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Cross-border payment options and their challenges

by Ana Lopez
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Founder and CEO of Global squirrelsa complete SaaS platform for international remote recruiting and payroll.

As companies look for a more flexible, diverse and global work culture, I see a growing demand for cross-border payments.

a recent survey indicates that about 64% of employers based outside Europe are happy to hire international employees. Yet three in four employers reported experiencing problems hiring people from other countries – with 47% of the problems related to payroll processing and payment of salaries.

As someone in the business of preparing and managing payrolls for overseas teams, I hope to shed light on the different modus operandi for making cross-border payments and some of the complexities involved.

The options available for cross-border payments

A cross-border payment is a financial transaction that has taken place between two different parties (payer and recipient) located in two different countries. Such parties can be anyone: individual to individual, company to company, company to individual, etc.

Of all the direct/indirect channels available to make cross-border payments, here are the most popular options available in today’s market.

International wire transfer

International wire transfers are generally facilitated by a financial institution called the SWIFT network. This is the most popular medium for cross-border payments, as this network generates a unique identifier for each recipient and shares it with the banks that support international payments.

Prepaid Payroll Cards

Some companies offer certain value cards to their employees, which can be used as debit cards to make purchases or withdraw money from ATMs. While not accepted in all countries, these prepaid pay cards are an alternative option for cross-border payments.

Paper checks

Even with their decline and the rise of digital banking, many think that paper checks are the most economical way of transferring money internationally. With this mode, you simply write the recipient’s name, address, and amount to be withdrawn on a paper check and mail it. Although the process looks cheaper, it is prone to many delays and subsequent fraudulent activity.

Digital wallets

Digital wallets are known for their speed, convenience and cost-effectiveness and are among the most widely used solutions for cross-border payments. PayPal, Apple Pay and Google Pay are some examples of international digital wallets. Being relatively new to the market, some recipients may find it difficult to redeem or withdraw the amount loaded into their wallet.

PEO/EOR Platforms

Professional employers’ organizations (PEOs) and employer-of-record platforms (EORs) can help ensure fast, secure and affordable cross-border payments, and they are considered more reliable than other payment methods because they can mitigate risks around currency conversions, taxes and deductions .

A reputable PEO/EOR platform should also take care of all compliance documents, labor laws and legal regulations of the countries you do business with.

Challenges in cross-border payments

All of the cross-border payment methods discussed above create problems in one way or another due to the complexity that global payments expose you to. Let’s talk about the most common challenges I think you should be aware of with cross-border payments.

Chain of intermediaries and associated costs

Cross-border payments have to go through many intermediaries to reach the recipient. Each intermediary service provider charges a certain transaction fee for providing support and ensuring a smooth transaction. Usually these costs range from $50 to $500 which proves to be expensive for the employers on top of the actual labor cost.

Currency conversions

Most employers aim to pay their international employees in their local currency. Since these exchange rates are constantly changing and add additional costs, this can become a pain point for businesses dealing with cross-border payments.

Laws, taxes and mandatory payments

Tax rules, labor laws, and government regulations may vary from country to country. In my experience, it can be very difficult for employers to carefully review and address all such rules and regulations.

Employers need to know how much tax to withhold from an employee’s wages, how much to pay to the government, and how much to add to mandatory savings/retirement accounts. Failure to comply with these rules, tax systems and other regulations can cost employers huge fines.

Slower payments and security threats

Another problem when making cross-border payments is the speed of the transaction. Due to various issues such as time zone differences, document verifications, and payment authentications, international payments take longer than local transactions. Since these transactions go through many intermediaries, they are susceptible to various security threats.

Best practices for making cross-border payments

First, I recommend that you look for the configuration that includes faster payments. When you make cross-border payments, you can’t afford any delays in setting up your account and processing payments. I recommend shooting for less than 48 hours to set up and initiate cross-border payments.

Also look at the security and transparency of your payment process. Do not enter into agreements if the payment option is not transparent enough or contains no details.

Amidst the various international payment methods available in today’s market, all with their own advantages and disadvantages, it is crucial for businesses to carefully evaluate and choose the method that can make their work easier and help them expanding global workforce.

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