Cross Border Payments - Sepa Regulations & Wikipedia definitions

The cross border payments

What is Cross-Border Payments?

Cross-border payments (or cross-border retail payments) is like "Think Global, Act Local, Selling Online" across borders around the world, thanks to the efforts of a new payments industry group for adopting the ready, set, go... ISO 20022 standard.

In short, ISO 20022 is the New Guide for Real-Time Cross-Border Payments, supported by the single Euro Payments Area (SEPA).

By definition, a cross-border payments are transactions that affect the payment systems (including cash) of at least two countries.

While a broad cross border payments wikipedia definition would regard a cross-border payment as a transaction that involves individuals, corporations, settlement institutions, central banks or a combination thereof, in at least two different countries.

Buying and selling online is inconstrained by time or location. Online customers are shopping around the clock and around the globe. Electronic commerce (e-commerce) merchants are selling online and across borders.

Businesses are looking to grow online and want a payment services provider that can support their cross border ambitions.

The cross-border payments market is probably the most important industry in the world of payment systems as of today 2022.

This is because having a partner with a broad range of products and understands local preferences for payment methods and currencies is crucial for success.

But that's not enough. As online merchants need a payment services provider with a global footprint and consultative approach, to help identify which currencies and payment methods mak eth emost sense and to work alongside with them, every step of the way in everyday, every time.

As trillions of $dollars/ £/ euro/ Naira are exchanged every day to cover the settlement of everything from multi-billion-dollar company investments, through to the value of the perishable cargo on a ship that's stuck in port;

All the way down to that rather nice holiday rental you could be eyeing for next summer. International payments are essential to everyone, in every country in the world.

A broad definition would regard a cross-border payment as a transaction that involves individuals, corporations, settlement institutions, central banks or a combination thereof, in at least two different countries.

Categories of cross-border payment transactions

The major categories of cross border payment regulation transactions that fit the definition would be:

1.  Border payments that originate in some country and for which the destination (i.e., the final beneficiary) is some other country.

2.  Border payment transactions in which the origin and destination are both in the same country, but which use the payments infrastructure of at least some other country for settlement.

3.  Cash payments.

Clearly, this categories of cross-border payment regulation transactions is not complete. Yet consider this in a world of high-speed/broadband internet connection and instant communication making a cross border payment is slow;

So much so that picking up a suitcase of cash and flying with it to anywhere in the world may be faster than making that payment electronically.

The purpose of cross-border payments goal is to help online merchants go further around and all over the world, a global network of payment products and acquiring partners, and extensive regional expertise.

And work with you to reduce the complexity of cross-border e-commerce, and take your business where you want to go.

However, there is a new challenger emerging. Immediate payments - aka instant or real-time payments - are the hottest thing in domestic payments ever.

With over 20 countries currently implementing solutions for immediate payments, consumers and businesses will soon be able to move money domestically, or throughout the European Union (EU), in real-time.

So it's only natural to consider how these domestic schemes can interoperate with each other to provide truly global real-time payments.

Just today 2022, a news item described a solution whereby the consumer can shout at their phone to send money to "Peter", and whatsapp Siri will oblige( not whatsapp siri commands). Well what if "Peter" is on the other side of the world?

Global Network of Payments Cross-border

With global network of payments cross-border, we are global. We don't just talk about global. Electronic commerce is experiencing explosive growth on a global scale, with an expected double digit growth over the next few years.

When we focus the lens on Asia Pacific countries, we are also seeing new digital methods of payments cross-border fuelling the growth of e-commerce in the region.

Such alternative payments, especially for large-value or lower-value transactions, are expected to surpass traditional card-based payments by 2023.

A payments systems survey across nine countries in the Asia Pacific region, found that many consumers who participated have had experience with trying out new digital payments.

With this trend in mind, it is much more important for businesses to offer the right payment methods for a given market rather than an exhaustive list of options.

Letting consumers pay in their own currency and using preferred payment methods increase conversion. That is the main reason merchants are offer over 150 currencies and 150 payment methods to create the local payment experience their customers expect.

Flexibility and convenience is the key. Using this flexible approach enables merchants to start processing payments using only the currencies and payment methods that best fit their business model;

And as their business grows, they get help to scale with the right mix of products and services for each phase of their growth.

