Methods for International Business Pay-outs
As global trade expands and the rise of e-commerce continues, local small and medium-sized businesses are looking abroad to create new markets and grow their business. In this article, we take the time to explain the most popular methods businesses currently use to deal with the challenges of transferring value internationally.
What Does it Mean to Make a Bank Transfer?
To transfer money, in the simplest definition, refers to the process of transferring value from one account to another. Using basic accounting concepts, this means debiting the sender’s account and crediting the receiver’s account by the same amount. When this happens, a payment has been made and the transfer of value is marked complete.
Within national jurisdictions, there exist banking systems, each with their own players, processes, and coding “schemes” to distinguish individuals’ accounts from one another. This system is standardized by one governing body, a central bank. In the US, this is the Federal Reserve; in the UK, the Bank of England; in the EU, the European Central Bank.
Transferring Money Internationally
Though the general banking systems in most jurisdictions are similar in nature, the discrepancies in details such as how a system structures its coding scheme can widely vary.
With each national region built under different systems, they create their own methods of transferring funds. These include ACH in the US, SEPA in the EU and Faster Payments (FPS) in the UK. They perform a similar task but within their own payment protocols. With the lack of standardization globally, we can see the complexity of sending money internationally.
This is not something banks around the world just discovered. Back in 1973, a group of about 213 global banks banded together to solve the international transfer issue. They formed a cooperative utility called the Society for Worldwide Interbank Financial Telecommunication (SWIFT). It was essentially a messaging system made to communicate with banks from all around the world. Through this system, banks have been able to perform wire transfers with relative ease. However, even today, nearly the same system still exists, resulting in technology over 40 years old being the dominant player in the international payments industry.
Using International Wire Transfers
International wire transfers are one of the most popular methods for businesses to use cross-border. The process is built on a method called correspondent banking. Two banks are correspondent when they have an established relationship with one another to help complete financial services, such as moving money. With the help of SWIFT messaging, the bank an individual wants to transfer money from organizes a chain of corresponding banks to connect to the bank in the foreign jurisdiction where the transfer is to be received. Through wire transfer services provided by financial institutions, businesses can request wire payments to other customers of other financial institutions. The sender and recipient do not have to be in the same country.
People regularly use this method to transfer funds due to their versatile nature. It allows you to make the transaction from nearly any corner of the world in real-time, requires limited effort, and the receiver can claim the funds in their local currency. As well, international regulations make wire transfers one of the safest ways to send and receive money. The wire may not be as perfect as popularity suggests. A single transfer could cost hundreds to tens of thousands depending on the amount being sent. Plus, long processing times can lead wires to be one of the more inconvenient methods of payment. With this said, it begs the question of other alternatives. The other two most popular methods are players that take you out of the banking ecosystem: Credit Card and Payments Services Providers.
Using Credit Card for International Payments
Another popular method of payment most businesses offer to their customers is Credit Card payment. Credit cards issued by MasterCard, Visa or other financial institutions provide an alternative way to transfer money internationally.
Regardless of the direction of the flow of money, both parties need to “subscribe” to the platform either in the form of applying and obtaining a credit card or contracting a card processor. Opting for Credit Card takes payments out of the traditional SWIFT ecosystem. In exchange, both parties can make payments around the world nearly instantly and can do it in person or online. Credit Card payment is also widely available through most businesses which add to the method’s convenience. Credit Card payments are a great option for businesses to provide for consumers.
The disadvantage is that credit cards, while they can be owned by a business, are not designed for B2B transactions. Due to the nature of most B2B transactions, credit card usage for businesses is usually restricted to protect against fraudulent activity. Most credit cards have a transaction limit, which often doesn’t suit vendor purchasing needs. On top of that, the general complaint with using and accepting credit card payment is the high fees.
Using Payments Services Providers For International Payments
In a market not fully satisfied, payments services providers entered the payment stage sometime in the late 90s with the establishment of PayPal. From here, many providers from prepaid cards, mobile payments to digital wallets began to pop up. Most of their models include creating their own ecosystem where members can enjoy, frankly, incredibly efficient, instant and simple payments to all areas of the world. As well, with new technology being leveraged every day, the safety and security of these transactions are especially solid. These alternatives to traditional bank transfers have gained traction as more significant players have entered the payments ecosystem. The payments services provider category helps in the process to send money internationally, whether that be actually transferring the money, converting currencies, holding money digitally or a combination of multiple services.