Why are international payments so complex?

‘Complex’ according to its dictionary definition means made up of interconnected parts or intricate. That’s an apt summary of international payments as we explain… Everyone has their favourite ways to pay and be paid. Often these payment habits are strongly national. For example, the Germans love cash, the French cheques and the Swedes Swish, a bank account-funded payment triggered from a mobile phone.

Local yet global

Most payment systems are domestic in scope and operate in a single currency. Yet people and businesses want to make and receive payments across national borders.

Whether it’s migrant workers sending remittances home. Or international students paying tuition fees. Or holiday homeowners needing to pay utility bills locally, individuals have many reasons to make international payments.

Any business dealing with other businesses needs an international payment solution, because that’s how global trade works. Businesses need to make cross-border payments to suppliers as well as accept them from customers.

To achieve global coverage, banks have built an international network of correspondent banking relationships, which link their different domestic systems together. Great in theory, but in practice payments can be time-consuming to process, expensive and slow.

Immediate yet delayed

On the surface, payment is the simple exchange of value between two parties. Yet behind the scenes, it’s more complicated. Particularly if the parties are not face to face and the exchange is cross-border.

To manage their risks, the banks involved must answer two questions. Firstly, is their customer who they say they are, also known as authentication? And secondly, is the customer good for the money, also known as authorisation?

Once this is established, the respective banks exchange payment messages. And then move the money so everyone gets paid. For historical reasons, largely dating back to how banks dealt with bills of exchange and cheques in the eighteenth century, clearing and settlement were two separate stages with a time lag in between.

Modern payment systems tend to be built on real-time payment technology, so transactions clear and settle individually in real time with immediate finality. Yet for traditional systems, there’s a natural tension between authorisation which is immediate and settlement which is not.

Bilateral yet multilateral

We talk about the ‘payment system’ but this is really a system of systems. Each may in turn be made up of individual components that can vary significantly.

For multilateral systems, standards and protocols are key to ensuring interoperability. That’s the ability of different systems, devices, applications etc. to connect and communicate in a coordinated way. The downside is that once things become hard wired or coded into systems, it can be tough and slow to change them.

Another problem is that payment journeys may be long. It may take multiple ‘hops’ between systems and those in a correspondent banking chain for the payment to get to its destination. It’s hard to know at the outset how long the payment will take or how much it will cost.

How can international payments be simplified?

Simplifying international payments involves tackling the three natural tensions described above, namely the problems of coverage, speed and systems complexity.

Inpay helps to do this by providing low-cost, fast and secure multi-currency cross-border payments as an alternative to SWIFT wire transfers.

• Coverage – The Inpay network covers 50+ countries and gives access to the 36 SEPA countries via the standard SEPA and instant SEPA solutions, the UK with instant GBP and further afield with local payment offerings.
• Speed – Inpay can receive funds in any currency and pay out locally in real-time. By using Inpay’s direct access to domestic clearing channels, financial institutions can benefit from speedier payments. But also deliver payments in full without deductions, while minimizing fees normally charged by intermediaries in the chain.
• Systems complexity – Financial institutions come in all shapes and sizes. So, it stands to reason that they may wish to manage technical integration in different ways. Inpay’s services are available via a single integration with a choice of connection methods: API, SWIFT, file upload or bespoke connectivity.