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NAVIGATING THE WORLD
OF CROSSBORDER PAYMENTS
Top Challenges Facing Businesses Initiating Global Mass Payments
Courtesy of
The multi-trillion dollar a year cross-border payment industry is expanding at an annual rate of more than 10 percent
and is in the process of fundamental change. The industry previously dominated by traditional correspondent banking
relationships is shifting as more nimble Payment Service Providers enter the market with innovative alternative
payment methods that compete with the traditional offerings on both cost and quality of service and address many
of the major challenges initiators are facing.
This white paper is intended for companies that need to initiate payments in freelance, royalty, marketplace,
e-commerce and other business scenarios that are experiencing the pain inherent in traditional cross-border payment
methods. This is also a resource for those looking to expand their business from domestic to international.
Alternative payment methods are reviewed in the light of how each method resolves specific initiator problems, and
the applicability of each method is discussed for different payment scenarios. A comparison table of the various
payment methods is presented as well as a checklist of best practices recommended for initiators.
2
CONTENTS
Traditional Cross-Border Payments
Payment Systems
Domestic Payments
Correspondent Banking
SWIFT
Segmentation
4
5
6
7
8
9
Challenges Facing Initiators
10-12
Payment Service Providers
13-15
Alternative Payment Methods
Debit Card
Low Value Payment Network (LVPN)
Electronic Wallet
16
17
18
19
Comparison Chart
20-21
Recommended Best Practices
22-24
About Payoneer
25-26
TRADITIONAL
CROSSBORDER PAYMENTS
Many of the challenges facing payment initiators today are a direct result of
the way that traditional cross-border payments work. In this section we
provide a brief overview of traditional cross-border payments in order to
understand the issues they introduce and how alternative payment
methods address many of these challenges.
4
PAYMENT SYSTEMS
Payment systems employ cash substitutes and comprise institutions, instruments,
procedures and technology to effect the transfer of monetary value between parties.
Traditional payment systems are negotiable instruments such as checks and letters of
credit. Electronic payment systems span debit and credit cards, electronic funds transfers,
direct debits Internet banking and electronic wallets.
National electronic payment systems are typically maintained and controlled by the
Central Bank of a country. The Central Bank makes adjustments to the electronic
accounts of participating banks without the physical exchange of money. Central
banks typically deploy:
Real-time gross settlement (RTGS)
systems that support low-volume,
high-value transactions between
banks. Money is transferred from one
bank to another in "real time" and on a
"gross" basis. Once processed,
payments are final and irrevocable.
Net settlement systems for
supporting high-volume, low-value
transactions between businesses and
individuals. Net settlement systems
settle transactions at the end of each
business day and are an alternative to
RTGS systems.
Traditional Cross-Border Payments 5
DOMESTIC PAYMENTS
Domestic payments are typically effected through domestic net settlement payment systems within
each country. Payment systems depend on both the payer’s bank and the beneficiary’s bank belonging
to the same system. Domestic net settlement payment systems are characterized by relatively low
transaction costs and a short time period required for funds to clear.
Payment
Initiator
Initiator
Bank
Payment
System
Beneficiary
Bank
Beneficiary
Domestic payment systems use common message standards, facilitating the removal of paper and
manual processes by businesses, promoting straight-through processing (STP). STP enables payment
instructions to be generated electronically as part of the business process, passed securely, efficiently
and cost-effectively to banks, and matched and reconciled automatically via a universal reference
number within invoicing, accounts payable, accounts receivable and other systems.
Domestic payment
systems are based on
local laws and practices,
and participation is
typically restricted to
existing domestic
banking and financial
structures.
Traditional Cross-Border Payments 6
CORRESPONDENT BANKING
Cross-border payments are complex because national payments systems do not generally support
direct participation by banks in other countries. In cases where one bank does not belong to the
payment system, a domestic correspondent bank is used to act on its behalf.
