Cross-border payments are transactions between payers and recipients in different countries. These payments enable businesses to purchase goods, acquire services, and move capital across international borders.

Cross-border payments can be costly and slow because they must move through multiple intermediaries such as banks and financial institutions. Each new banking system adds its own processing time and fees. The variety of currencies and international laws and agreements also complicate the payment process.

But recent technological advancements have begun to simplify cross-border payments. The blockchain and digital payment platforms make cross-border payments easier, faster, and cheaper. These technologies increase transparency, decrease the number of intermediaries, and reduce fees.

Global business-to-business (B2B) payments are projected to reach $124 trillion by 2028, due primarily to cross-border transactions. Below, we’ll explain how businesses use cross-border payments for B2B transactions, the challenges of these payments, market trends, and how to handle regulations and taxes.

What’s in this article?

• How do cross-border payments work?
  
• How do businesses use cross-border payments for B2B transactions?
  
• B2B cross-border payment challenges
  
• Growth trends in the B2B cross-border payment market
  
• Innovations in real-time B2B cross-border payments
  
• Cloud technology advancements for cross-border payments
  
• How to handle regulations and taxes for global transactions
  

How do cross-border payments work?

Several factors can shape cross-border payments, including the countries, regulations, currencies, and payment method involved. Here are the stages of a typical cross-border payment:

• Initiation: First, a business initiates a payment to an international recipient through a bank transfer, wire transfer, or specialized payment platform.

• Currency conversion: Since the sender and recipient are in different countries, the sender’s bank or payment provider must convert the funds from the sender’s currency to the recipient’s currency at the present exchange rate.

• Intermediary banks: The payment might pass through intermediary banks first. These banks facilitate moving the payment to its intended destination.

• Clearing and settlement: The corresponding banking systems clear and settle the payment. They verify the payment details, ensure sufficient funds, and transfer the funds to the recipient’s bank account.

How do businesses use cross-border payments for B2B transactions?

Here are some common uses of cross-border payments for B2B:

• Buying goods and services: Businesses often buy materials, components, or finished products from international suppliers. Then they settle the invoices with cross-border payments.

• Managing supply chains: Complex global supply chains pay for expenses such as shipping, logistics, and customs duties with cross-border payments.

• Paying overseas employees or contractors: Businesses with remote employees or contractors in different countries pay their workers’ salaries, wages, and fees with cross-border payments.

• Investing in foreign markets: Companies looking to expand globally might invest in foreign businesses, real estate, or other assets. They must transfer funds through cross-border payments to do so.

• Repatriating profits: Cross-border payments can transfer profits from international subsidiaries in foreign markets to businesses in their home countries.

• Settling financial transactions: Businesses might pay for financial transactions such as loan repayments, dividend payments, or royalty fees with cross-border payments.

B2B cross-border payment challenges

While cross-border payments can be useful for B2B businesses, they can lead to operational and financial challenges.

Transaction delays

International payments can take days to process. This delay can be harmful in time-sensitive industries such as manufacturing and perishable goods. The following factors can cause delays:

• Time zone differences: Operational hours vary across global banks, affecting the speed of transaction processing.

• Manual processing: Some aspects of international payments still require slower manual intervention.

• Compliance checks: Complex security and compliance checks can also slow down the process.

Compliance with multiple regulatory frameworks

Each country has its own regulatory framework for financial transactions, including Anti-Money Laundering (AML) rules, counter-terrorism financing (CTF) standards, and Know Your Customer (KYC) requirements. Compliance with these varied and sometimes conflicting regulations can be troublesome and costly. Failure to adhere can result in major legal penalties and reputational damage.

Opaque and unpredictable costs

The payment chain contains hidden fees, including correspondent bank charges, intermediary bank fees, and currency conversion markups. This unpredictability complicates financial forecasting and reconciliation.

Intermediary banks and additional fees

Most international payments involve multiple banks, including the sender’s bank, intermediary banks, and the recipient’s bank. Each one might charge their own fees, which can reduce the total amount for the recipient. Involving multiple banks can also complicate payment tracking.

