Why Are International Payments in USD So Difficult?
If you have ever been wondering why international payments in USD are so difficult and expensive to make, we are going to explain it in this article.
The U.S. dollar is a global currency, with more than 80% of worldwide foreign exchange transactions taking place in USD. There are several reasons for that: liquidity, accessibility, acceptability, and most importantly, the backing from the Federal Reserve of the United States (FED). The FED has an excellent reputation in global markets for safe and timely USD payment settlements. Also, all top-tier banks have offices in the U.S. and are able to settle on behalf of their international clients.
The difficulty of transacting in USD comes from strict compliance and the USA Patriot Act. This is used both for achieving US foreign policy and anti-money laundering (AML). Financial crimes such as AML and anti-terrorism are hot topics for US regulators, especially after 9/11.
How Do International Payments in USD Work?
Paying in USD internationally usually involves an additional correspondent bank in the routing of such payments. Every correspondent bank that touches the money takes a fee, and fees can accumulate and reduce the value of the original payment amount. Even more, the receiving bank can also apply a fee or exchange the original USD into a local currency. This is one of the reasons we recommend transacting in local currency if possible.
In a similar vein, the international payments and settlements in USD are handled by Fedwire (the Federal Reserve of the United States), also known as the real-time gross settlement system of the central bank. Fedwire is an electronic funds transfer system used by financial institutions for USD transactions. Such transactions are initiated when the sending institution receives accurate transaction instructions (such as an ABA routing number, name, account number, etc.) from the receiving institution (usually a bank). This information is then submitted to the Fedwire system (FED), and once processed, FED will debit the funds from the sending bank's reserve account and credit the receiving bank's account. Such transfers get completed instantly or within one business day.
In other words, the FED has significant control over all international payments in USD and is able to enforce U.S. AML policies (terrorist financing, for example) or political agendas (sanctions). Losing the ability to transact in USD is basically a hold on global trade for a country. Also meaning the U.S. has the leverage to enforce its policies, and that is why countries like Russia and China are looking for alternative currencies to transact globally.
What Are The Alternatives To USD?
Since 2016, the USD is no longer the single reserve currency in the world. It remains the king currency (the most prevalent), but the International Monetary Fund (IMF) introduced four other reserve currencies to the list: EUR, GBP, JPY, and Chinese Yuan.
There are speculations that the 75-year USD dominance is coming to an end, even though the vast majority of transactions are still happening in USD. Besides that, there is a new term "de-dollarization,", where countries like China and Saudi Arabia agreed to use different currencies for their oil trade (the Chinese yuan, for example).
Another alternative is gold. For example, Russia is increasing its gold reserves very rapidly.
Very recently, Bitcoin and blockchain technology have been speculated about among politicians and prominent business people as a possible decentralised alternative to the USD. The idea of cryptocurrencies was always to ditch the use of fiat currencies.
How to Make International Payments in USD
Now that we have discussed the background of the USD as a currency, it is time to explain how one actually makes an international payment in the USD.
First and foremost, if you wish to make an international payment in USD, you must have an account that supports the currency. Usually, it is a multi-currency account that is able to receive and send payments not only in USD but in a variety of other currencies.
Secondly, you need to have USD in your account. That can be done by exchanging your local currency into USD. If you are using a multi-currency account, that should be an easy and straight-forward process.
Thirdly, you will have to have all necessary payment details. If it is a business payment and in a larger amount than $100,000, you should also be ready to present the invoice or other type of document that will prove the legitimacy of such a transaction.
Last but not least, a good digital bank will not only provide a multi-currency account but also a great variety of payment routes that will guarantee successful international payments in USD. It is important to understand that the payment service provider is the key here. That is why we are providing a first consultation free of charge for our clients, especially those who wish to optimise their payment flow or currency exchange. Feel free to contact us and get a list of the best payment and FX providers in the market.
On a microeconomics level, the USD is a difficult currency to deal with, especially because of high risk and anti-money laundering controls. Having a good payments partner will help you send international payments in USD seamlessly and without any problems. Contact us to get a list of the best payment providers for international payments in USD.