When someone makes a purchase, there’s a system that carries the money from the buyer’s account to the merchant’s account. With cross-border payments, it becomes more complex. International transactions require a change of currency, foreign transaction fees and dealing with an exchange rate. To navigate through these channels, a banking system ushers the money along.
In every cross-border payment, banks and a group of varying domestic entities work together to transfer funds. When a purchase is made, a “correspondent bank,” or the entity requesting the money, speaks with the “respondent bank,” which represents the entity buying something.
Foreign trade payment methods
Throughout the major cities of the world, each bank has a counterpart in another city. So funds will first leave the buyer’s bank and go to that bank’s counterpart in the merchant’s country to prepare for remittance. The merchant’s bank will then receive the remitted funds, and they will be settled into the merchant’s account. These banks often work with others to transfer the money, which often involves more than four banking locations dealing with one another, navigating currencies, varying taxes, and transaction fees. Because there are so many entities working on a single purchase, the process can be slow.
Cash Flow in Cross-Border Payments
