Cross-border payments are the backbone of international trade, particularly for Indian companies seeking to grow. These payments, however, carry secret charges that can eat into profitability. This blog delves into the complexities of international payment fees, their effect on companies, and how to avoid them with cost-efficient global payment solutions.
Understanding International Payment Fees
Cross-border payments entail several financial institutions, each charging fees that can be classified as visible and hidden costs. While visible charges such as wire transfer international fees and currency conversion fees are made known at the time of payment, there are hidden charges like foreign exchange markup fees and correspondent bank charges that are not clearly indicated.
Visible Costs in Cross-Border Transactions
- Wire Transfer International Fees
Banks levy charges of between $20 and $75 per transaction on cross-border transactions using the SWIFT network. The charges are dependent on the bank and the size of the transaction.
- Currency Conversion Charges
Conversion of currency comes with a margin over the interbank exchange rate of foreign currencies. For instance, if the market rate is ₹84 for USD, it may quote ₹83, which results in heavy losses on big transactions.
Hidden Costs to Watch Out For
- Foreign Exchange Markup Fees
Banks also tend to put a 2-4% markup on the exchange rate, which more than doubles transaction costs. For example, a 1% markup on a payment of $50,000 can amount to a loss of ₹41,000.
- Correspondent Bank Charges
Intermediate banks that process international payments charge extra fees between $15 and $50 per transaction. These fees are subtracted from the payment value in advance.
- Export Documentation Costs
Key documents like the Foreign Inward Remittance Certificate (FIRC) and Bank Realisation Certificate (BRC) also involve an additional cost. These documents are necessary for tax purposes and filing GST.
- GST on Forex Conversion
GST is levied on currency conversion services in India, introducing additional cost complexity to cross-border payments.
Impact of Hidden Fees on Businesses
- Reduced Profit Margins: High transaction fees eat into profits, making it more difficult for MSMEs to continue operations or invest in expansion.
- Cash Flow Constraints: Sudden charges can lock up working capital, impacting short-term commitments such as salaries or inventory purchases.
- Global Competitiveness: Passing on high fees diminishes price flexibility while passing them on to customers threatens market share loss.
Cost-Effective Solutions for International Payments
- Zero SWIFT Charges: Suppresses intermediary bank charges by cutting out SWIFT transfers.
- Competitive FX Margins: Guarantees up to 50% foreign exchange rates higher than standard banks.
- Instant e-Invoice and e-FIRA Generation: Simplifies regulatory compliance by automating export documentation procedures.
- Global Bank Accounts: Supports businesses receiving local payments in more than 100 countries with no FX markups.
- Best Practices for Managing Payment Costs
- Select an international payment gateway with clear pricing and competitive exchange rates.
- Track real-time cross-border payments to prevent poor exchange rates.
- Keep an export documentation list to avoid penalties and maintain compliance.
Leveraging MSME Loan Schemes for New Business
Indian MSMEs can explore government-backed loan schemes that are created for new businesses to enter exports. Such schemes offer financial assistance in covering operational expenses and venturing into lucrative export businesses in India.
Conclusion
Cross-border payments are riddled with overt and covert charges that can affect profitability and cash flow. Knowing these charges and taking advantage of cost-effective global payment solutions such as EximPe will help Indian exporters streamline their payment processes and gain global competitiveness. Keeping up to date with developments such as real-time cross-border payments and having strong compliance strategies in place will be key to long-term success in international trade.