It is easy to add additional payment methods, helping merchants expand into new international markets, without extra hassle.

This allow merchants to enter into new markets with clear understanding of the different consumer payment preferences and regulatory environments, while maintaining remittance in the currency of their choice.

Here the Remittance services are part of the broader retail payment system both domestic and cross-border. Remittances are cross-border retail payments with particular access requirements on both the demand and supply sides.

For SEPA cross border payments (or single Euro Payments Area cross border payments), it is no secret that the majority of European banks and financial institutions are currently faced with making big and strategic decisions.

The pan-European instant payment initiative is due to go live in 2017, new regulations such as PSD2 (the Second Payment Services Directive) will come into effect soon and the digitalisation of the sector is well under way, with customers demanding new services and payments methods.

Information technology (IT) departments and bank executives need to make difficult choices.

Do they try and adapt their current IT infrastructure to accommodate instant and mobile payments solutions as well as new European regulations;

OR do they completely replace their current platforms with new ones, designed to follow strict PSD2 requirements and to accommodate new payments solutions?

If this weren't enough, the worldwide payment scenario offers an even more fragmented landscape, characterised by a lack of interoperability between immediate payments schemes.

The result is that, today, cross-border payments reach their final recipients only with difficulty.

For example, some payment systems company are providing the payments framework to allow international money transfer provider TransferWise to add more services to its network.

TransferWise, a London based, which offers international money transfers based on a peer-to-peer model is using a Universal Payments Framework to help it more quickly reach scale and have the flexibility to expand its payment processing for any payment type, channel, currency or network.

Large-value payment system (LVPS) vs. Low value payment systems

With large-value payment systems (LVPS), cross-border payments are generally though not necessarily related to financial market transactions, particularly foreign exchange (Forex).

On the other hand, Forex market transactions need not to imply a cross-border payment.

Non large-value (or Low value payment systems) cross-border payments more related to the International trade of goods and services, Unilateral funds transfers from individuals residing in country X to other(s) in country Y (international remittances).

This subsection will concentrate in low-value payment systems or retail cross-border payments.

Cross-border Retail Payments

With Cross-border retail payments, customers expect a set of convenient, cheap, reliable and predictable instruments to cover their most important payments needs. Such as face-to-face-payments, one-off and recurring remote payments, ATM cash withdrawals.

It can be said that many of these customer requirements are reasonably met in many countries at the domestic level, performance in most areas is poor for cross-border transactions.

Between the years 2002 to 2003, the average fee applicable to retail cross-border payments transfers in the Euro zone was 100 times higher than that applicable to comparable domestic transfers.

A "natural" good explanation for all this is that, with few exceptions (e.g. payment cards), payment infrastructures already in place are only domestic in terms of their scope; this is, they were developed for a monetary zone delimitated by national boundaries.

An additional issues which involves, Payment instruments being used, Involvement of a Foreign Exchange Transaction, Different risks, Supply factors (diversity of service providers), Regulation (including customer protection) and Oversight.

All over the world, cash continues to be the most relevant instrument for cross-border payments in terms of volume (number of transactions).

As for cashless transactions, payment cards are the most relevant instrument in terms of volume, as in the EU, cards account for approximately 85 percent of total cashless transactions.

In most cases, however, cards are still not used as payment instruments but rather for ATM cash withdrawals; Using cards for remote payments?

The relevance of cheques for cross-border payments is clearly decreasing.

With the payment system technology currently available, electronic credit transfers and direct debits appear to be the natural instrument for remote payments.

Until relatively recently, only available through cumbersome and costly correspondent arrangements; Only in recent years, with the spreading of processing and messaging technologies, they are starting to become accessible to the average individual.

FX transactions involvement

With FX transactions, not necessarily the case for Cross-border payments in the Euro area, or payments between a dollarized country (for example, Ecuador) and the United States of America (USA).

In some cases, more than one FX transaction, meaning more intermediaries; Usually, large exchange rate spreads.

Interestingly, however, at present cross-border transactions between countries that use the same currency are not very different in terms of overall inefficiency (i.e. high cost) from transactions involving two or more currencies.

Each one has different risks. The risks are actually the same than for domestic transactions, although the mix can be quite different.