Payment
Initiator
Initiator
Bank
Payment
System
Correspondent
Bank
Correspondent
Bank
Payment
System
Beneficiary
Bank
Beneficiary
Most of the world’s major banks maintain correspondent banking relationships with local banks in
each of the important foreign cities of the world. At least 80 percent of bank-to-bank cross-border
payments currently take place through traditional correspondent banking arrangements.
International correspondent banking is a large decentralized network. Each bank makes a decision as
to how it wants to handle cross-border payments for its clients. These decisions can be different for
paying and receiving funds, and for different countries or categories of payments. Each bank makes an
independent decision about how to send, receive and settle payments.
Wire is the de facto standard for settling cross-border payments by
correspondent banks. In many cases, this is overkill for low-value
cross-border supplier payments that do not warrant the high security
and immediacy of payment qualities that RTGS systems provide.
Traditional Cross-Border Payments 7
SWIFT
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is an industry-owned
limited liability cooperative that supplies secure messaging services and interface software for
financial transactions to more than 7,650 banks, securities brokers and investment managers
in more than 200 countries.
The SWIFT communication system is what makes it possible for the complex system of correspondent
banking to work. SWIFT is not a payments system, but rather a standardized messaging system that banks
around the world use to tell each other what they have done and what they want done with different
types of transactions. SWIFT provides the message codes and protocols that help a receiving Bank
understand the transaction that a sending Bank has sent it, so that the receiving Bank can act accordingly.
SWIFT provides the messaging infrastructure for
most electronic cross-border payments today.
Traditional Cross-Border Payments 8
SEGMENTATION
Banks typically classify the cross-border payment landscape into four broad product segments, each with
its own competitive landscape, fee structure and independent delivery mechanisms. The chart below
illustrates this segmentation.
Individual
Business
Individual
Remittances
Payout
Business
BENEFICIARY
PAYMENT INITIATOR
e-Commerce
Purchaces
Supplier
Payments
Supplier B2B payments are made when one
enterprise pays another.
E-commerce purchases include physical goods as
well as travel, entertainment and other digital goods.
Payroll, retirement and benefits payments
are made by enterprises to counterparties in
other countries.
International remittances are payments made
by foreign workers to family members in home
countries.
This white paper addresses the rightmost quadrants of the diagram
representing cross-border payments initiated by businesses.
9
2
CHALLENGES
FACING INITIATORS
The decentralized, non-standardized international correspondent
banking network has inherent problems that can cause pain for
payment participants. Some of the challenges facing initiators of
cross-border payments include:
10
Absence of direct relationships with downstream banks. If a problem occurs
(for example, a payment is not received), the initiator may not be able to trace the
transaction quickly or reliably.
Time required for a transaction to clear. Cross-border transactions typically take
days or weeks to clear, and the period is often not known by the parties in advance.
Limited data transport capabilities and lack of standards. With multiple
intermediaries involved, it may not be possible to reliably carry data through to the
receiving party, preventing reconciliation, payment tracking and STP.
Cost. With multiple intermediaries involved, each charging a fee and/or taking some share
of the foreign exchange revenue, these transactions can be expensive for participants.
Often, end users do not know whether costs are also assessed to their counterparties.
Price-based competition between banks is limited to a small number of corridors between
specific countries. The World Bank estimates that globally, sending remittances costs an
average of 7.99 % of the amount sent.
5 Most Costly Corridors
Average Cost in USD
5 Least Costly Corridors
South Africa > Malawi
14.88
Singapore > Bangladesh
0.79
South Africa > Zambia
12.92
Spain > Dominican Republic
1.23
Singapore > Pakistan
12.31
Saudi Arabia > Yemen
1.50
South Africa > Botswana
12.26
UAE > Pakistan
1.52
South Africa > Mozambique
12.25
UAE > Yemen
1.55
Average total cost includes the transaction fee and exchange rate margin.
