Complex Made Simple

Inefficiencies in handling cross-border transactions

Cross-border transactions are critical components of the global economic landscape. A recent survey reveals that there has been a tremendous increase in such transactions recently and adds that great growth is expected in the future as well.

According to the PayCommerce UAE Cross-border Payment Transaction Report 2017, the value of cross-border transactions is set to triple by 2022 from the present $20.5 trillion to $54.8trn. Due to the growth in such transactions, many innovative methods for international payment transfers are being explored.

However, most cross-border payments are still being handled by international banks, due to which there still remain many inefficiencies, says the report.

Below are some of the most crucial:

Lack of transparency: According to the PayCommerce report, more than 70 per cent of companies that were surveyed in the UAE felt that there was lack of transparency while handling payment transfers.

Out of the 122 respondents, 74 per cent did not have knowledge about what transaction fee they were being charged, while 54 per cent were not able to track their payment status or receivables through international bank transfers, thus highlighting the lack of transparency. Furthermore, a majority of companies also pointed out that traditional payment methods were very slow (32 per cent) as well as expensive (44 per cent).

High cost: Thanks to technology, trillions of dollars are being sent to various countries over the Internet in a digital format. However, traditional bank transfers still dominate; 35 per cent of UAE companies send and receive international payments via bank transfers. Only one quarter opt for third party remittance service, while only 14 per cent use online payment gateways and 21 per cent make use of credit cards.

It is important to note that 66 per cent of respondents had no idea how many financial entities the payment has to pass before it reaches the final recipient. The more the number of banks and financial entities are involved, the higher the fees, notes the report, because each entity charges its own fee, thus adding to the transaction cost, making it expensive. Over and above the actual transaction cost, consumers have to pay between AED80 to AED240 in fees, the report reveals.

Customers want efficient and cost-effective transactions: Of the total transaction volume of the payment industry, 20 per cent comes from cross-border transactions; yet they are responsible for the generation of 50 per cent of transaction-related revenue. According to a report by Visa, cross-border payments are inefficient since there is no single global payment system. It is this lack of global standards between the local government and the systems which need to be addressed immediately.

However, there is some change in this scenario, as the traditional correspondent banking model for cross-border payments is facing a lot of pressure, not just from customers, but also from regulators and competitors. Moreover, 81 per cent of companies said in the report that they would want to track the status of their payments or receivables made via international banking.

Due to the widening gap between the expectations of the customers and the traditional international payment systems, customers are opting for innovative payment methods that eliminate costly clearance procedures, enable payees to receive remittance in real time and reduce the risk in settlement procedures.

Delays: Another major grouse is the time taken for transactions to get through even after paying such high transaction costs. On average, for international transfers to come through, it takes three to five working days, said 49 per cent of UAE companies surveyed.

Meanwhile, 35 per cent of companies opt for bank transfers and 25 per cent choose remittances via third party services, and there are growing number of companies (14 per cent at present) who are opting for online payments or credit cards (21 per cent). Moreover, 67 per cent of companies in the PayCommerce survey were willing to opt for a more cost-effective as well as transparent method for international transactions.

The report concludes that there is a changing landscape of international transactions due to technological advancements, changing consumer behaviour and changes in regulations. New international payment networks are providing innovative solutions that will help make international transactions easier and faster for businesses.

Thanks to digital innovation, new and efficient methods are being developed to help bridge the gap that exists between international transactions and customer satisfaction.