Most people accept a degree of ambiguity and price inflation when conducting cross-border payments and exchanges. What are labeled by banks and forex brokers as”transaction fees,” “service charges” or “exchange rate fees” often vary considerably from organization to organization without clear rhyme or reason. When you’re traveling and spending money abroad, transaction fees can significantly inflate your expenditure. But how do those fees impact businesses who must conduct a large volume of cross-border transactions daily to service their customers and suppliers around the globe?

Many businesses can’t quantify the immediate and secondary expenses associated with their current cross-border payment process. The sophistication of your cross-border payment solution can either hamper or catalyze your growth; to understand how your payment process affects your expansion opportunities, it helps to know the costs associated with cross-border payment processing.

Transaction fees

For a bank to host a cross-border transaction, they must have liquidity in both participating nations’ currencies. For example, hosting a US/UK transaction would require possession of US dollars and British pounds. If the initiating bank doesn’t have the currency on hand, then they need a means of purchasing it on the FX market in order to execute the transaction.

Small banks rarely have foreign currency in their possession. In contrast, larger international banks often have liquidity in a number of different currencies, but it still isn’t viable for them to maintain a large library of currencies that aren’t regularly used. Instead, both small and large banks maintain relationships with foreign banks and use these connections to execute foreign transactions outside of their specialty. As a result, when money is sent via international wire, the transaction process often involves more institutions than just the initiating and receiving bank.

The more institutions that are involved in executing a transaction, the more money a sender will lose in “transaction fees.” Transaction fees are individually-set hosting fees that each institution collects to compensate their involvement. More often than not, institutions will inflate transaction fees to insulate themselves from shouldering any FX risk due to currency volatility.

With the help of a third-party payment solution, you can automate the cross-border payment process, maintain control over the transaction chain and dictate the transaction fee that your customers are charged. In comparison to traditional payment options such as banks, third-party payment solutions can save clients and their customers upwards of 50 percent on cross-border transactions.

Exchange rate fees

While exchange rates are informed by a currency’s relative value on the FX market, they’re not one-for-one representations of that value. Exchange rates, like transaction fees, are determined by the transaction host and are often inflated to increase profits and shift the financial risk of conversion onto the currency “buyer.”

Before the growth of the fintech industry and the advent of third-party payment solutions, exchange rates were often not disclosed to the sender (in this case, the sender would also be the currency “buyer”) until after the transaction was initiated. This lack of transparency regularly resulted in a payment arriving short of the intended sum. In addition, lack of insight into exchange rates often led hosting institutions to charge inflated, static conversion rates to compensate for any market changes that could occur, once again shifting the financial risk onto the payment sender.

With the help of a third-party payment provider, you can leverage a vast global payment network to make transfers when FX rates are optimal, and pass operational and FX savings on to your customers by charging less for cross-border transactions. With more control over exchange rates and international transfers, you’ll be able to increase your profit margins and facilitate scalability without burdening your customer.

Operational costs

The operational costs of cross-border payment processing can be significant if the solution you’re using isn’t equipped to offer transparency, compliance, payment flexibility and control. If your payment processing platform lacks exchange rate or validation APIs, for example, customers won’t know the exchange rate they’re getting before initiating a payment and won’t be prompted to fix any inaccurate, miskeyed or invalid payment information before sending. This results in more failed or inaccurate payments and significantly increases the time your company must spend dealing with payment issues and customer concerns. Failed payments can also put your business in the position of refunding customers out-of-pocket in order to avoid negative PR and plummeting satisfaction rates.

In addition to reducing your volume of failed payments, automating your cross-border payment process will also greatly reduce the amount of resources you need to scale your business and power payments from a back-end perspective. That means you can spend less time, manpower and budget dealing with payments, instead redeploying your internal resources to improve your core product, service delivery and customer support.

Currencycloud is able to host hundreds of thousands of transactions a month with an operations staff of less than ten people — something that’s only possible with the help of reliable and efficient payment automation tech. By keeping our operational costs low, we can dedicate our budget and internal resources to improving our API interface in response to evolving customer needs, lending tech support and giving our clients the resources they need to integrate with our system and see long-term return on their investment.

Customer satisfaction and retention costs

When it comes to digital payments, offering customers more payment options and a more responsive and compliant payment interface translates into a better overall user experience. If your payment process adds unnecessary friction to an otherwise seamless brand experience, your customer lifetime value, satisfaction and retention rates can suffer. Leveraging a third-party payment platform can help you offer international customers the same payment options as local customers, and help keep prices competitive without sacrificing revenue as you expand into foreign marketplaces.

If you plan on expanding into foreign marketplaces, leveraging a payment solution can reduce the cost, risk, uncertainty and hassle attached to cross-border commerce. To learn more about the tangible and intangible costs of your current cross-border payment processing solution, reach out to us to start a conversation.

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Richard Arundel

As one of Currencycloud’s founders, Richard has played an important role in the company’s rapid growth. Having started his career at HiFX – one of the largest foreign exchange market brokers in the UK – Richard has a deep understanding of the finance and payments sector. Prior to becoming GM of Currencycloud’s North America business, Richard has held successive positions as Sales Director, Client Relationship Director and VP Client Services at Currencycloud, helping the company increase revenue, size and scope. Having left London for New York in 2017, Richard is now responsible for performance across the US, including directing sales development programmes and go-to market strategies. His experience in creating high performing teams, as well as building and maintaining partnerships in the world of fintech, is the driving force behind Currencycloud’s US strategy.