internationally

The increased globalisation across all areas of our personal and work lives means money is crossing borders more often. The average international eCommerce site supports nearly 11 currencies and nearly seven different payment types. Even B2B cross-border transactions are evolving beyond paper cheques and manual payments. According to one study, the value of B2B cross-border transactions of all payment types is forecast to exceed $42.7 trillion in 2026. Individuals and businesses are driving the demand for frictionless cross-border transactions that are as efficient, safe, and cost-effective as domestic services.

The growth and revenue expansion in cross-border transactions are also driving interest in the market from payment providers. Fintechs are starting to disrupt the market with innovative business models, while traditional financial services companies are looking for ways to incorporate new business solutions to retain their market share.

How do cross-border transactions work?

Generally speaking, when someone makes a purchase, a financial system carries the “money” from the buyer’s account to the merchant’s account. (We say “money” since it’s all done electronically and no physical money changes hands.) When the money crosses borders, things get more complicated as there are currency changes, foreign transaction fees, and exchange rates to deal with. Plus, more entities get involved at every step, such as international banking networks, domestic banks, and other financial systems.

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For each cross-border transaction, the correspondent bank (the entity requesting the money) “speaks” with the respondent bank (the entity making the purchase and sending the money.) While each bank typically has a counterpart in another country, that may not be the respondent’s bank. Likewise, the correspondent’s bank may not be in their home country’s primary banking network that sends cross-border payments. All this means that each payment must go through several banks at either end of the transaction before making the complete journey from buyer to merchant.

Most cross-border transactions involve seven steps.

  1. Purchase or Initiation: An entity makes a purchase or starts the transaction process. The paying entity uses local payment options or methods to start the transaction.
  2. Routing and processing: The payment information or transaction is sent via an encrypted gateway to obtain authorisation to deduct the funds from the payee’s bank account. The more global banks connected to the gateway, the higher the chances the transaction is processed quickly and efficiently.
  3. Payment verification: The payment is verified and approved or declined by the receiving bank. The verification ensures there are sufficient funds in the payee account after currency conversion and fees are applied.
  4. Transaction confirmation: If approved, the transaction is sent to fulfilment or the next stage in the process. If declined, payee entity will receive an error message explaining why. This information is typically “translated” into a simple “payment/transaction is declined” message for end-users, covering various errors.
  5. Transaction fulfilment: For retail orders where a good or service was purchased with the transaction, the merchant can safely begin processing the fulfilment of the order. In all other cases, the transaction moves to the next stage.
  6. Settlement: At this stage, the transaction is approved, but the digital money hasn’t moved from the payee’s account to the recipient’s. This is because the transaction hasn’t cleared and hasn't been reconciled between the two entities. It must pass through a global automated clearing house (ACH) to be cleared and reconciled. This typically takes between two and five business days.
  7. Tracking: Each bank involved in the transaction sends a reconciliation report to the recipient entity. Global payments platforms can consolidate the reconciliation report making it easier to track the status of each transaction, reconciliation, and settlement.

Each stop along the way usually introduces a time delay (even if it’s only a few milliseconds,) additional transaction fees, and more risk of the transaction being blocked or rejected. The additional steps in cross-border transactions make them challenging, slower, and more expensive than domestic ones.

Challenges with cross-border transactions

Cross-border transactions are generally more costly and slower, with less access and transparency than domestic payments. They can take a few weeks to reconcile and cost up to 10 times more than a domestic transaction. Here are a few more challenges with cross-border transactions.

1. High funding costs

Depending on the transaction type and currencies involved, payee entities must provide funding in advance. They may need to access the relevant currencies or foreign currency markets to even initiate the transaction. That means putting aside capital to cover expected transactions, and those funds can’t be used for anything else.

2. Transaction fees

The more entities involved in a cross-border transaction, the higher the cost due to bank fees at each stage. Many of these fees are absorbed into the merchant bank fees and accounts, but they’re sometimes passed along to consumers or the originating payee. For example, credit card companies often charge card holders a foreign currency transaction fee for purchases made in currencies other than the card’s currency. This rate can vary between cards, issuers, and currency types, so it’s hard to know the fee for the transaction.

3. Currency exchange rates

Exchange rates fluctuate all the time, affecting both payee and recipient entities. Recipients could end up with a deficit if the rate decreased between the time the transaction was begun, processed, and settled. Likewise, payees may spend more on their end if the rate was higher when they started the process. To avoid this, many merchants offer the ability to purchase in a local currency and use a payment gateway or processor to find the best exchange rate for the merchant automatically. Consumers save money when spending, and merchants save during the transaction and settlement processes.

4. Long transaction chains

A transaction chain is the number of entities involved in a payment transaction. Domestic transactions or in-network single currency cross-border transactions tend to have shorter chains. Multi-currency cross-border transactions tend to have longer ones. The correspondent bank model allows entities to offer cross-border transactions, but it can lengthen the transaction chain at the same time. Each “link” in the chain increases the timeline, funding needs, fees, validation checks, and the potential for data to be corrupted as it is transmitted.