Potentially increased legal risk or increased operational risk due to intensive manual procedures (i.e. lack of interoperability).

However, fraud and other security and integrity concerns (e.g. Anti-Money Laundering (AML)/ Know Your Customer (KYC) are regarded as the main risks. In the case of cards, cross-border fraud is approximately 20 times higher than domestic fraud.

Increasing demand for cross-border payment services with enhanced flexibility, speed and geographical outreach.

Banks have not been able to cope with this; As banks strong in urban areas, where they have generally well-developed infrastructures and where generally payments involve bancarized sectors.

Thus, non-banking or even non-financial institutions hold an important market share in the different stages of the value chain; Proprietary messaging systems and Large distribution networks covering remote locations.

International Payments Framework Association (IPFA)

A number leading international provider of payment systems company are joining the International Payments Framework Association (IPFA). Why?

IPFA, which was launched 12 years ago (in February 2010) by a group of 21 banks, clearing houses and associated payment service providers, the IPFA has as its prime purpose the provision of business rules, standards and operating procedures to improve non-urgent cross-border credit transfers.

This new association is creating a contractual framework, based on the ISO 20022 message standard, which will bind the members to those operating rules.

As a leading global vendor of payment systems companies fully supports this initiative to simplify the processing of international credit transfers by leveraging existing payment networks and the ISO 20022 standard.

Payment systems companies hope to help shape this new organization and develop its rules, and then working with its customers to implement any resultant standards.

As they shares its aim of improving cross-border payments, and its experience, focus and product set will greatly assist banking clients with regard to the IPFA operational and technical requirements in order to be operational.

Cross-border Payments Regulation and Customer Protection

With Cross-border Payments Regulation, transparency standards are particularly low for cross-border payments. Several implicit charges that are not clearly disclosed to customers (for example, exchange rate spreads, charges applicable to the receiver);

Additionally, even when some information is provided it is difficult to calculate the cost and make comparisons. In other words, it is costly for customers to foster competition through customer research and comparisons;

Minimum service levels, which, for example, give certainty on the time of accreditation of funds to the beneficiary, are practically non-existent.

Still no consensus that retail systems should fall under the direct control of the overseer. As additional problems in the case of retail cross-border payments;

Overseeing non-financial payment services providers and overseeing the full flow of a transaction would necessarily involve two or more national authorities.

Money Transfer Remittance

With Money transfer remittance, the sender can pay the capturing agent using any means of payment that is acceptable to both.

This transaction is a standard domestic payment; nothing special about the fact that the service is a remittance.

Identification of the sender is not technically necessary for the purposes of making the remittance per se, but will usually be necessary in order for the RSP or its agent to comply with Anti-Money Laundering (AML) / Counter-Terrorist Financing (CFT) regulations.

However, the sender does need to provide the capturing agent with sufficient information to identify the receiver. The capturing agent sends this information to the disbursing agent; and the sender passes it to the receiver for the latter to claim the funds.

The location of the transaction between the sender and the capturing agent ('access point') is usually a physical location such as a local shop, post office, bank branch, fx bureau, etc.

New technology makes 'virtual locations' such as the internet or mobile phones increasingly possible.

The nature of the location affects the payment possibilities: for virtual locations it is likely to be necessary to use card payments, e-money or credit since physical instruments are not possible.

Typically, the disbursing agent will pay the receiver in cash or by crediting a bank account but other means may also be used, as with capturing.

The relatively underdeveloped payment infrastructure in some receiving countries may raise particular issues about the possibilities for disbursement.

The disbursing agent needs to know whom to pay and how much to pay. It may also need other information - for example, the currency in which the payment is to be made or the mode of payment. Sometimes it may be possible for the sender to transfer other optional information.

Identifying the receiver typically involves a combination of a sufficient level of authorization from the capturing agent (e.g. some form of secure message identifying the receiver) and evidence from the receiver about their identity (e.g. suitable ID and perhaps a transaction code).

However, if the receiver has an account at the disbursing agent (eg where the agent is a bank), evidence of identity is likely to be the same as for any other transaction (e.g. to withdraw funds from the account, the receiver might use a payment card and PIN).

The information from the capturing agent to disbursing agent will sometimes travel together with the funds - i.e. passed through the various intermediaries in the settlement process.

