Cross-Border Payments

Cross-Border Payments

Cross-border payments are financial transactions between individuals or businesses in different countries. The funds are typically transferred via banks or other financial institutions and often involve currency conversions. They can be made using a variety of payment methods.

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Cross-Border Payments Facts

Cross-border payments volume and value are growing exponentially each year. In 2024, the global cross-border payments market was valued at over $194 trillion. It is projected to exceed $290 trillion by 2030. Volumes are expected to increase by 5% annually through 2027 to reach a market size of $250 trillion. Approximately 80% of global transactions involve cross-border payments.

Why Cross-Border Payments Matter

Cross-border payments enable money to flow between countries and thus are critical to the global economy. They facilitate international trade, travel and tourism, remittances between individuals, investments, international contributions to charities and many other activities.

The Main Types of Cross-Border Payments

There are two main types of cross-border payments: wholesale and retail. Wholesale payments are high-value transactions that typically occur between financial institutions, but they may also be transacted between large companies or governments. Wholesale transactions are small in volume but high in value. They enable global financial activities, such as importing and exporting goods and services, borrowing and lending, foreign currency exchange and trading within financial markets.

Retail cross-border payments are transactions between consumers and/or businesses, often for goods and services across borders. These include person-to-person (P2P), consumer-to-business (C2B) and business-to-business (B2B) payments. Some examples are online purchases, travel and tourism, and remittances, in which immigrants send money to relatives in their home countries. Retail payments are larger in number but smaller in value than wholesale payments.

Example Scenarios for Cross-Border Payments

The potential scenarios for making cross-border payments are almost innumerable, but some examples include:

  • B2B payments for goods and services, such as an auto manufacturer buying equipment from an overseas supplier.
  • Investors buying and selling securities in foreign markets.
  • Tourists paying for their accommodations and meals.
  • Consumers making online purchases from e-commerce retailers in other countries.
  • Large corporations undertaking mergers and acquisitions or joint ventures.
  • Nonprofit organizations and governments providing international and humanitarian aid, such as delivering food or funding development projects.
  • Companies hiring freelance workers — such as designers and developers — from a global labor pool.

How Cross-Border Payments Move Between Countries

The typical cross-border payment process begins when the payer initiates the transaction through a financial institution or payment service provider (PSP). The institution or PSP then runs the necessary compliance checks, like anti-money-laundering (AML) and know-your-customer (KYC) procedures. Currency is then converted as needed.

Next, the funds are transferred through intermediary banks (also known as correspondent banks) and/or payment networks that connect the two parties. The banks and networks ensure that the transaction complies with international requirements and regulations. For some payment methods, the funds may pass through as many as five intermediaries before reaching their final destination.

Last, the payment is applied to the recipient's account, and both the payer and payee receive a confirmation notice of the transaction.

Cross-Border Payment Methods and Solutions

Cross-border payments can be made using a variety of instruments, including:

  • Wire transfers, which are often used for larger transactions. These are the tried-and-true method of moving funds among bank accounts. They are secure but slow and relatively costly due to fees and exchange rates. Even so, wire transfers are the predominant method for cross-border B2B payments and large transactions. The most common solution for these transactions is Swift, the global network used by financial institutions and some large corporate organizations. Another example is Europe’s SEPA (Single Euro Payments Area) system for European countries.
  • Credit cards, which are widely accepted around the world.
  • Electronic funds transfers (EFT), sometimes referred to as e-checks or electronic payments. They are usually made as ACH transactions.
  • International money orders, a paper-based method that can be sent through the mail or electronically through a third-party provider. These are typically used for smaller transaction amounts.
  • Online payment platforms/digital wallets — like PayPal, Apple Pay, Alipay and Stripe — that individuals or businesses use to send and receive money through their phones or computers. These generally incur lower fees than traditional banking methods and offer real-time tracking and relatively simple currency conversion. But their reach is limited in some countries, and restrictions are placed on certain currencies. Compliance requirements are inconsistent across borders.
  • Blockchain technology and cryptocurrencies, which offer lower transaction fees and real-time settlement, and involve few intermediaries. But they are only loosely regulated, have not been widely adopted and come with security concerns.
  • Instant cross-border solutions, such as The Clearing House’s RTP network, which enable settlement in minutes. They offer lower transaction costs and more transparency than many other mechanisms. But adoption has been slow so far, and regulatory requirements vary across countries. RTP has limits on payment amounts, too, although those have been raised as the network gains traction.

Benefits and Challenges of Cross-Border Payments

Like any payment type, cross-border payments come with both benefits and challenges. Among their advantages, cross-border payments allow businesses to:

  • Gain access to global markets and expand into new markets.
  • Grow their revenue and take advantage of new business opportunities.
  • Diversify their customer base, supplier base and investment portfolio.
  • Rely less on domestic markets.
  • Hold multiple currencies, so they can better manage exchange-rate fluctuations and guard profit margins.
  • Draw from a global talent pool.

However, with cross-border payments, businesses and individuals must also deal with:

  • Regulatory and compliance requirements, which can be complex.
  • Currency risk, due to variations in exchange rates, which can affect transaction value.
  • Fees and surcharges, depending on the country and payment method involved.
  • Fraud and security risks, such as cyberattacks and business email compromise scams.
  • Operational complexity, which consumes time and resources.
  • Slow settlement times due to differing banking systems and time zones, as well as added verification steps.
  • Lack of transparency into a payment’s status.

Cross-Border Payments Strategies

These advantages and disadvantages must be weighed when choosing a payment method — a choice that often hinges on cost, amount and timing. By taking a strategic approach, businesses can select the optimal payment type for each payment, customer or purpose.

To do so, consider factors such as:

  • Customers’ and/or suppliers’ payment preferences.
  • The reliability and security of each payment method.
  • The costs and risks associated with each payment method.
  • The amount of the payment.
  • The intended timing of the payment.
  • The destination of the payment and the currencies involved.

Financial institutions and some fintechs offer payment optimization services that route payments using the best method for the payer’s requirements.

To learn more about cross-border payments, download the AFP Payments Guide: Seismic Shifts Are Coming for Cross-Border Payments, underwritten by Wells Fargo.