Average Cost in USD
Source: http://remittanceprices.worldbank.org/en
Challenges
FacingPayments
Initiators 11
Traditional
Cross-Border
Lack of transparency relating to currency conversions that are implicit in the
transaction. It is often unclear which party is responsible for exchanging currency and what
margin is being added above the inter-bank rate.
Compliance with regional regulatory environments and KYC (Know Your
Customer) practices. Countries impose different regulations for preventing money laundering,
controlling currency flows and enforcing sanction regimes. Regulations impact the type and size of
transactions that are permitted as well as the optimal method of payment to use. Country specific
limitations need to be respected in order to avoid failed disbursements.
Lack of end-to-end customer support for tracking exceptions and addressing operational
issues encountered by beneficiaries that speak multiple languages
Regional and beneficiary preferences and practices will also impact the optimal choice
of payment method. For example:
Beneficiaries living in un-banked regions prefer prepaid cards.
Beneficiaries living in countries with strict currency controls prefer LVPN to avoid the high
taxation on international WIRE transfers.
Freelancers contracting out work will prefer electronic wallets as they provide a closed loop stored
value system allowing them to easily receive payments as well as pay sub-contractors.
Initiators perceive existing cross-border
payments services as being cumbersome,
error prone and expensive.
Challenges Facing Initiators 12
PAYMENT
SERVICE PROVIDERS
3
In correspondent banking, both paying and receiving parties deal directly with their banks. Payment
Service Providers (PSPs) provide alternative services for handling cross-border payments for payers
and beneficiaries. These services effect the payment transaction for one or both end parties through
proprietary systems and networks. PSPs settle transactions financially by dealing with correspondent
banks on a net basis.
Several long-term trends contributing to fundamental change in the cross-border payments
landscape are being led by PSPs. Innovative new payment service offerings by PSPs address many of
the challenges arising from correspondent banking.
13
KEY TRENDS INCLUDE:
Globalization is driving corporations to transact more frequently across borders.
FORECASTED GROWTH IN
VOLUMEOF CROSSBORDER PAYMENTS ($T)
37.1
Developed Countries
Emerging Markets
6.8
13.9
2020
7.5
2010
Source: Boston Consulting Group:
http://www.bcg.com/documents/file71194.pdf
Online purchasing continues to grow
By large enterprises as part of automated procurement systems
By smaller enterprises purchasing directly
Multinational banks and corporations are expanding
Operational efficiencies are being sought through outsourcing
Growth of non-bank payment service providers:
Payments Institutions (PIs) within the Payment Services Directive of the European Commission
Money Service Businesses (MSBs) regulated by state authorities in the U.S.
Payment Service Providers 14
NEW SERVICES INTRODUCED
BY PSPS FALL INTO SEVERAL CATEGORIES:
Proprietary low-value payments networks that connect directly into the automated
low-value clearing house systems in different target countries.
Global debit card networks. Card networks including MasterCard, Visa, and American
Express create the effect of seamless cross-border payments transactions. The card
networks handle foreign exchange conversion and settlement among participating
banks, which are required to follow the networks’ operating rules.
PSPs offer initiators alternative methods for
paying beneficiaries across borders.
FX brokers. In many countries, these brokers supply the needs of high-volume
cross-border payment initiators, bundling management of foreign exchange conversion
risk with the mechanics of payments.
International money remitters. Companies such as Travelex and Western Union offer
branded payments services to consumers and enterprises, usually with a variety of
“money in” and “money out” options.
Online wallet services such as PayPal and Moneybookers are similar to the international
money remitters, but focus on online-originated transactions.
Traditional
Payment
Cross-Border
ServicePayments
Providers 15
4
ALTERNATIVE
PAYMENT METHODS
16
DEBIT CARD
In this scenario cross-border payments are handled by a payment system that is
owned and regulated by one of the major card networks. The payment system
facilitates daily net settlement of funds between participants, addresses the data
transport requirements accompanying the transaction, performs any currency
conversions that may be required and arbitrates if disputes arise between parties.
