5 Reasons Why Cross-Border Payments Are Expensive

Why Cross-Border Payments Are Expensive? 

If you’ve ever been wondering why cross-border payments are expensive, then please keep reading on. 

It can often seem that cross-border payments are highly priced even though it’s just a simple payment. 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: 

  1. Correspondent Banking. All cross-border payments go through correspondent banking network that involve intermediary banks in moving money for you. Each intermediary will be charging  some fee along the way.   

You might ask: why 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 relevantly low as there are buying the service in bulk. When they re-sell to the end client, this means that end client’s cross-border payment will be going through the Top Tier Bank.  And this is where the wholesale service come from initially. 

Logically, SME will be charged higher price for any payments due to low value and infrequency of transactions, while a big corporate will be having thousands of payments. Eventually,  huge volume will create more business for payments specialists and a better price for big corporate client. 

/var/folders/cj/wdr1ls7x34dg8byp1jp9mklr0000gn/T/com.microsoft.Word/WebArchiveCopyPasteTempFiles/main-qimg-c455be72ac4cbc5599d1f243591751bc
  1. Profitability. Business of cross-border payments is a highly profitable area, and the institutions moving money internationally are incentivized to keep it like that. The banks will continue charging fees as long as the market participants are willing to pay them.  

Anyhow, some digital banks (linkas I str apie digital bansk vs traditoal bank) and payments specialist are disrupting this market with very low fees or even absence of fees. But in the end, if they have to pay for correspondent banking services, they will eventually need to charge something their clients.  

  1. 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 have to have KYC (know your client) and AML (Anti-Money Laundering) procedures and people on payroll that will implementing those procedures. This is a heavy cost burden for those institutions.  
  1. Foreign exchange costs. Most of the cross-border payments involve currency conversion which can impact the ultimate cost of that transaction.  

Usually currency conversion is not cheap because of several counterparties involved into such transaction, where each of them have to make a cut. For example, if SME client is being charged 0,3% fee for EUR/USD conversion, the payments company or a bank is getting the  same liquidity for 0,02% or less. In case of a bigger banks, the cost of converting major currencies via a direct market access (https://en.wikipedia.org/wiki/Direct_market_access) usually is in a range of 0,000% to 0,005%. While SME will be paying for the very same 0,3-0,5%. 

  1. GeographyIt is true that some regions are heavily unbanked which means that cross-border payments penetration into those regions becomes a difficult task.  

Finding a suitable cross-border payment route to unbanked region might inflate the cost of transaction due to many correspondent banks involved. In some regions people do not even use electronic money. So the transaction must reach the final recipient in a 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 have more underneath than it looks like from the first sight. There are some factors to account for thus the price of cross-border payments is high.  

Even so, there are payments specialists like IFX Payments that specialize in cross-border payments and foreign exchange and can offer cross-border payments at a much lower cost.  

It is easy and straight forward bank account opening process for cross-border payments with IFX Payments that will eventually save your time, money and nerves while transacting internationally.  

Conclusion 

Cross-border payments can be more difficult than they seem. Each intermediary involved in 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 payments transactions with IFX Payments. 

Suggested Articles

Leave a Comment

Your email address will not be published. Required fields are marked *