5. Complex compliance checks

Cross-border transactions tend to face broader and more stringent compliance checks against fraud, sanctions, and financial crime. Each check takes time and may happen multiple times during the transaction’s journey. Each bank or payment gateway may use different rules and guidelines when checking transactions, leading to incorrect flagging or declines. For example, if a customer has a similar name to one in financial crime databases, they may be declined automatically.

Domestic compliance checks may complicate these transactions if they move through different domestic banking networks or systems and trigger domestic compliance rules. For example, in the US and Canada, transactions that move across states and provinces may trigger unique checks that other transactions may not.—And that’s even before the transaction gets to an international border.

6. Tax and legal implications

Taxes and local laws are another complication for cross-border transactions. There are implications for individual countries involved in the transaction and any tax-related treaties between their governments. Sales tax is the most obvious example of tax implications for cross-border transactions and how it’s applied to different transaction types depends on the countries involved. For example, it may apply to goods over a certain threshold in one country, and under that threshold in another. It may not apply to services at all in most countries and apply to all services in another, but at different rates depending on the recipient entity’s location.

7. Limited operating hours

Digital transactions can happen at any hour of the day, but balances and settlements often depend on bankers’ hours of operation for updates. That means that reconciliation and settlements can only happen during the hours banks are open in the payee and recipient entity’s location. This can create long delays and bottlenecks in clearing and settling cross-border transactions, especially across large time differences.

The impact is that transaction fees may fluctuate since foreign exchange rates may change during this time. Banks, entities, and recipients often must hold enough balance to cover unknown costs of the eventual foreign exchange rate, driving up overall transaction costs.

8. Fragmented and truncated data formats

Financial transactions contain sufficient information to confirm the identity of the those involved in the transaction and confirm its legitimacy. However, data standards and formats can vary significantly across countries, systems, message networks, and financial jurisdictions. This variation results in data fragmentation or loss as systems are not set up to handle unfamiliar data. Data may need to be translated and could lead to slight changes in spellings or formats, making it difficult to set up automated processes and increasing delays and decreasing transaction success rates.

9. Legacy technology platforms

Traditional financial institutions are notorious for using legacy technologies that may not interface well with newer technologies. These legacy processes and technologies may have fundamental limitations that cause settlement delays and create processing bottlenecks, such as relying on batch processing, no real-time monitoring, and low data processing capacity. These systems may not be able to handle the ebb and flow of financial transactions in real-time. Legacy technology may be a significant barrier for emerging business models and cross-border transaction technologies who want to enter a new market.

Enter: The modern cross-border transaction model

Enhancing cross-border transactions by making them faster, cheaper, more transparent, and easier to implement has widespread benefits for the online payment market. Delivering widespread change is a slow process, so what can people, merchants, banks, and financial companies do in the meantime?

A global payables platform can save time, money, and effort on cross-border transactions.

Reduce transaction delays

Global payment platforms often have built-in features that automatically choose the relevant processors, banking networks, and gateways that work for both payee and recipient entities. They eliminate the need to ensure you have the right bank or financial network partners to complete cross-border transactions. The platforms have already developed the partnerships, so you don’t have to.

Save on transaction fees

Global payment platforms with intelligent payment processing features will save you money on cross-border transaction fees and currency exchange rates. They have predetermined rules that route transactions automatically based on origin, destination, currency type, product type, and more.

Optimise compliance checks

Because global payment platforms partner with regulated and approved payment gateways and processors, origin and destination entities can have confidence in each transaction. The transactions are sent through previously approved and authorised systems, so the checks are done more efficiently and securely.

Increase transaction accuracy and transparency

Automation and intelligent routing rules efficiently process and record transactions as they’re sent through the system. Pertinent data is stored for future use, enabling future optimisations and ensuring better accuracy. The platform also improves transaction reporting, reconciliation, and settlement, offering more transparency into each transaction phase.

Automate previously manual tasks

Previously manual tasks like reconciliation report verifications or settlement balancing can be done automatically by the global payment platform. This frees up staff to work on other transaction activities. These tasks are also done faster and more efficiently, increasing transaction transparency and helping entities forecast required bank balances more effectively.

Enable multiple transaction types

A global payments platform can save time and money by allowing recipients to choose the cheapest and fastest transaction type, for example, by always sending an international bank ACH transfer when sending to a specific destination. Specific transaction types can also be set up to run automatically based on custom rules, such as always checking a minimum of three payment options for credit card transactions or using a specific bank or network for transactions over $10,000.


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Cross-border transactions will continue to increase and evolve as borders become increasingly less relevant to shoppers, whether you’re in the B2C or B2B market. While most people think of eCommerce and online shopping in the B2C market as the most relevant in this space, B2B cross-border transactions are starting to increase. More companies and enterprises realise there are better ways to send and receive large amounts of money than a paper cheque or wire transfer.

No matter what market you’re in, merchants and vendors will want to ensure faster transaction acceptances with the lowest fees possible. They want to save money and reduce the timelines for the customer’s money to arrive in their bank account. Payment companies that can deliver that frictionless, optimised experience will succeed in this growing market. Those who can’t will fall behind.