Typically the case in an open service, where there is no direct relationship between the capturing RSP and its agent, on the one hand, and the disbursing RSP and its agent so there is no easy way for the two to communicate directly.

Transferring information with funds can be difficult and time consuming if the different payment instructions in the settlement chain use different message formats (may involve expensive manual intervention.

In other remittance services, the information will typically be transferred independently of the funds (e.g. directly from the capturing agent to the disbursing agent, with a copy to the RSP) by any one of a wide variety of means (e.g. public channels such as the internet, e-mail, fax, phone, mail or courier or proprietary communication channels such as intranets or interbank links).

Of course, even if most information is transferred directly, enough information about the transaction must also travel with the funds for ID purposes when paying the specific remittance.

A remittance is likely to involve a settlement chain - a series of separate payments, each of which may be made differently.

From capturing agent through to disbursing agent settlement normally takes place by means of a credit transfer from the payer to the payee's bank, with one of the payments being cross-border (typically by correspondent banking).

The payments between agents and the RSP may be batched and possibly netted, although the scope for netting may be limited given the largely one way nature of remittance flows.

Some RSPs may have bank accounts in both sending and receiving countries, in which case the cross-border element can be partially internalized;

The funds from the capturing agent are credited to the RSP'saccount in the sending country, the funds to the disbursing agent are paid from its account in the receiving country, and the RSP records this fact internally.

However, again because of the largely one way nature of remittance flows, the RSP may have to transfer funds from the sending country to top up its account in the receiving country.

Although settlement is a chain, the transactions within it do not have to take place in sequence. For example, the disbursing agent may pay the receiver before it has received funds from the disbursing RSP.

This is particularly likely with services where the receiver has a choice of where to collect the funds and thus where the RSP will not know which disbursing agent to pay until after the funds have been collected.

To the extent the transactions in the chain do not take place in sequence, some credit risk is created (paying before being paid). There is also a need for liquidity.

For example, if the disbursing agent pays the receiver before being paid by the RSP, the agent needs either to have sufficient funds or credit available.

Providing liquidity has a cost. The increased speed achieved by providing liquidity is therefore likely to increase the overall price of the service.

SEPA Cross-border Payments

A look at the SEPA. With the SEPA Cross-border Payments (or Single Euro payments area cross-border payments); in theory, the adoption of the Euro domestic payments and payments between the countries of the Euro zone ought to be identical.

Between the years 2002 up to 2003, this was not the case - there is a High costs when compared to domestic transactions;

Relatively low STP rates; Lack of transparency and Poor performance for customers (cost, quality and time).

For cards, seamless domestic and cross-border processing, but significant price differences between domestic and cross-border.

The European Commission decided that a drastic political solution was necessary. In December 2001 the European Parliament adopted the Regulation on cross-border payments in euros.

Main features are that all fees applicable to card and ATM cross-border transactions in euros, up to €12,500, must be identical to those being applied to domestic transactions.

This same regime would apply to credit transfers starting on July 1, 2003. To comply with this Regulation, the European Payments Council approved two key market conventions;

The CREDEURO Convention - Establishes a basic bank-to-bank pan-European credit transfer that allows banks to give guarantees to their customers as regards information requirements, execution time and remittance information transmitted.

The Interbank Charging Principles Convention - A standard procedure for achieving end-to-end certainty in charging methods, and allowing for the instructed amount to be credit to the beneficiary in full.

Recently, in the media we read how France leading bank BNP Paribas has completed its first live cross-border B2B payments between corporate clients using blockchain technology.

The transactions, conducted on behalf of packaging outfit Amcor and trading cards group Panini, were cleared in various currencies between BNP Paribas bank accounts located in Germany, the Netherlands and the United Kingdom (UK).

For the cash-without borders transaction, the payments were fully processed and cleared in a few minutes. As a result, highlighting the potential of the blockchain technology to eliminate delays,unexpected fees and processing errors, and pave the way for real-time cash management.

This proof-of-concept shows that blockchain technology offers real opportunities to considerably improve offer for corporate treasury managers.

On the payments front, this confirms the strong business commitment to follow closely and further accelerate the participation in a number of market initiative aiming at improving the corporate payments experience using blockchain technology.

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