Foreign exchange (FX) risk

Currency fluctuations can drastically change the exchange rate during the payment process, causing unexpected losses. Sophisticated financial instruments and expertise can protect against FX risk, but they might not be available to all businesses.

Operational risks and errors

Moving international payments through multiple systems increases the risk of operational errors such as misrouting and data entry mistakes. These errors can delay transactions and require substantial effort and cost to resolve.

Fraud and security concerns

Cross-border payments are particularly vulnerable to fraud due to the involvement of multiple parties and systems. Data breaches, phishing scams, and unauthorized transactions can result in substantial financial losses and diminished customer trust.

Limited payment tracking

Because many traditional systems lack real-time visibility, businesses cannot easily track their cross-border payments. This uncertainty can disrupt supply chains, delay project timelines, and strain relationships with suppliers and partners.

Technological incompatibilities

Differences in banks’ technology platforms can create inefficiencies in the transaction process, requiring additional reconciliation and manual adjustments.

Limited access to banking

Recipients in some regions, especially those in developing countries, might have limited access to banking services. They might have to use less secure, slower alternatives to receive international payments.

Legacy systems and integration

Many businesses still pay with outdated legacy systems, which are often incompatible with modern cross-border payment solutions. Integrating cross-border payments with these systems can be costly, time-consuming, and prone to errors.

Growth trends in the B2B cross-border payment market

Several key trends are driving growth and transformation in the B2B cross-border payment market:

• Real-time payments: More countries are adopting real-time payment systems, which enable near-instantaneous cross-border transactions.

• Fintech solutions: Fintech companies are disrupting traditional banking models with innovative, user-friendly payment solutions. These companies use technologies such as blockchain, application programming interfaces (APIs), and AI to simplify processes, reduce costs, and increase transparency.

• Transparency and compliance: Regulatory scrutiny of cross-border payments is increasing. To comply with regulations, businesses are adopting solutions that provide end-to-end visibility, automated compliance checks, and strong reporting capabilities.

• Localized payment experiences: Businesses are seeking payment solutions that support the specific needs and preferences of different markets. This includes features such as payments in local currencies, support for local payment methods, and compliance with local regulations.

• Digital currencies: Cryptocurrencies and central bank digital currencies (CBDCs) are emerging as potential alternative payment methods for cross-border payments. They have faster settlement times, lower transaction fees, and increased transparency compared to traditional methods.

• Market consolidation: Larger players are acquiring smaller fintechs and traditional banks are partnering with technology providers. This consolidation has resulted in more comprehensive and integrated payment solutions.

• Business-to-business-to-consumer (B2B2C) models: Payment providers are increasingly adopting B2B2C models, where they provide services to businesses that then provide these services to their customers. This model increases reach and scalability in the market.

These trends indicate a future where cross-border payments are faster, cheaper, more transparent, and more accessible to businesses of all sizes.

Innovations in real-time B2B cross-border payments

Here are some key advancements in real-time B2B cross-border payments:

• Real-time payment networks: Real-time payment networks such as FedNow in the US and Faster Payments in the UK enable near-instantaneous cross-border transactions, reducing the delays associated with traditional correspondent banking.

• Blockchain and distributed ledger technology (DLT): Payment platforms such as RippleNet and IBM Blockchain World Wire use DLT to create secure, transparent, and immutable payment ledgers. These ledgers make intermediaries unnecessary, reduce settlement times, and lower transaction costs.

• API-driven platforms: APIs integrate different payment systems, banks, and financial institutions—enabling faster and more effective data exchange, automated reconciliation, and simplified payment flows. API-driven platforms such as Visa B2B Connect make real-time cross-border payments more visible and controllable.

• Artificial intelligence (AI) and machine learning (ML): AI and ML optimize routing, detect fraud, and manage risk in real time. These technologies can analyze vast amounts of data to identify patterns and anomalies, leading to faster decision-making and lower chances of errors or delays.

• Embedded finance: Embedded finance integrates financial services directly into business processes and platforms. Businesses can then initiate and receive cross-border payments within their existing workflows, making separate banking systems unnecessary and reducing friction in the payment process.

