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International payment management: challenges and solutions

May 2, 2024

In an increasingly interconnected and globalised world, the ability to manage international payments effectively has become a critical component to the success of any global business. Whether you are doing business with overseas suppliers, expanding your presence in international markets, or hiring talent from around the world, you need a reliable, efficient and cost-effective method for making and receiving payments across international borders.

However, managing international payments comes with its own set of challenges. From high costs and slow speed to a lack of transparent reporting and complex currency management, companies often find themselves navigating difficult terrain. 

In this article, we will delve into understanding these challenges and explore the different solutions available that can ease the process, allowing companies to maximise efficiency and minimise costs in today's global environment.

What do we mean by international payment management?

International payments management refers to the process of making and receiving payments between different countries and regional areas. For companies that operate globally, this management is essential when carrying out their daily operations, as it involves multiple currencies, tax systems, bank policies and specific regulations in each country. In Spain and the rest of the world, this management includes transfers, SWIFT transactions and digital payments, among many others.

Currently, there are several international payment methods. These include traditional bank transfers, payments via SWIFT (Society for Worldwide Interbank Financial Communications), and increasingly, digital and fintech payment solutions. There are also payments via international credit cards and online payment services, such as PayPal.

How do international payments work?

Understanding how international payments work is essential for any business operating globally. 

Although the operation may vary depending on the countries involved and the payment method selected, the process generally follows these steps:

I. First, the issuing company, also known as the payer, requests its bank to send a payment to a company in another country. This request can be made physically at a bank branch or digitally via the bank's online banking platform.

II. The originator's bank, known as the issuing bank, then initiates the transaction. This includes currency conversion, if necessary. The issuing bank will also be responsible for checking the payment request and performing the necessary security checks.

III. Once these steps have been completed, the transaction is sent through an international payment network. This network may include several intermediary banks, and the transaction may go through several processing stages before reaching the recipient's bank. One of the most commonly used systems for these transfers is SWIFT, which is a secure messaging system that banks use to communicate with each other.

IV. Finally, the recipient's bank, known as the beneficiary bank, receives the transaction. It then verifies the transaction and credits the funds to the recipient's account.

Each of these steps can involve different fees, and the process can take several days. However, with new technologies and payment solutions, work is underway to make this process more efficient and less costly.

The main challenges in managing international payments

Making international payments is not a straightforward process and faces many challenges. The following are some of the most common ones.

High cost

The cost associated with making international payments can be significant. Banks and other financial service providers often charge fees for processing these transactions. According to a study by the Organisation for Economic Co-operation and Development (OECD), these fees can be as much as 7% of the amount transferred, which can be a considerable cost for businesses.

In addition, companies have to consider the cost of currency exchange, when transactions are carried out in a currency other than the euro. Banks and financial service providers often apply a margin to the interbank exchange rate, which can further increase the cost of international transactions.

Low speed

The speed of international transactions is another major concern for businesses operating internationally.

International money transfers can often take several days to complete. According to a World Bank report, the average time for international transfers is 3-5 days, depending on the country of origin and destination of the funds.

This delay can cause cash flow problems and hamper companies' financial planning. It is no longer that the cash flow is not instantaneous; it is that it takes much longer to process than a domestic transaction, which can lead to significant discrepancies in business accounting.

Lack of transparency

Sometimes companies do not have all the information they need to fully understand the costs associated with international transactions. For example, fees and exchange rates may not be clear until the transaction is completed. 

According to a European Commission study, this lack of transparency can lead to unexpected costs and hinder the efficient management of international payments.

Currency and exchange rate risk management

Although Spain's entry into the euro eliminated foreign exchange risk in international transactions at the eurozone level, currency management remains a major challenge in international transactions.

Fluctuations in exchange rates can have a significant impact on companies' costs. For example, if a Spanish company enters into a transaction in dollars and the euro depreciates against the dollar, the cost of the transaction for the company may increase. Managing this foreign exchange risk is a crucial aspect of managing international payments.

International payment management solutions

Overcoming the challenges associated with international payments requires the adoption of strategic and efficient solutions. Some of the most relevant solutions are highlighted below:

  • Fintech solutions: Fintechs have revolutionised the financial sector, providing innovative solutions for international payments. Companies such as TransferWise (now Wise) or Revolut offer international money transfer services that are faster, cheaper and more transparent than traditional options.
  • Currency risk management: To manage the risk of currency fluctuations, companies can opt for futures or options contracts. These financial instruments allow companies to lock in a specific exchange rate for a future date, protecting them against market fluctuations.
  • Service Level Agreements (SLAs): Service Level Agreements with payment service providers can guarantee a certain level of performance, such as speed of transactions and transparency in the reporting of their fees. SLAs can help businesses obtain a more predictable and reliable service.
  • Real-time payment (RTP) systems: Real-time payment systems allow funds to be transferred between bank accounts almost instantaneously. These systems, which are being implemented in many countries, can significantly accelerate the speed of international transactions.
  • Digital currencies and blockchain: Emerging technologies such as cryptocurrencies and blockchain can offer innovative solutions for international payments. For example, the use of blockchain technology can increase transparency and reduce transaction costs.
  • Open banking: Open banking allows businesses to share their banking data securely with authorised third parties. This can facilitate the integration of international payment solutions and allow businesses to benefit from more efficient and personalised payment services.
  • Payment system integration: Companies can integrate their international payment systems into a single unified system. This can simplify payment management, provide greater visibility and control over transactions, and improve operational efficiency.
  • Corporate treasury management platform: the challenges in international payments also have their problems within companies. Embat is a corporate treasury management solution that provides companies with a centralised platform to manage all their financial operations, including international payments. They also allow you to consolidate your transactions, track cash positions in real time, manage currency risk and much more. Using treasury management software can help improve efficiency, reduce risk and provide greater transparency and control over international payment transactions.

By implementing these solutions, companies can overcome the challenges associated with managing international payments and take full advantage of the opportunities offered by global trade.

Conclusions

Ultimately, managing international payments is an essential component for any business operating globally. While this task can be complex and fraught with challenges, such as high costs, slow speed, lack of transparency and currency management, there are solutions and strategies that can alleviate these difficulties and make this process more efficient.

It is essential to keep up with the latest technologies and trends in international payments. Whether it is by using fintech solutions, implementing an effective currency management policy or ensuring transparency in all transactions, companies can optimise their operations and ensure they are prepared to meet the challenges that global trade presents.

Finally, it is essential to remember that managing international payments is not just a matter of efficiency and cost. It is also a vital aspect of your relationship with your international partners and customers. Effective and transparent management of international payments can help build your company's trust and credibility, factors that are essential for success on the international stage.

Carlos
Serrano García-Lisón
Co-founder @ Embat
Carlos, CFA and Industrial Engineer, brings his experience from J.P. Morgan and TowerBrook Capital Partners to corporate treasury management as a co-founder of Embat.

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