How to perfect cross-border payments in minor currency pairs

There can be many complications when it comes to making cross-border payments in minor currency pairs. This guide will give you all the information you need to make the process faster, cheaper and more secure.

How to perfect cross-border payments in minor currency pairs

The need for making cross-border payments is continuing to increase and while making payments in major currency pairs has improved over the years, there is still much work to be done in making cross-border payments in minor currency fairs. Here we explain why, and what you need to do to overcome this.

Foreign currencies are always exchanged in pairs, with a high percentage of transactions involving major currency pairs. This refers to any payment featuring the US dollar and any of the other seven major currencies, which are:

• The euro (EUR)
• The Japanese yen (JPY)
• The British pound (GBP)
• The Swiss franc (CHF)
• The Canadian dollar (CAD)
• The Australian dollar (AUD)
• The New Zealand dollar (NZD)

These payments tend to be easier to make than with minor currency pairs, which are transactions featuring two major currencies that aren’t the dollar. These payments can be more complicated and expensive for a variety of reasons that’ll we’ll touch upon below, something that can inhibit businesses or simply prevent a person from sending or receiving money abroad.

Fortunately though, it’s possible to avoid these issues. But first, why exactly can making cross-border payments in minor currency pairs be so complex and costly?

Why making cross-border payments in minor currency pairs can be difficult

The main issues with making cross-border payments in minor currency pairs include:

1) The number of intermediaries slows things down

Many banks in the seven countries and regions listed above don’t have direct relationships with each other, meaning they have to rely on intermediaries (called correspondent banks) to make cross-border payments. These intermediaries undertake tasks like verifying the identities of the two parties and checking that they meet the relevant jurisdictions’ laws.

For common currency pairs, like the dollar and the euro, this chain tends to be quite short. But for those that aren’t as common, such as the Swiss franc and the Japanese yen, or the New Zealand dollar and Japanese yen, there are more intermediaries, leading to more delays, as well as greater costs.

2) Unfavourable exchange rates add extra costs

Another major issue with cross-border payments featuring minor currency pairs is the high foreign exchange rates involved. These rates are determined by factors such as differentials in inflation levels and interest rates, and the two countries’ respective public debt levels and account deficits. With minor currency pairs featuring economies of hugely varying sizes, many cross-border transactions in these currencies can therefore have unfavourable foreign exchange rates, adding to the costs.

3) The lack of standardization leads to delays

More problems arise due to fragmented data formats and messaging standards. For instance, many countries’ formats only allow Latin characters, which can make dealing with nations using non-Latin scripts (such as Japan) difficult. Although numerous countries have now fully migrated to the ISO 20022, a uniform international payment messaging standard, most of the nations using major currencies haven’t.

4) Differing regulations can cause issues

Similarly, disparate regulatory regimes between jurisdictions can also lead to delays, as well as a lack of transparency. For example, banks might use different methods and sources for conducting checks, which can cause payments to be wrongly flagged, such as where organisations or individuals have similar names to those on sanctions or financial crime databases.