We live in an era of global economy, where the goal of large companies is to expand their business beyond their borders. Achieving this is a rather complex matter, where we must be familiar with issues such as, for example, what is a cross-border transaction or what is cross-border debit? Do not worry! Here we explain everything.
What is a cross-border transaction?
Cross-border transaction is, in basic terms, an exchange of goods, property, money or services involving different countries. It is somewhat more complex than a simple Internet purchase from a foreign country, although it also applies.
However, we need to go beyond this simple fact. We can talk about a more complex commercial agreement, such as investment in foreign companies, the purchase and acquisition of these companies in their entirety or the merger of companies from different countries that are related to the same sector.
What are the most used cross-border transaction fees?
At this point we will tell you what the cross-border transaction fee is, and this is related to sending money from one country to another. Companies, individuals, banks or settlement institutions operating in two different countries may participate.
It is relevant in transfers between countries that handle different currencies. Imagine, for example, making a monetary transaction from the United States, which uses the dollar, to a country like Brazil, where the official currency is the Real (R$).
The border payments market has not been entirely straightforward, as companies and individuals face different challenges, among which we mention:
- Limited access.
- Lack of transparency.
- Low speed.
- High rates.
Cross-border payments have taken various forms. Some of the most commonly used are:
Bank transfers
These are simple bank-to-bank transfers. It involves charging fees to change the currency denomination from one country to another bank rates may vary from country to country.
Payments by debit card
It is one of the preferred options for consumers. From the buyers perspective, all that is required is to enter the credit card number and wait for the transaction to be verified and the debit balance to be credited.
However, this requires additional work when it comes to international transfers; a conversion from one currency to another is required, so the fees increase considerably.
Virtual wallets
Today, there is a large network of digital wallets, some of which operate in almost every country in the world. Their rates vary according to the country in which they operate. They are often used through mobile devices.
Transactions B2B
This comes from the English term Business to Business, which are commercial exchanges that take place between two companies, when one company sells a product or service to another as a form of payment.
What does the McKinsey Global payments report 2021 say?
As use of alternative payments is skyrocketing, banks must urgently embrace the next generation of payments to stay in the race.
The report found that by 2025, instant payments and e-money payments will account for more than 25% of global non-cash transactions, up from 14.5% in 2020.
The report found that nearly 45% of consumers frequently use mobile wallets to make payments (>20 transactions a year) up from 23% in the 2020 poll. Furthering this trend, global B2B non-cash transactions will increase to reach nearly 200 billion transactions by 2025, from 121.5 billion in 2020.
The pandemic reinforced major shifts in payments behavior: declining cash usage, migration from in-store to online commerce, adoption of instant payments. These shifts create new opportunities for payments players; however, it is unclear which are permanent and which are likely to revert—at least partially—to prior trajectories as economies reopen. Nonetheless, the long-term dynamics seem clear.
Examples of cross-border transactions
Mergers and acquisitions are corporate strategies aimed at the external growth of a company, achieved by leveraging other companies. The acronym for this process is known as M&A (Mergers and Acquisitions). Examples of cross-border transactions include the following:
Transfer of intellectual property
A company founded in Delaware that buys the intellectual property rights of two German software engineers, making creditors of an algorithm created by them. As payment, the U.S. company assigns its company shares to the German engineers.
Acquisition of a foreign distributor
A German company wants to buy an American distribution company. The American company has an outstanding debt with the German company. The German company converts the debt into equity and becomes a creditor of the American company.
Merger of companies
Grupo Mexico, a leading company in the area of cargo transportation, copper production and infrastructure, completed the acquisition of a U.S. company named Florida East Coast in order to enter the North American market.
What is Cross-border Interbank Payment System?
What makes cross-border transactions tricky?
There are several considerations to keep in mind when entering into a cross-border agreement, because it can create a big number of legal challenges.
The first thing to evaluate is the fact that all countries have different legal, cultural and tax regulations for completing the merger or acquisition of foreign companies. Therefore, the consideration of both countries is required to reach a consensus.
Think, for example, in the case of the United States, of acquiring an American company or merging with one, it is important to consider that in this antitrust country certain agreements must be reviewed. In addition, each state is autonomous, i.e., it has its own rules. So, you should not only think about the country, but also about the regulations of the state where you want to perform the merger.
Another detail to evaluate is the risks and disadvantages that exist whenever an attempt is made to merge or acquire a company of foreign origin:
- The culture of both organizations must be homogenized.
- It takes time to complete the integration of both parties in administrative, managerial and commercial terms.
- Often, during the integration process, companies face a drop in production and performance, which can lead to a loss of money.
- The company that buys or acquires a company may find hidden debts, as well as accounting or tax inconsistencies of the company it is acquiring.
- In the days leading up to the acquisition or merger, companies may experience a drop in the value of their shares.
Therefore, it is a rather complicated, costly and time-consuming issue that companies must take into account when initiating a merger or acquisition business strategy. However, knowing what a cross-border transaction means has helped many companies to continue to merge, indicating that it is worth all the effort involved.
Do you already know what a cross-border transaction is and what the cross-border transaction fee means? If you still have any doubts, ask us at PayRetailers. As we are experts and we have a high level of experience in the subject, we can provide you with the necessary support to start your business in international proportions.
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