4 Challenges of managing international payments with traditional banking systems

The value of all funds crossing international frontiers is set to grow from $150 trillion in 2017 to a projected $250 trillion by 2027, driven by the increased international mobility of goods and services, capital and people. 

As the financial gatekeeper of your organisation, you understand that paying overseas suppliers and getting paid by foreign clients swiftly, securely and transparently is critical to business success. 

As domestic and international payments are processed very differently there is an increased risk of non-compliance, human error and failed payments when finance teams don’t handle these separately.  

 And what happens as a result? You guessed it – increased costs, possible reputational damage, and strained relations with overseas suppliers and partners. 

But the reality is that many businesses still rely on legacy technology provided by traditional banks to process their international payments. 

Whether it’s because of the “this is the way we’ve always done things” mindset or simply a lack of awareness of alternatives for cross border payment solutions, businesses shouldn’t accept high costs and failed payments as simply a cost of making international payments. 

Let’s look at the challenges of managing international payments with traditional banking systems, focusing on key areas of cost, legacy technology, access to less traded currencies and support and what your business can do to transform its cross-border payments into a lean and efficient process. 

High Costs

SMEs, in particular, tend to use their bank directly when making overseas payments as it’s the most convenient and any fees charged on foreign exchange can be lumped into part of the all-inclusive cost price of the goods. 

However, this is likely to cost the company dearly resulting in a reduction in bottom-line profits. The acceptance by businesses combined with a lack of transparency of cost means banks are overcharging their clients on FX margins and fees. 

In fact,Studies have found that total Forex spreads of up to 3.7% including fixed fees are charged meaning the UK’s small businesses hand over around £4 billion to the major banks every year, simply to buy goods and services abroad.  

To make matters worse, there is a huge disparity in the foreign exchange rates offered to larger corporate clients and SMEs.   

A European Central Bank report gives support to anecdotal evidence that smaller corporate clients tend to pay higher rates for protection against swings in exchange rates. The report further reveals that rates can be as much as 25 times higher than for the bank’s larger corporate clients. 

Consider the significant impact on commercial margins for small businesses because their banks are less likely to offer favourable currency hedging solutions. 

In addition, for each step of the cross-border payments process, banks are introducing charges to businesses whether this is for local account maintenance, converting to local currency, sending and receiving money or other related services. 

With headline inflation rates at 7.7% and 10.1% (as of April 2023) in Ireland and the UK respectively, business owners are struggling with increases to the cost of raw materials. Noncompetitive FX rates and exorbitant fees for global payments shouldn’t compound this further. 

In contrast, specialist payment providers combine agile technology with global bank relationships to cut the costs on cross border payments, particularly for smaller businesses. These fintechs can also offer access to payment rails with fewer steps along the path, reducing costs further. 

Unlike a traditional bank, payment providers also offer bespoke currency risk management solutions to protect clients from risk in highly volatile markets.  A dedicated relationship manager will offer businesses a comprehensive review of its payment strategy, assessing currency risk to shield against currency risk. A strategy can then be put in place to protect profit margin and sustain growth. 

All this can be done cost effectively and unlike traditional banks, a specialist payment provider will not discriminate based on company size.

Legacy payment technology

Suppliers and overseas subsidiaries and partners need to be paid on time; It is a basic cash flow concern for businesses. Legal and reputational risk can become a reality when vendors are not paid on time. 

But traditional banks often operate on outdated & legacy systems and processes that are not optimized for efficiency, leading to longer processing times. Legal and reputational risk can become a reality when vendors are not paid on time.  

The international payment process using traditional banking systems involves several intermediaries, including correspondent banks and clearinghouses, which can cause delays. These legacy systems also lack the ERP integration functionality which automates cross border payments for optimum straight through processing rates (STP). 

Corporate clients with high value / high volume payments feel this more acutely, especially when transferring multiple currencies using different payment methods. Traditional bank systems are unable to support batch/mass payments with AP staff having to manually key data leading to errors and delays.  

To highlight the problem a Censuswide survey revealed that over seven in ten finance teams (72%) spend up to 10 people-hours per week, or 520 hours per year on AP-related tasks that could be automated, including payments execution and reconciliation. 

In its True Impact of Failed Payments Report, LexisNexis revealed accuracy of payment details (40%), speed of payment processing (32%) and little-to-low manual labour (11%) are the three most important factors for cross-border payments processing. 

The study further revealed that more than 70% of respondents are unsatisfied with their payment failure rate and almost two-thirds of respondents (64%) indicated broken or failed payments negatively impacts staff workload. 

 The costs associated with failure were revealed to be an average per payment fee of U.S. $12.10 for rejected or repaired payments.  

Account numbers (IBAN and non-IBAN) and incorrect beneficiary details account for two-thirds of all payment failures.  

