In today’s interconnected global economy, businesses are increasingly conducting transactions across borders. As a result, international payments have become an integral part of financial operations.
However, failed international payments can have significant implications across the supply chain for a company’s profits and team performance. In this blog post, we will explore some ways in which failed payments can adversely affect the bottom line
Why do cross border payments fail?
Payments that are rejected in the international banking system are referred to as failed payments.
A payment can fail for several reasons but there are three common causes that surface repeatedly.
Payment information requirements can vary by jurisdiction. What may suffice for compliance purposes in Canada may not be accepted in the UK for example.
Some jurisdictions require only the initials of the payee and the beneficiary, while others insist on full name, the beneficiary address and exact purpose of payment in the remittance field. This results in incomplete or difficulty in sanctions screening by financial institutions, as they do not have full details in all cases
This lack of standardisation in data formats and data elements and lack of interoperability of cross-border and domestic payments systems leads to challenges
For example, limitations in the number of characters allowed in some SWIFT fields leads to incomplete information.
Errors caused by manual data entry
When you rely on a person to correctly transfer data from one place to another, mistakes are to be expected.
Data inaccuracy usually means errors in entering data values. The use of disparate systems and the associated administrative burden of manual data entry leads to errors and failed payments.
Poor Validation tools
International payment straight through processing rates depend on the efficiency of the validation tools used to validate payment data.
Problems can also arise when reference data used to validate bank details is not up to date.
This tends to be more common with basic look up tools used by traditional banks as opposed to APi technology used by fintechs.
What is the financial Impact of failed payments?
Failed international payments directly affect a company’s financial health. When payments are not processed successfully or are delayed, businesses may face cash flow issues, or a reduction in stock or service levels, leading to missed opportunities and delayed projects.
Non-payment or late payment of invoices can strain relationships with suppliers and partners, potentially disrupting the supply chain and affecting the availability of critical resources.
Many see payment failure as simply ‘the cost of doing business’. But apart from tangible costs like repair fees and labour costs which can be easier to measure, there are also intangible costs of failed payments like customer retention that can seriously damage a business in the long run.
In its True Impact of Failed Payments report, LexisNexis® Risk Solutions lays bare the financial impacts of failed payments
- US $118 .5 billion – the estimated cost to the global economy in failed payments each year.
- 10 days – the amount of time it can take for a bank to decline to settle a payment, meaning a large amount of liquidity is trapped in the banking system daily because of failed payments.
- Bank fees – largest cost segment for failed payments throughout the world.
- 58% – the percentage of the $38 billion cost of failed payments in Europe which is attributed to fees. A sizeable proportion of the remaining cost is attributed to higher headcount and salaries in Europe compared with other regions.
In a Finextra article Curbing the cost of payment failures with straight through processing , Momlee Bhattacharjee, SVP, global product lead, domestic payments and Citi payment outlier detection, Citi highlighted the business impact of failed payments
“The overall cost of managing a failed payment – including investigations, repair costs, reprocessing fees, and exchange rate movements – could easily be over $50 per transaction,”
The global reasearch study by LexisNexis® Risk Solutions revealed that most organisations experience a payment failure rate of 5%.
Worryingly though, the study also revealed they just under a fifth (18%) of organisations experience a failure rate of between 5-10%. The fiscal impact on larger institutions could be substantial given the higher volumes of payments.
Failed international payments can significantly impact a company’s reputation and relationships with stakeholders. Late or failed payments can damage the trust and credibility built with suppliers, partners, and customers over time. This can tarnish the company’s reputation, making it harder to secure favourable terms, negotiate contracts, and develop mutually beneficial partnerships.
Moreover, negative experiences with failed payments can lead to dissatisfied customers or suppliers who may seek alternatives. Word-of-mouth travels fast, and a company known for payment issues may struggle to attract new customers or retain existing ones. Such reputational damage can result in lost business opportunities, reduced sales, and impact the company’s profits.
Mitigating the Impact of Failed International Payments
To mitigate the impact of failed international payments, businesses should consider implementing the following strategies:
a) Robust Payment Infrastructure: Invest in secure and reliable payment systems that facilitate efficient international transactions and provide real-time visibility into payment statuses.
b) Proactive Communication: Establish clear lines of communication with payment providers, banks, and suppliers to promptly address any payment-related issues. Transparency and proactive communication can help prevent and resolve payment failures promptly.
c) Supplier Relationship Management: Foster strong relationships with suppliers by implementing fair and timely payment policies. Negotiate contracts that outline clear payment terms and conditions, incentivizing on-time payments.
d) Automation and Integration: Leverage technology solutions that automate payment processes and integrate them with financial systems, reducing manual errors and improving operational efficiency.
Failed international payments can have far-reaching consequences, impacting profits and team performance. By understanding the financial, operational, and reputational risks associated with failed payments, businesses can take proactive measures to mitigate these risks.
Investing in robust payment infrastructure, fostering strong relationships with stakeholders, and leveraging automation can enhance payment reliability, streamline operations, and protect the company’s bottom line. By addressing payment failures proactively, your business can ensure smoother financial operations, improve team productivity, and safeguard the company’s reputation in the global marketplace.
How Fexco can help
As a leading provider of global payment and receivable solutions for over 25 years, Fexco uses innovative technology to ensure cross-border payments are made on time, every time. Its payment validation API ensures straight-through processing rates of +99%, mitigating expensive payment repairs and resubmissions.
Free your finance operation to focus on more value-added tasks instead of the administrative burdens and costs associated with delayed and failed cross-border payments.