How do cross-border payments work: a guide to fees

Global payments are inherently complex. However, in our interconnected world, businesses are no longer constrained by their geographical location. Increasingly, businesses in different countries are seeing opportunities to expand internationally, either by accepting payments from overseas clients or working with overseas suppliers.

To accomplish this, they need to use cross-border payments to send and receive funds in different currencies. Global payments remain slow and costly despite significant technological advances in the financial sector. When businesses operate across borders, this is one of their biggest complaints.

A variety of methods are available for moving money between countries, some of which are faster than others and some of which incur additional costs. Some fees may not be upfront or displayed from the start due to layering. Long-term profits can be eroded by hidden or unclear costs.

In this guide, we will explain:

How cross-border payments work in terms of fees

What costs you should be aware of

How you can minimise them when sending or receiving money globally.

Whether you are sending or receiving money internationally, you can expect a range of fees. These are in addition to the fluctuating exchange rates you also need to take into account.

Transaction Fees: These are percentage-based or flat fees charged by financial institutions or payment processors for handling the transaction. Consider the volume of transactions you’re processing, as high transaction volumes coupled with high transaction fees can significantly impact your bottom line.

Exchange Rate Markups: Beyond the exchange rate, you may also need to pay a markup, which is often a hidden fee. When making many cross-border payments, be mindful of the increased cost of each international transaction.

Intermediary Bank Fees: If the cross-border payment is done through a wire transfer, intermediary banks (also known as correspondent banks) may charge fees. Depending on how many intermediary banks are involved, you may be charged multiple times. Again, this is not a fee you may be aware of before making the transfer.

Receiving Bank Fees: The recipient’s bank may also charge a fee for processing the incoming funds. This is particularly problematic when sending salaries cross-border or paying clients for bigger projects, as they may receive less than initially agreed. Ensuring the correct bank accounts are used and verified can help navigate these fees and avoid unexpected charges.

Regulatory Fees: Depending on the country, you may be charged regulatory fees or taxes on international transactions.

SWIFT Fees: If the transaction uses the SWIFT network, there may be additional fees associated with the SWIFT messaging service.

Moreover, to transfer funds, as previously mentioned, you must take into account the FX costs and the constantly fluctuating exchange rates between multiple currencies. Money can be lost if, at the moment of sending the transfer, your currency is weaker than the recipient’s.

The total cost of cross-border international wire transfers appears grim when all these factors are taken into account. It is therefore understandable why so many SMEs are concerned about global payments costs and either decide to completely step away from them or incessantly look for better ways to handle them.

Let’s break down a scenario where you are sending 500,000 INR from the UK to a supplier in India through a wire transfer, a common payment method used for international money transfers.

Amount to Send: 500,000 INR
Sending Bank: A major UK bank (e.g., HSBC, Barclays)
Exchange Rate: Let’s assume the mid-market rate is 1 GBP = 100 INR
Fees:

Sending bank fee: Flat fee for international wire transfer: £30 (This can vary between £15-£50)

Exchange rate markup: Assume around 3%

Intermediary bank fee: Assume two are involved, £20 each - £40 total

Receiving bank fee: Assume 500 INR, approximately £5

Amount to be Sent: 500,000 INR
Amount Converted: 5,154 GBP (including markup currency conversion fees)
Total Fees: £30 (sending bank) + £40 (intermediary banks) + £5 (receiving bank) = £75
Total Cost: 5,229 GBP
As you can see, this transfer has a high cost. In the case of regular bank transfers and international payments such as these, you may expect a significant hit to your revenue.

You can reduce international payment fees in several ways:

Use cards where currencies allow

Avoid high-value or high-volume transactions with cards due to limits

Be aware of foreign transaction fees that may apply

Explore alternative payment methods like digital wallets or cryptocurrency to cut costs and improve acceptance rates

In order to secure better rates, you can negotiate with your bank based on your volume. You can also set up alerts to monitor FX and send payments at a more favourable rate. It is problematic because it may lead to delays processing payments, which frustrate vendors, and it only addresses a portion of the fees.

Streamlining cross-border payments and avoiding high fees and FX costs involves three key components:

Batch payments and merged payments to the same vendor

Sending payments at a desirable exchange rate

Avoiding intermediary banks by establishing direct banking relationships in the recipient country or using local currency accounts.

Through, for example, virtual accounts with localised details, access to various local payment methods and routes with slightly different fee structures, such as SEPA, global ACH payments, Faster Payments, etc., and the ability to combine payments to lower costs, you can achieve all of the above through the right fintech solution.

Many banks and fintechs offer services like this to cross-border businesses, so it’s important to consider all the options and pick one that fits your needs and scales with you, so you don’t have to resort to traditional banking methods again.

Fyorin’s financial operations and cross-border payments platform was built on top of a robust network of global financial institutions, meaning that we give you direct access to:

100+ currencies across 200 countries to pay and get paid

Virtual accounts with localised details to transact globally like a local

Over 100 local payment routes to eliminate costs associated with intermediary banks and ensure immediate delivery of funds

Ability to send payments in bulk and automate accounts payable by integrating with your accounting tool

Mid-market FX rates and the ability to hold funds in desired currency without limits

Fyorin focuses on enhancing cross border payments to meet evolving customer demands and improve efficiency.

With Fyorin, you can lower the cost of your cross-border transactions and make them as flexible and easy as they would be if you only operated locally.

Interested in changing how much you pay for your cross-border financial transactions now? Get in touch with us by emailing [email protected] or booking a free demo!

What are the common fees associated with cross-border payments?

Not all fees in cross-border payments will be displayed upfront, but the ones you can expect are transaction fees, exchange rate markups, intermediary bank fees, receiving bank fees, regulatory fees, and SWIFT fees if sending through SWIFT. These fees are a significant consideration for businesses engaged in international trade.

How can you avoid high FX fees?

You can avoid high conversion fees by setting up alerts or, preferably, establishing direct banking relationships with banks where you want to send money or using local currency accounts.

How can you minimize cross-border payment fees?

The best way to minimize cross-border payment fees is to collaborate with a fintech solution that lets you utilize and open virtual accounts with localized details and gives you access to local payment rails. This will remove costly bank layering and allow you to transact in the local currency.