Navigating the International Payments Landscape

Thanks to contributors Sriram Iyer and Sai Kailash.

As businesses expand beyond national borders and engage in international transactions, the need for efficient and secure international payment systems becomes more important. In 2022, international payments surpassed $150 trillion in flow, and projections indicate substantial growth to $250 trillion by 2027.¹

In this article, we dive into international payments’ diverse use cases, modes of operation, and the exciting trends shaping the future of the global financial ecosystem.

What are international payments?

International payments, also known as cross-border payments, refer to financial transactions that involve the transfer of funds across national boundaries. From multinational corporations conducting large-scale transactions to individuals sending money to family members abroad, international payments help facilitate the movement of money from one country to another.

Typical use cases

The use cases for international payments are diverse. For businesses, these transactions are essential for purchasing goods and services, paying suppliers, and managing the complexities of a global supply chain. On the consumer level, individuals rely on international payments for remittances, travel expenses, and online purchases from international vendors.²

International payments can be categorized into Business-to-Business (B2B), Business-to-Consumer (B2C), Consumer-to-Business (C2B), and Consumer-to-Consumer (C2C) transactions. They encompass international trade, cross-border investment, international travel and tourism, overseas payment of salaries and professional fees, and foreign remittances, etc.

1. International trade – Merchants who want to expand their business to local markets and retail clients who want to purchase goods or services from another country use international payments to complete transactions, which mostly consists of B2B and C2B transactions. They include:
   1. Import or export of goods and services between companies
   2. Intra-company transactions between head office and foreign subsidiaries
2. Cross-border Investment – Investors diversify their portfolio globally to capitalize on opportunities beyond domestic markets which can include stocks, bonds, real estate, alternative assets, and ownership stake (Foreign Direct Investment). International payments help facilitate fund allocations. These payments are mostly B2B but can also be C2B transactions.
3. International travel and tourism – The surge in global tourism underscores the necessity for an efficient cross-border payment ecosystem. Travelers seek a dependable method to conduct transactions for lodging, transportation, dining, and a myriad of other services in foreign currencies. These payments are C2B in nature.
4. Overseas payment of salaries and professional fees – In a post pandemic era, there has been a substantial increase in the global remote workforce. Companies are required to make overseas payments to their employees and freelance contractors. These payments are B2C in nature.
5. Foreign remittances – Cross-border payments play a crucial role for millions of migrant workers and students living away from their home countries. These transactions typically involve payment from migrant workers to their families living in their home countries or vice versa. These transactions are C2C in nature.

Since international payments were established, they have been dominated by B2B transactions. For the past five years, B2B accounted for approximately 97% of the total volume. However, B2C, C2B, and C2C payments are on the rise as retail e-commerce and overseas payments become popular.

Modes of international payments³

International payments can be conducted through various modes . Traditional methods, such as wire transfers and international checks, have long been the go-to options. However, the rise of digital payment solutions introduced more agile alternatives including digital wallets and block-chain based payments.

• Cash-based payments
• Paper checks
• Bank transfers
• International wire transfers
• Electronic funds transfers
• Global ACH payments
• Credit card payments
• Debit card payments
• Digital currencies
• Mobile/Digital wallets
• Blockchain-based payments

^{Source: https://www.aciworldwide.com/cross-border-payment-processing}

Currently, wire transfers and global ACH payments take up a large share of international payments flow. However, digital wallets also play an important role in the ecosystem. For example, PayPal is most preferred mode of international payments in more than half of the world.⁴

While there are a variety of methods for international payments, each mode of payment presents its unique characteristics that vary in speed, cost, currency pairs offered, and risk. Wire transfers, while established, are often associated with longer processing times and higher fees. They are more suitable for large dollar amounts. On the other hand, digital wallets bring speed and convenience to international transactions but can carry more risk.

Upcoming trends

As payment experiences continue to evolve, innovative technology is giving rise to five major trends:⁵

1. Real-time international payments – In February 2023, India and Singapore collaborated on the development of real-time overseas payment link.⁶ Countries are increasingly connecting their domestic real-time payment rails to build a joint real-time international payment ecosystem.
2. Multi-currency accounts – Various financial institutions now offer multiple currency accounts to businesses. This could help reduce currency conversion charges and mitigate exchange rate fluctuation risk.
3. Distributed Ledger Technology (DLT) – Countries are experimenting with their own Central Bank Digital Currency (CBDC) to conduct international payments. Use of DLT (blockchain) has the potential to provide a transparent, secure, and real-time settlement system for international transactions. Regulated Liability Network (RLN) is an example of a new theoretical financial market structure that could be built upon DLT to allow central bank money, commercial bank money, and electronic money to be transferred on the same ledger.
4. Compliance Tech – International payments are subjected to more than 26,000 rules.⁷ Fintechs are building technology to automate compliance for businesses.
5. Digitization of payments – The rise of digital wallets, QR code payments, and other mobile-centric solutions would increasingly take away market shares from international wire transfers.

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