Cross-border payments: a guide for your business

If you want to sell products internationally or accept international payments, it’s good to understand how they work. After all, you wouldn’t set off on a journey without a map and the knowledge of how to use it (or, these days, Google Maps and a healthy phone battery). So, let’s dive into the international payment system.

To explain fully, let’s first look at the most straightforward cross-border transactions, which occur when sending money between two banks (both fictional and continuing our explorer theme) that have a direct relationship:

Here, Amundsen Bank sends a message to Baret Bank telling them to make a payment for their customer. Baret Bank then credits the end customer’s account with the funds.

As this is a cross-border payment, here’s where things get a little more complex:

– A currency change can be required

– Exchange rates need to be applied

– An international transaction fee must be paid

Luckily, banking systems, financial institutions and fintechs are usually on hand to manage these payment flows. When a payment is initiated, the banks and other financial firms send information to transfer the funds.

However, it’s good to remember that currencies usually only serve individual countries (though we have the Euro and SEPA in Europe to streamline this). That means that the money is not physically transferred overseas during cross-border payments. Instead, banks have accounts in other countries and provide accounts for banks from other countries. This way, they can make payments in different currencies.

Of course, banks don’t always have a direct relationship. In this case, they use an intermediary – a correspondent bank. When this occurs, it is known as correspondent banking. This type of money flow plays a crucial part in making sure international payments are processed correctly. There can be multiple correspondent banks involved in a single transaction, which can result in additional costs.

You can see how that looks here:

The cross-border ecommerce payment flow

To explain cross-border transactions in ecommerce, we’ll use an imaginary consumer – let’s call him Mike.

Mike is about to use his credit card to buy some new climbing gear from an online retailer who is located in another country. He checks out and clicks confirm.

His payment begins its voyage.

So, what happens next? First, the card information needs to be captured and encrypted. The payment gateway or payment service provider that the online retailer uses usually does this.

The gateway then sends the payment authorisation request and transaction information to the acquiring bank – or the financial institution processing the online retailer’s card payments.

The acquiring bank then sends a request to Mike’s bank – the issuing bank – via the card network to get approval for the transaction. The issuing bank approves the payment and informs the acquiring bank it has done so. The acquiring bank then authorises the transaction and the merchant’s website sends Mike to a confirmation page to tell him that the payment is complete.

All of this happens within an instant. Again, let’s see what that looks like:

But if you’re part of a business selling internationally (or that’s thinking about international ecommerce expansion), then there are some more things you need to bear in mind.