What are cross-border payments and how do they work?

David Beach6 minutes
Guides
What are cross-border payments and how do they work?
In this article

Cross-border payments are an essential part of doing business in today’s globalised world.  Whether it's paying bills or collecting customer payments, the ability to navigate the complexities and leverage the opportunities that accompany international payments is pivotal to growth on a global scale. 

In this guide, we’ll cover:

  • What are cross-border payments?

  • Why are cross-border payments important?

  • How do cross-border payments work?

We’ve also included a handy cross-border payments glossary of terms, so you can easily get to grips with the terminology on this vast topic. 

What are cross-border payments? 

Cross-border payments, also known as international money transfers or global payments, are financial transactions that involve sending or receiving money across currencies and national borders.

Essentially, multi-currency transactions involve the transfer of funds between individuals, businesses or entities located in different countries or jurisdictions using international payment rails.  

Cross-border payments are critical to the day-to-day operations of the global economy. Trading on a global scale simply isn’t possible without using an international payment solution of some kind. 

Despite their critical nature, cross-border payments are shrouded in challenges such as slow speed of settlement, high costs, and a lack of transparency. There does seem to be positive change on the horizon though, if the G20 cross-border payments roadmap is anything to go by. 

Why are cross-border payments important? 

Cross-border payments enable businesses and individuals to engage in economic activities on a global scale, including trade, remittance and eCommerce. 

Launching into a new market with a local currency throws up many questions around the financial side, such as how to: 

Cross-border payments form an integral part of the global economy, yet they come with layer upon layer of challenges, as the Bank of England explores.  

Choosing the best cross-border payment solution for your business is a strategically vital decision, as getting this right can have a dramatic effect on your bottom-line.

How do cross-border payments work?

There are many ways to make cross-border payments, with different steps and parties involved depending on the route taken. 

Broadly speaking, overseas money movement relies on a network of issuing, intermediary and correspondent banks to execute international payments across multiple currencies and jurisdictions. 

Because of the world’s fragmented payment infrastructure, it can be slow and costly to make cross-border payments. In fact, in a Pay.UK report, it cites that 85% of UK SMEs experience challenges when arranging cross-border payments. 

Correspondent banking and the payment corridor

It’s easier to understand cross-border payments and correspondent banking if we first understand the payment corridor or country corridor. This refers to the route taken by the payment to reach the end account, known as the recipient. 

If the currency pair is commonly traded then the route will be shorter and requires fewer intermediary correspondent banks. Commonly traded currency pairs are known as major pairs. USD, GBP, EUR & JPY are examples of major pairs because they are the most in demand and most frequently exchanged currencies, globally. 

If the currency pair is less frequently traded, and thus has less volume in international circulation, it is considered an exotic pair - i.e. USD to ZAR (South African Rand). This means more intermediaries appear in the corridor to connect the sender to the recipient account. The payment corridor is often affected by geopolitics or regional economic strength.

You can think of payment corridors like travel corridors. For example, there are many direct and fast ways to travel from London to Paris because the cities share high travel demand between them (a major pair), but fewer ways to travel from Paris to Wanganui, New Zealand (exotic pair), which has much lower travel demand, meaning multiple connecting flights and buses are required to complete the route. Here are a few real-life examples of overseas payment processing to illustrate how they work:  

Scenario 1: Collecting a card payment from a customer

  • Customer pays with a card or uses an online payment platform in USD.

  • Payment is routed through a payment gateway and card network. 

  • Merchant receives funds in GBP minus the card processing fee and the conversion fee.

Scenario 2: Collecting a card payment from a customer

  • Customer pays in USD via bank transfer.

  • Payment is routed through the correspondent banking system.

  • Merchant receives funds in GBP minus the conversion fee among other fees.

Scenario 3: Paying a supplier overseas

  • Wire transfers, credit cards or online payment platforms can be used.

  • Funds can either be sent via currency exchange or settled via accounts that use the local currency.

  • The sender (and sometimes the beneficiary) are subject to various fees for each transaction.

Scenario 4: Paying overseas staff

  • Business uses an online payment platform to digitally send employee salaries in bulk.

  • The online payment platform will administer the payment.

  • The sender is charged various fees.

Scenario 5: Making bulk supplier payments

  • Most bulk payments are sent using an online payment platform. 

  • The sender is charged fees for each transaction processed. 

  • Delivery of funds is fast and secure. 

Scenario 6: Like-for-like settlement

  • A business makes a purchase in their local currency, USD.

