Businesses are increasingly global. With goods and raw materials sourced from each corner of the globe, it is hardly surprising that the value of cross-border payments is predicted to reach $250 trillion by 2027.
However, expanding into international markets brings with it a set of unique challenges, particularly when it comes to paying suppliers, contractors or global subsidiaries.
One of the major concerns is the increased risk of payment errors, which can have severe financial implications. With an estimated cost to the global economy of $118.5billion per year, the impact of broken or failed payments is too large to ignore
In its report , True Cost of Failed Payments a recent study by LexisNexis® Risk Solutions, 49% of organisations surveyed indicated that broken or failed payments have a severe impact on the cost to the business. More than 70% said they were not satisfied with their payment failure rate.
Why do payment errors occur in cross border trade?
As consumers, we are used to a payments experience that feels instant. When paying friends or family our money is debited immediately and appears in the beneficiary account in minutes, particularly if accounts are held in the same bank within a particular country.
When moving money across borders however, complexities arise for a number of reasons
- Compliance checks:
Trading overseas involves compliance with a myriad of regulations, varying across different jurisdictions.
Payments moving across borders need to comply with local financial crime controls such as sanctions screening. As such, they need to be checked multiple times to protect the integrity of the financial system.
Ignoring compliance measures not only increases the risk of payment errors but also exposes organizations to legal and financial repercussions.
- Fragmented Data
The legitimacy of the payment and identity of the parties (beneficiary/sender) need to be confirmed which requires sufficient message data.
As data standards and formats vary across jurisdictions, errors and delays often result due to exact payment data requirements. When cross border payment processing is manual in set up and execution, errors and payment failures are naturally more frequent.
- Legacy Systems
International payments processing using traditional banking systems lacks real time monitoring and has low data processing capacity.
Using these systems, AP (Accounts Payable) departments often use multiple bank portals and payment rails to process payments to different countries in a variety of currencies. The use of disparate systems and the associated administrative burden of manual data entry leads to errors and delays.
These systems also employ basic pre validation tools to validate bank details before entering the international banking system.
Types of errors
In its ebook ‘Reducing friction in cross-border payments,’ Swift (Society for Worldwide Interbank Financial Telecommunications) reveals where frictions occur in its network:
- 34% of exceptions on SWIFT (Society for Worldwide Interbank Financial Telecommunication) are the result of formatting errors (account format incorrect, routing code incorrect
- 21% of payment exceptions on SWIFT are the result of account issues (closed, blocked, account name mismatch)
- 17% of payment exceptions on SWIFT are the result of invalid or missing data (regulatory information missing etc.)
While trading overseas presents numerous opportunities for finance professionals, it also exposes them to increased payment risks. The compliance landscape and the validation of bank details are critical aspects that demand meticulous attention.
Adhering to local and international regulations, verifying bank details accurately, and leveraging technology-driven solutions can help mitigate these risks and streamline international payment processes.
Let Fexco help to reduce errors in your cross-border payments
Fexco eliminates manual and repetitive work for busy finance teams, ensuring cross-border transactions are delivered and received cost-effectively and on time.
Our pre-payment validation API ensures payments are made error free, achieving straight through processing rates of over 99%. Get in touch to learn more about our services.