A cross-border payment is a transaction where the payor and the recipient are based in different countries. This type of payment involves transferring money across geographical borders and often involves converting from one currency to another. Cross-border payments are common in international trade. Remittances from migrants sending money back to their home countries, and online purchases from foreign vendors.
These payments can be more complex and expensive than domestic transactions due to factors such as:
- Currency Exchange: The need to exchange one currency for another. Which involves exchange rates that can fluctuate and affect the final amount received.
- Bank Fees: Both sending and receiving banks (and possibly intermediary banks) may charge fees for their services.
- Regulatory Requirements: Different countries have their own regulations and compliance standards for financial transactions. Including anti-money laundering (AML) and know-your-customer (KYC) rules, which can complicate the process.
- Payment Infrastructure: The lack of a unified global payment system means that transactions often need to navigate through multiple banking systems, each with its own procedures and timescales, which can delay transactions and add costs.
- Security Concerns: Cross-border payments are subject to risks including fraud and cyber-attacks, necessitating robust security measures that can also add to the cost and complexity of transactions.
Financial technologies (FinTech) and blockchain-based solutions are increasingly being explored and adopted to address some of these challenges by streamlining processes, reducing costs, and improving the speed and security of cross-border payments.
Sources: The Banking Expert & Wikipedia.