  • The non-US seller receives the payment into their USD account.

  • No currency conversions are needed, avoiding conversion and associated fees.  


A key part of mastering global transactions is understanding the key players in cross-border payments and their role in facilitating international payments. 

One differentiation in the cross-border payment marketplace is the fees charged by the provider. As a business, avoiding cross-border fees when transacting globally on a large scale will help boost your profitability and therefore long-term success. 

It’s also worth knowing that some cross-border payment providers like Airwallex give you access to market-leading foreign exchange rates, meaning you can make fast and cost-effective international transfers.

Cross-border payments: A glossary of terms 

Today’s global payment infrastructure is fragmented, with different terms used in different localities. A key aspect of navigating the complexities of cross-border payments is understanding terminology and using it correctly. That’s why we’ve put together this brief cross-border payments glossary of terms to help you. 

BIC

A Bank Identifier Code (BIC) identifies banks and financial institutions worldwide and is used for sending and receiving international payments.

Central banks 

Central banks act as the monetary authority and often as the regulator of a country or a group of countries. Central banks influence international payments by setting interest rates, issuing currency and managing foreign exchange reserves.

Correspondent banks 

Correspondent banks serve as conduits, enabling seamless cross-border transactions by providing banking services to local institutions lacking a direct presence in foreign financial systems.

Nostro & Vostro accounts

Correspondent banks hold nostro and vostro accounts with local institutions around the world in those local currencies. This enables them (for a fee) to convert one currency into another. Nostro and Vostro comes from the Italian, ‘ours’ and ‘yours’.

Payment corridors

Also known as country corridors, refers to the route taken by the payment to traverse the correspondent banking network. Geopolitics and world economic events affect payment corridors.

Cross-border payment systems

There are many types of international payment methods, with traditional bank transfers and global card schemes being two of the most commonly used.  

FX

Foreign exchange (FX) is the process of converting one currency into another. Businesses that need to make international payments have to manage foreign exchange rates, which are the prices of one currency in terms of another currency.

IBAN

An International Bank Account Number (IBAN) is important in cross-border payments because it helps to identify and verify the bank accounts of the payers and payees in different countries and currencies. 

Interchange 

Interchange refers to the fees charged by the card networks for merchants to accept their cards for international payments. 

Local currency account

Local currency accounts or global accounts allow you to collect payments in local currencies and then use these proceeds in the same currency later, thereby eliminating unnecessary currency conversion fees. 

Major & exotic currency pairs

A major pair is a pair of currencies that are commonly traded on the global exchange market, are highly liquid and hold stable value - i.e. GBP, EUR, USD & JPY are considered major pairs when traded with each other. Exotic pairs refers to a pair of currencies that are thinly traded, are illiquid (i.e. not much of the currency exists) and are prone to volatile fluctuations. 

Nostro & Vostro accounts

Correspondent banks hold nostro and vostro accounts with local institutions around the world in those local currencies. This enables them (for a fee) to convert one currency into another. Nostro and Vostro comes from the Italian, ‘ours’ and ‘yours’.

Payment corridors

Also known as country corridors, refers to the route taken by the payment to traverse the correspondent banking network. Geopolitics and world economic events affect payment corridors.

Payment gateways

Think of payment gateways as the bridge between a merchant’s website or app and the payment processor or acquirer that handles the transaction. Payment gateways, usually offered by payment service providers, allow merchants to offer checkouts and other payment methods to customers. Payment gateways also handle currency conversion and local payment methods. 

SWIFT

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global messaging network used for international financial communication. International wire transfers are normally made using the SWIFT network.

SWIFT codes 

SWIFT codes (also known as BIC codes) are unique identifiers assigned to financial institutions. They ensure the accurate routing of messages and payments within the SWIFT network. SWIFT can be used for international payments involving various currencies, including the euro. 

SEPA

Single Euro Payments Area (also known as SEPA) is a European initiative that simplifies and standardises euro payments within the EU and EEA. SEPA specifically focuses on euro-denominated payments within a defined geographical area.

Unlock new revenue streams with cross-border payments

Effectively managing cross-border payments enables small businesses to trade on a global scale, unlocking opportunities for new revenue streams. 

Having a comprehensive understanding of the basic building blocks that make up global payment systems will allow your business to find affordable and convenient cross-border payment solutions while also streamlining your daily operations to drive growth.  

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David Beach
Content Marketing Manager - EMEA

David manages the content for Airwallex. He specialises in content that helps EMEA businesses navigate global and local payments and banking.

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