• Multicurrency wallets and accounts: Digital wallets and accounts that support multiple currencies simplify cross-border transactions. Businesses can hold and manage funds in different currencies, reducing the need for frequent conversions and minimizing exposure to FX risk.

Cloud technology advancements for cross-border payments

Cloud technology advancements have made cross-border payments faster, more secure, and more accessible. Here’s how cloud technology is transforming cross-border payments.

• Innovation and collaboration: The cloud creates an environment that promotes innovation and collaboration. Fintech companies and traditional financial institutions can quickly develop and deploy new solutions on cloud platforms. Cloud technology also allows different entities to work together on shared platforms and data sets.

• Scalability and flexibility: Cloud platforms can scale significantly, allowing financial institutions and payment processors to handle increasing volumes of transactions without major infrastructure investment. This flexibility is especially useful for handling spikes in transaction volume during holidays or other peak times.

• Security: Modern cloud platforms provide strong security measures including encryption, multifactor authentication, and continuous monitoring. These measures help protect sensitive financial data from breaches and fraud.

• Real-time processing: Cloud technology reduces the settlement time of international transactions through high-speed internet connections and powerful processing capabilities. As a result, businesses can transfer funds across borders in a matter of minutes rather than days.

• Cost efficiency: For financial institutions that use cloud services, physical infrastructure investment is light and maintenance costs are low. The customers receive these operational savings in the form of lower fees for international transactions.

• Interoperability: Cloud-based systems integrate with various banking systems, payment networks, and regulatory frameworks across different countries. This interoperability simplifies moving payments through multiple banks and jurisdictions, reducing errors and delays.

• Advanced analytics and AI: Cloud platforms often have advanced analytics and AI capabilities. These tools can detect fraud, predict transaction patterns, and provide insight into payment trends. Advanced analytics can also improve compliance with regulatory requirements by automating the detection of suspicious activities.

• Regulatory compliance: Cloud service providers often have tools and frameworks to help financial institutions comply with international regulations. These include data residency solutions, compliance reporting, and secure storage of transaction records.

• Customer experience: With cloud technology, payment service providers can offer a more user-friendly experience. Features such as real-time payment tracking, instant notifications, and easy access to payment histories improve transparency and build trust with customers.

• Global accessibility: Cloud technology enables businesses and individuals to access payment services from anywhere in the world. Small and medium-sized enterprises (SMEs) looking to expand their markets internationally especially benefit from this access.

• Disaster recovery and business continuity: Cloud platforms provide strong disaster recovery and business continuity solutions. Should a system failure or natural disaster occur, these platforms can quickly restore data and services without interrupting cross-border payment services.

How to handle regulations and taxes for global transactions

Here are some tips for handling regulations and taxes in cross-border transactions.

Regulations

• Know your obligations: Each country has its own set of rules for financial transactions. These often include sanctions, data protection laws such as the EU’s General Data Protection Regulation (GDPR), and Anti-Money Laundering (AML) regulations to prevent illegal activities such as money laundering or terrorist financing. Research the specific regulations that apply to your business and the countries involved.

• Partner with experts: Consult legal and financial professionals who specialize in international transactions. They can guide you through compliance issues and help you set up your business structure in a tax-efficient way.

• Use technology: Many modern payment platforms and software solutions have built-in compliance features. These tools can automatically examine transactions for potential issues, generate reports, and help you keep track of all the necessary documentation.

Taxes

• Understand tax treaties: Tax treaties are agreements between countries that determine how cross-border income is taxed. These treaties can offer benefits such as reduced tax rates or exemptions on certain types of income. Understand how these treaties apply to your business and transactions.

• Plan ahead: Work with a tax advisor or accountant who specializes in international tax to develop tactics that legally minimize your overall tax burden. For example, you might restructure your business, choose specific locations for your operations, or time transactions strategically.

• Keep detailed records: Keep detailed records of all income, expenses, assets, and liabilities related to your international transactions. Having well-organized records will make it easier to file tax returns, respond to audits, and avoid penalties.

• Transfer pricing: If your company operates in multiple countries, research transfer pricing rules. These rules govern how you price goods and services transferred between different parts of your company. They prevent companies from artificially shifting profits to low-tax jurisdictions.