Why International Payments In USD Are So Difficult?
If you have ever been wondering why international payments in USD are so difficult, the please keep reading on.
U.S. dollar is a global currency with more than 80% of worldwide foreign exchange transactions happening in USD. There are several reasons for that – liquidity, accessibility and acceptability and most importantly the backing from Federal Reserve of United Sates FED. FED has excellent reputation in global markets for the USD payment settlements and safety. Also all top tier banks have offices in U.S. and are able to settle on behalf of their international clients.
The difficulty of transacting in USD comes from strict compliance and UAS Patriot Act. This is used both for achieving US foreign policies and anti-money laundering AML. Financial crime such as AML and anti-terrorism are hot topics for US regulators, especially after 9/11.
How International Payments In USD Work?
Paying in USD internationally usually involves an additional correspondent bank in the routing of such payment. Every correspondent bank that touches the money takes a fee, and fees can accumulate and reduce the value of original payment amount. Even more, the receiving bank can also apply a fee or exchange original USD’s into a local currency. This is one of the reasons we recommend to transact in local currency if possible.
In the similar vein, the international payments in USD and settlements in USD are handled by Fedwire (Federal Reserve of U.S.) also knows as real-time gross settlement system of central bank. The Fedwire is 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 ABA routing number, name, account, etc) from 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 during one business day.
In other words, FED has significant control of all international payments in USD and is able to enforce U.S. AML policies (terrorists financing for example) or political agenda (sanctions). Losing an ability to transact in USD is basically a hold onto global trade for a country. Also meaning U.S. has a leverage to enforce its policies and that is why countries like Russia and China looking for alternative currency to transact globally.
What Are The Alternative To USD?
Since 2016 USD is no longer the single reserve currency in the world. It remains to be a king currency (the most prevalent) but International Monetary Fund IMF introduced four other reserve currencies to the list: EUR, GBP, JPY and Chinese Yuan.
There are speculations that the 75 years USD domination is coming to the 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 (Chinese Yuan for example).
Other alternative is gold. For example, Russia is increasing its gold reserves very rapidly.
Very recently, the Bitcoin and the blockchain technology is being speculated between politicians and prominent business people as a possible decentralized alternative to nowadays USD. The cryptocurrencies idea was always to ditch the use of fiat currencies.
How To Make International Payments In USD?
Now after we have discussed the background of USD as a currency it is time to explain how do one actual makes an international payment in USD.
First and foremost, if you wish to make an international payment in USD you must have an account that supports USD. Usually it is a multi-currency account that is able to receive and send payments not only in USD but in a variety of 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 100k, you should also be ready to present the invoice or other type of document that will prove the legitimacy of such transaction.
Last but not least, a good digital bank will not only provide a multi-currency account but also great variety of payment routes that will guarantee the successful international payment in USD. It is important to understand that the payment service provider is the key here. That is why we recommend to check out IFX Payments – a digital bank that specializes in international payments in USD and 80 other currencies. IFX Payments will be able to exchange your local currency in USD under a tiny and transparent margin. In addition to this, you can also check our article “Payment Service Provider That Will Save Your Money”.
On a microeconomics level, USD is a though currency to deal with, especially because high risk and anti-money laundering controls. Having a good payments partner such as IFX Payments will help you to send international payments in USD seamlessly and without any problems.
Statistics were taken from here.