But banks rely on legacy technology to access payments data using basic reference tools. This simplistic approach often results in payment failure whereas Fintechs and non-banks employ innovative technology (APIs and web-based solutions) to realise higher straight through processing rates. 

Payment providers use technology that integrates seamlessly with accounts packages. Customers can integrate using APIs or upload a file with multiple currencies and payment types to pay clients in locations across the globe.  This avoids manual keying of data, which consumes AP staff time but could also lead to potential errors. Payment validation before execution ensures quick delivery of funds leading to better functioning supply chains and happy suppliers. 

Access to less traded currencies

As more businesses extend their supply chains and establish connections in far-flung destinations, the requirement to trade in ‘exotic’ or local currencies increases. 

Flexibility with supply is becoming more essential, especially for smaller businesses. Sourcing from African, Asian, and South American partners means less reliance on conventional markets, typically saturated by larger competitors. 

When domestic rivals are offering payments in dollars or other major currencies, offering a local currency payment could well give a business a competitive edge. 

However, transferring money in local currency to more complex territories may be a real issue for traditional high street banks. Sometimes even large global banks are unable to serve businesses with payments to developing countries. 

Recent studies show that correspondent banking relationships (CBRs) have been shrinking in several countries since the global financial crisis. Direct connections between banks are costly, with some payments requiring multiple intermediaries. 

These problems are particularly acute for more exotic currencies, which are rarely served by traditional banks.  

There may be regulatory issues that banks must comply with when processing payments in exotic currencies. These regulations can be complex and may require additional resources to ensure compliance, adding to the challenges of processing payments in these currencies. 

Typical high street banks simply do not have access to the payment rails necessary for the swift, secure, and cost-effective delivery of exotic currencies.

As supply chains evolve and expand to include developing countries, businesses need to be confident that they can deliver payments to these destinations in local currencies when the need arises.  

Well established payment providers are specialists in exotic payment processing and delivery. Their relationships with global banking partners mean they can access the payment rails that facilitate the seamless delivery of exotic currencies at low cost. 

With the added advantage of more agile technology, they can also ensure regulatory compliance, validate payment details upfront and reduce the administrative workloads common when making more complex payments. 

Customer Support issues

If you are a business making overseas payments to suppliers or subsidiaries, you know how time critical this can be. After all, receiving your goods promptly means quicker time to market and any delays can disrupt operations. 

The reality is that human error, fraud, and compliance issues can delay an international payment, and this can increase the higher the volume and payment type. 

We have already discussed how the manual nature and legacy technology of traditional banking systems can contribute to errors and failed payments. But when you need to speak to someone about an urgent supplier payment issue, how well is your query handled? 

It’s a familiar scenario. Your supplier in China hasn’t received funds for goods you ordered. Your team spends precious time trying to resolve the issue, trying to contact the bank, dealing with an irate supplier, manually trawling through data to figure how if bank details match the processed payment.  

The funds are in limbo. You need assistance fast. You want to speak face-to-face or over the phone with a real person because you want this problem resolved quickly. And then it comes – “Thank you for waiting. Your call is important to us. I’m sorry, but all our operators are busy at the moment, but please stay on the line. Your call will be answered shortly”. This is then followed muffled, generic music. You get the message. 

Customer service in the traditional banking system is poor. According to a review published by the Central Bank of Ireland, customers of Irish banks have had to endure waits of up to two hours for telephone support with as many as 50 per cent of one bank’s customers simply giving up and ending calls before being able to speak to a human being.  

Larger businesses generally have few concerns as banks are delighted to service them, but for vital smaller businesses, this is not always the case. 

In fact, a recent survey by Smart Money People revealed that 51% of small to medium-sized enterprises (SMEs) in the UK are considering switching their main bank or banking facilities provider. 

Popular reasons given for switching to fintechs among senior decision makers were lower fees (45%), better online banking services (33%) and better customer service (29%). 

On the contrary, payment providers specialise on providing domestic and international payments and receivables services.  

As a consequence, support from a payment provider will always be personalised, with specialists willing to go the extra mile to make sure your funds are delivered on time, every time. 

 Banks focus on providing and prioritising other product lines like current and savings accounts, credit and debit cards and loans like mortgages. As a consequence, service and investment into international payments can reflect this. Not particularly appealing when you have a payment lost in the international banking system. 

About Fexco International Payments

Fexco provides automated, global payment solutions to businesses (SMEs and corporate), adding operational scalability and efficiency with real-time payment reporting to drive financial decisions. Our focus is on providing solutions for financial transformation, removing the frictions in global payables and receivables and freeing finance teams to make more of a strategic impact for organizations.  

Our clients can make payments in over 130 currencies (including exotics) to almost 200 countries and territories worldwide. We offer FX rates and lower fees that are more competitive than a typical high street bank, all with support from real people. 

We can provide a tailored solution to align with your business requirements saving you time and money. Talk to us today to find out more.