Why Are Cross-Border Payments Expensive?
If you’ve ever been wondering why cross-border payments are expensive, then please keep reading on.
It can often seem like cross-border payments are highly priced, even though they're just simple transactions. Especially for smaller value payments, or SME payments, which are small in value and can be infrequent.
There are several reasons why cross-border payments have high costs associated with them:
Correspondent Banking. All cross-border payments go through the correspondent banking network, which involves intermediary banks moving money for you. Each intermediary will be charging a fee along the way.
You might ask: Why do bigger companies get their cross-border payments cheaper? It is simple—because of wholesale correspondent banking. It works in a way that specialised payment companies get their payment routes from top-tier banks, such as Deutsche Bank, Citi, Barclays, etc. Their own cost is relatively low as they are buying the service in bulk. When they resell to the end client, this means that the end client’s cross-border payment will be going through the Top Tier Bank. And this is where the wholesale service initially came from.
Logically, SME will be charged a higher price for any payments due to the low value and infrequency of transactions, while a big corporation will have thousands of payments. Eventually, huge volumes will create more business for payment specialists and a better price for big corporate clients.
Profitability. The business of cross-border payments is highly profitable, and the institutions moving money internationally are incentivized to keep it that way. The banks will continue charging fees as long as the market participants are willing to pay them. Anyhow, some digital banks and payment specialists are disrupting this market with very low fees or even no fees. But in the end, if they have to pay for correspondent banking services, they will eventually need to charge something to their clients.
Regulatory costs. There are other costs that clients do not see. Being compliant with the regulation is an expensive process. Moreover, each bank or cross-border payments company has to have KYC (know your client) and AML (anti-money laundering) procedures and people on its payroll that will implement those procedures. This is a heavy financial burden for those institutions.
Foreign exchange costs Most cross-border payments involve currency conversion, which can impact the ultimate cost of that transaction. Usually, currency conversion is not cheap because several parties are involved in such transactions and each of them has to make a profit. For example, if an SME client is charged a 1% fee for EUR/USD conversion, the payments company or a bank is getting the same liquidity for 0.05% or less. In the case of bigger banks, the cost of converting major currencies via direct market access can be very close to zero.
Geography. It is true that some regions are heavily unbanked, which means that cross-border payment penetration into those regions becomes a difficult task. Finding a suitable cross-border payment route to an unbanked region might inflate the cost of the transaction due to the many correspondent banks involved. In some regions, people do not even use electronic money. So the transaction must reach the final recipient in the form of cash. And that can complicate the process even more.
How Can I Send Cross-Border Payments?
It is now clear that cross-border payments are more complicated than they appear at first glance.There are some factors to account for, so the price of cross-border payments is high.
Even so, there are payment specialists in our network that specialise in cross-border payments and foreign exchange and can offer cross-border payments at a much lower cost than local banks.
It is an easy and straight-forward bank account opening process for cross-border payments with our partner banks that will eventually save your time, money, and nerves while transacting internationally. Reach out to us to get introduced to the most cost-saving banking platform across the globe.
Conclusion
Cross-border payments can be more difficult than they seem. Each intermediary involved in a cross-border payments transaction is getting a cut, which eventually inflates the ultimate fee for the transaction. But you can save on those cross-border payment transactions with our team's help.