Payment
Initiator
Initiator
Bank
PSP
Payment
System
ATM
Beneficiary
The PSP maintains a global card issuing relationship with one of the card brands.
The initiator refers beneficiaries to apply for debit cards from the PSP.
The initiator transfers funds to the PSP and instructs the PSP to load funds to
beneficiaries’ cards.
The beneficiary withdraws funds at an ATM in his region that accepts the card brand.
Debit cards are most appropriate for disbursing high volumes of recurring low
value cross-border payments to beneficiaries in a wide geographic area.
Traditional
Cross-Border
Alternative
PaymentPayments
Methods 17
LOWVALUE PAYMENT NETWORK (LVPN)
Local low-value payment networks act as gateways facilitating the absorption of
cross-border payments into a particular region’s low-value payment system. In addition,
several PSPs operate at a global level, maintaining accounts and holding balances in
multiple countries and currencies to facilitate cross-border payments into different regions
by their customers. These PSPs typically also provide wire transfers to supplement their
offering and provide wider global coverage.
Payment
Initiator
Initiator
Bank
PSP
Payment
System
Local Bank
Account
Beneficiary
The PSP maintains a bank account with adequate credit balance in the beneficiary’s country.
The initiator transfers funds to the PSP and instructs the PSP to remit funds to the beneficiary’s
bank account.
The PSP converts funds if necessary and submits an instruction via a local bank account into the
regional payment system to transfer funds from its locally-held bank balance to the beneficiary’s
bank account.
The beneficiary receives funds into his bank account as if it were a local transfer.
The PSP tops up balances in its local bank accounts as required.
Traditional
Alternative
Cross-Border
PaymentPayments
Methods 18
ELECTRONIC WALLET
Electronic wallet services facilitate the initiation of payments and money transfers via the
Internet. PSPs providing e-wallet services allow their customers to send, receive and hold
funds in different currencies worldwide and to make financial transactions online by
transferring funds electronically between individuals and businesses.
Payment Initiator
eWallet
Payment System
eWallet
Initiator Bank
Beneficiary
A payment initiator typically loads funds into his e-wallet account via an online credit card
transaction. Depending on service provider and location of the initiator, direct transfer from
the initiator’s bank account via a low-value payment system may also be supported.
Initiator sends an instruction to the PSP managed payment system to transfer funds from
his e-wallet account into the beneficiary’s e-wallet account.
In cases where the initiator and beneficiary reside in different countries, the PSP facilitates
the cross-border transaction and may convert currency if the e-wallet accounts of the
participants are held in different currencies.
In cases where the beneficiary resides in a country supported by the PSP for withdrawal of
funds, he may be able to withdraw funds directly to his local bank account. An additional
currency conversion may be incurred at this point.
Beneficiaries residing in countries in which the PSP does not support withdrawal to local
bank accounts are restricted to spending funds where the e-wallet is accepted.
Traditional
Alternative
Cross-Border
PaymentPayments
Methods 19
5
COMPARISON CHART
20
5
Wire
Debit Card
LVPN
eWallet
Cost per transaction
High
Medium
Low
Low
Appropriate transaction value
High
Up To $10k
Low-high
Low
Time required for funds to clear
Slow
Fast
Fast
Fast
Tracking payment progress
No
Yes
Partial
Yes
Reconciliation tools
No
Yes
Partial
Yes
Where is currency converted
Beneficiary Bank
Card Network
Initiator/PSP
PSP
Cost of currency conversion
High
Fair
Negotiable
High
Difficult
Easy
Possible
Easy
Customer support
Weak
Strong
Weak
Strong
Geographic reach
Worldwide
Worldwide
Limited
Limited
Finality
Yes
No
Yes
No
Settlement risk
Low
Low
High
High
Security
High
Low
Low
Low
Automation friendly
No
Yes
Yes
Yes
Researching exceptions
Comparison Chart 21
RECOMMENDED
BEST PRACTICES
6
22
Understand how your current cross-border payments are being made, by category
of payment; determine if higher-priced methods are being used for transactions
that do not require these features.
