Understanding International Payments for Businesses

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Understanding International Payments for Businesses

In today's globalised business landscape, international payments have become a necessity for many small and medium-sized enterprises (SMEs). Whether you're paying overseas suppliers, managing international payroll, or transferring funds to overseas offices, understanding international payments is crucial. This comprehensive guide aims to answer your key questions.

What are International Payments?

International payments, also known as global or cross-border payments, are transactions where the sender and the recipient are in different countries and often use different currencies. As the benefits of trading internationally become ever clearer, international payments are becoming a core part of operations regardless of business size. 

Common reasons for making international payments include making inter-company transfers, funding an overseas office or paying staff or invoices elsewhere in the world. 

How Long Do International Payments Take?

To understand how long it takes to make an international bank transfer, you have to look at how they work. The majority of international payments are made by SWIFT

SWIFT enables banks to send funds to and from one another easily, even if the banks don’t have a direct relationship. Let's say you need to send funds from your UK-based bank account to a supplier based in China. Your bank may not have a relationship with the Chinese bank, so they would need to route the payment via an intermediary. Such intermediary banks act like postal depots. They handle your payments and make sure they are sent on to the correct bank.

If each bank in the chain processed your instructions as soon as they received them, payments would be really fast. But it’s not quite that simple, mainly due to the risk of fraud.

Each bank has to carry out its own checks on the payment to satisfy its anti-fraud and financial crime responsibilities.

The checking process takes time and means that it can take anywhere from a few hours to a week for your recipient to receive a SWIFT payment. The time it takes to process the instruction will depend on the policies, processes, and efficiency of each bank.

Delays are unavoidable, but that’s why it’s important to find an international payments platform that allows you to track your payments so you know where your payment is at all times.

How Much Do International Payments Cost?

International payments often involve fees. The two main types of fees will be a flat transaction fee and a foreign exchange spread. 

A flat fee (which might be referred to as a payment fee, transfer fee or wire fee) is a fixed fee for making the transaction, and this doesn’t change based on the value of the transaction.

A foreign exchange spread is usually charged as a percentage of the transaction value, and can vary hugely by the provider you use. This spread is the difference between the mid-market exchange rate and the exchange rate that you receive for a transaction, so it can be easily hidden. Our research suggests that up to 96% of a bank's profit for an average SME transaction within the EU comes from the FX spread.

Some banks and brokers have also been known to change the foreign exchange spread that you are charged over time. They might offer you “honeymoon pricing” to win your business and after a few transactions may start to increase the fee they charge. Be aware that very few providers actually display the mid-market rate as part of the transaction information. Fewer still provide the total cost of the transfer. 

It's crucial to understand these costs upfront to avoid any surprises, so make sure you use a provider that offers transparent, consistent pricing. 

How Does Currency Conversion Work in International Payments?

When you are operating internationally you will eventually need to make a payment to an individual or business who operates in a different currency. To complete the transaction you will need to convert your currency to theirs. Here’s how it works:

  1. In most cases, you’ll receive an invoice which has an agreed amount that you will need to pay in the currency the recipient wants to receive.
  2. Using your international payments provider you should be able to specify the amount and currency you need to pay.
  3. The international payments provider will then tell you the local currency equivalent and (hopefully) any fees involved.
  4. If you’re happy with your quote, you should be able to lock that exchange rate in and choose who you want to send funds to.
  5. The last step is to send in your local currency, which your provider will then convert and send on to your recipient.

The two main things to be aware of here are:

1. The exchange rate

The exchange rate you are offered compared to the mid-market exchange rate will give you an indication of how much you’re being charged in the exchange rate spread. However any good provider will show this amount in pounds and pence (or dollars and cents). 

2. Any additional fees

You want to make sure your recipient receives the exact amount specified in the invoice, so check with your provider to see if there are any additional charges that might be taken from the payment amount. 

Can Businesses Track an International Payment?

It used to be the case that once a payment was sent, it was only once your recipient had confirmed receipt that you know that the money had arrived safely. However with innovation from the SWIFT network, real-time payment tracking is now a reality. 

SWIFT gpi is an initiative that combines the traditional SWIFT messaging and banking system with a new set of rules. Any bank that joins GPI (Global Payments Innovation - an end-to-end real-time tracking technology developed by SWIFT) has to follow these rules, which include transparency of fees, end-to-end payment tracking, and confirmation of credit to the recipient's account.

A provider which integrates with this system will be able to tell you where your funds are in real time, giving you and your recipient peace of mind. 

What are the Best Practices for Making International Payments?

Working with overseas suppliers and setting your business up for making international payments can feel overwhelming. However with the right knowledge and tools, making international payments can be as straightforward as domestic transactions. Here are some tips about making international payments quickly, securely and at low cost:

1. Shop around for an international payments provider

Finding the right provider is key to ensuring you don’t suffer down the line. The right provider will have all the features your business might need. 

  • If you will need to make multiple payments for payment runs or doing international payroll make sure your provider has a batch payment feature
  • If timing is key, make sure your provider offers same day payments. If you like to stay informed, check that they can provide payment tracking.

2. Make sure you know what payment methods you need

Generally, when you’re making an international payment you’ll be sending funds via SWIFT. However some of your recipients might want to receive funds via other payment methods. 

Local options such as SEPA (for sending Euros) or Faster Payments (for sending GBP) are always useful to have available.

3. Cost is important, but cheapest isn’t always best

Making sure you’re getting a good deal is always high on the list, but don’t compromise elsewhere. Make sure your payments provider can offer you the tools, information and service that you need to make international payments. 

Finding an international payments provider that has a user-friendly platform means that making international payments won’t become a chore for you and your team.

4. Check your exchange rates

Knowing what is going on in the exchange rate market isn’t vital to running an international business. Invoices will have to be paid, whatever the exchange rate is, so as long as you know exactly what you’re paying in fees you know you’re doing the best you can. 

However if you want to keep your finger on the pulse of the market, some providers will offer exchange rate charting and alerts tools. These will keep you up to date with what’s happening in the markets without you having to do the legwork. 

5: Find a provider with excellent customer support

With the constant improvement of technology, security and information, it’s increasingly rare for things to go wrong when making international payments. Payments might get delayed, typos might mean that payments get sent to the wrong account or recipients may have closed their account without telling you, but in most cases these problems can be resolved. 

But that’s why it’s all the more important to make sure your provider offers excellent customer support. Even the best built platforms need good customer support for when you have questions or need help to resolve these issues quickly and effectively. Being able to speak to a human when you need help can make the world of difference

Navigating international payments doesn't have to be a daunting task. By understanding the process, costs, and best practices, businesses can manage their international transactions efficiently.