The profile of payments initiated by your company may warrant using different payment
methods. To retain standard interfaces for initiation and reporting, it is recommended to
use a single provider that can support all payment methods and geographies that are
optimal for your payments.
Keep in mind that each payment method has a unique set of advantages and
disadvantages for payers and beneficiaries that make it more or less appropriate
for the type and geographic profile of the payments initiated by your business.
Investigate means of benchmarking FX rates
that can be embedded at the time of payment.
Recommended Best Practices 23
When choosing a payment provider, verify that they provide capabilities and support
payment methods that best serve your specific cross-border payment requirements.
Factors for consideration should include:
Geographic and currency reach
Finality of transactions
Category of payments
Multilingual customer support for handling
Volume and average value of payments
beneficiary enquiries
Time required for funds to clear
Reporting and reconciliation capabilities
Demand updates from banks and payments
providers on availability of net settlement based
solutions for cross-border payments.
Recommended Best Practices 24
ABOUT PAYONEER'S MASS PAYOUT SERVICES
Payoneer operates a state-of-the-art global payout platform, networking with major
banks and Payment Service Providers worldwide to offer a complete range of payment
methods to its customers.
Payoneer’s business customers enjoy the convenience and benefits of using a single
unified interface for initiating, tracking and reconciling payments regardless of
beneficiary location, payment method or currency.
Payoneer’s service enables beneficiaries worldwide to quickly, easily and cost-effectively
receive funds no matter where they are located. For payers and payees alike, Payoneer
removes geographical borders and ensures smooth, cost-effective, secure transactions.
Complete suite for managing global payouts on a massive scale
Powerful platform powers mass payments to 200+ countries in 100+ currencies
Send funds globally within minutes to your beneficiaries through optimal payment
methods including local bank transfers, online account (eWallet) and Prepaid
MasterCard® card
Rich integration options and full automation using Payoneer’s API
24/7 customer support for your beneficiaries in 35 languages
Dedicated account management every step of the way
About Payoneer 25
ABOUT PAYONEER
Payoneer empowers global commerce by connecting businesses, professionals, countries and
currencies with its innovative cross-border payments platform. In today’s borderless digital world,
Payoneer enables millions of businesses and professionals from more than 200 countries to reach
new audiences by facilitating seamless, cross-border payments. Thousands of leading corporations
including Google, Airbnb, Elance-oDesk and Getty Images rely on Payoneer’s mass payout services.
With Payoneer’s fast, flexible, secure and low-cost solutions, businesses and professionals in both
developed and emerging markets can now pay and get paid globally as easily as they do locally.
Founded in 2005 and based in New York, Payoneer is venture-backed, profitable and ranked in the
top 100 of Inc. 5000’s Financial Services companies.
PAYONEER’S MASS PAYOUT OFFERING
=
PAINLESS CROSSBORDER PAYMENTS
By sending cross-border payments through Payoneer, your business will immediately benefit from a
comprehensive choice of payment methods and wide geographical coverage ensuing from the
network of top tier payment providers that Payoneer has partnered with worldwide. Payoneer’s
payment-savvy Account Managers can assist your business to apply payment methods that are most
applicable for your business scenarios and geographical requirements, while ensuring low transaction
costs, fast clearance, strong security, flexible tracking and superior multilingual customer services.
Traditional Cross-Border
AboutPayments
Payoneer 26
Learn More About Payoneer’s Cross-Border Payment Solutions
LEARN MORE
www.payoneer.com
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provided in the publication is intended to be current and accurate, no warranties whatsoever are made in respect to it. Payoneer is not responsible
for any errors or omissions in the content of the publication and no entity or person at Payoneer is liable for any losses suffered by any person or
entity that relies on this publication.