SME Challenges in Cross Border Payments
In the past few years, SME defined as Small and Medium-sized Enterprises (generally defined as companies with annual turnover <$100m, or employ <200 workers) are thriving despite the existence of global giants. The SME market contributes to 48% of Singapore’s GDP, employing about 65% of its workforce and constituting 99% of all its enterprises. In fact, SMEs now account for 90% of the business worldwide. As a result, the opportunities for SMEs are now greater than ever.
In light of the Covid-19 pandemic, online buying for both B2B and B2C goods and services has also seen an exponential growth in the past year. As more and more businesses make their shift to an online marketplace and China, being the world’s largest ecommerce supplier, many SME business owners face a common problem, and that is cross-border payments into China.
Cross-border payments are an important part of the day-to-day operations of any SME. Still, it is currently plagued with a lot of challenges. If you are interested in knowing what these challenges are and their solutions, then you are on the right page. Continue reading below for more valuable information.
Cross-border Payment Methods
Before anything else, it is important that you have a clear idea of the different types of cross-border payment options that you have. Here are the common cross-border payment methods available worldwide:
Bank Transfer is the most common and traditional method of cross-border payment. Large banks often hold several currencies, but that can still be limited given the number of users there are.
As for smaller banks, most of them do not have foreign currencies. As a result, they outsource bigger banks to process the cross-border payment on their behalf. When this happens, the duration of the payment process extends significantly, and there will be more bank charges involved.
On average, money transfer outside the European area can take between 2 to 5 working days. This is if there are no holidays from where the money is originating from to where it will be received. If there is a holiday in any of the locations, then there is a chance that the process can take longer.
There are several fees involved when it comes to bank transfers. However, the biggest value difference it has compared to other cross-border payment options is in the exchange rate. Since the process takes a couple of days, the exchange rate can significantly differ, and the value of your money has a tendency to be smaller.
Credit Card Payments
Credit card payment is probably the most convenient cross-border payment option for merchants. They simply have to input their payment details, and it will be processed immediately.
However, acquiring banks and credit card networks does more work to convert from one currency to another. This results in additional fees and charges passed down to the credit card owner.
International Automated Clearing House (ACH) is also known as Global ACH. It is a simple cross-border payment method to affiliates and suppliers. It works by utilizing various entities such as local banks, Bankers' Automated Clearing System (BACS), and Single Euro Payment Area (SEPA). However, this method is not carried out using a card network.
Using the International ACH method of cross-border payment can be very convenient and inexpensive. However, the downside is that it can take several days to process. On top of that, the receiver must also have an International Bank Account Number.
PayPal is a well-established online cross-border method. What is nice about it is that the interface is very straight-forward so transferring money is no hassle at all. However, it has two major drawbacks.
The first disadvantage of using PayPal is that there are no clear standards on how funds are held. This means that some transfers are received immediately while others take a few days to be fully processed. The second disadvantage is that the transaction fee is quite high.
Suppose the individual you are paying in China does not have an IBAN, credit card, or PayPal. In that case, the best cross-border method for you is paper checks.
Basically, paper checks are physical documents that contain instructions to the bank to provide the recipient a specific amount of money from your bank account. All you will need in this process is the receiver's name and an address where the check will be mailed.
However, it might take a few weeks before the check is received, depending on where it is sent from. This method of cross-border payment is also more prone to fraud than other methods.
List of SME Challenges in Cross Border Payments
Here are the top concerns of merchants when it comes to cross-border payments:
Hidden Transfer and Exchange Fees
One of the biggest problems that merchants face with cross-border payment is hidden transfer and exchange fees.
Hidden fees typically refer to weak exchange rates and commissions included in the money transfer process. These are often not only charged to the money sender but also the receiver.
Meanwhile, exchange fees usually refer to currency conversion fees. Each banking institution has its own exchange rate fee that applies when you send money from your country to another. These conversion fees are typically high, depending on the currency on the other end.
The problem with conversion fees is that these are not usually declared, and you might not even notice it unless you are sending a huge sum of money and the difference becomes evident.
These hidden fees are, most of the time, unavoidable. However, the best thing that you can do is to compare the rates of the services to know where you are better off.
Bank Incurred Charges
International bank transfers can be easily considered as the traditional method of cross-border payments. However, the problem is that even large local banks have a limited range of currencies stocked. This means that they might be able to accommodate your payments at a particular time, especially when other users are also doing the same transaction.
On top of that, your bank of origin may use bank intermediaries in order for your payment to arrive at its destination. When it does, each bank will charge you for processing your payments. This means that the more bank intermediaries are used, the bigger your bank charge will be.
Long Processing Time
Standard international payment methods usually take between 2 to 5 working days. It can even take longer depending on where the funds are sent to and how many intermediary banks are in between. The more financial institutions involved in the payment, the longer the transaction will be. An ideal cross-border payment service provider must offer a real-time or on the same day crediting option.
The Recommended Solution
Among the many cross-border payment options for SMEs, AP-1 is among the best there is. These are some of the reasons why:
- Quick Settlement
- Direct Foreign Exchange Rates for China
- Integrated UnionPay & Visa Solution
- No Minimum Deposit or Balance
By using AP-1, you get to enjoy the following benefits:
Efficient Cross-Border Payment
AP-1 Business accounts provide cross-border B2B online payment by utilizing UnionPay’s network. UnionPay is China’s largest payment and clearing network.
Cross border payments facilitated by banks often take up to 5 working days before it is credited. But with AP-1 Business, your payment will reach your recipient in China in one day (i.e. T+1).
Aleta Planet’s payment platform was designed in-house and has met international data security standards such as being PCI DSS-compliant. Its platform has also met all requirements from UnionPay and China’s State Administration of Foreign Exchange (SAFE) prior to integration with UnionPay network and technology. Lastly, Aleta Planet is also governed under the Payment Services Act, regulated by Monetary Authority of Singapore (MAS), and funds deposited with Aleta Planet are stored in a separate custodian account, ensuring that your funds are safe and protected.
How to Open an Account
Opening an AP-1 business account is super easy and fully digital. You just have to provide the following documents:
- Business Account Application Form and Agreement
- Company Business Registration Documents
- Director’s Identification
- Company’s Ultimate Beneficial Owner’s ID
Once you have all these documents ready, you can upload and send it to email@example.com, and your account will be ready within 5 working days. Easy, right?
When it comes to cross-border payment, merchants' biggest challenges are the long processing time and steep cost. Having a reliable cross-border payment option is critical because it is an important aspect in a business’ day-to-day operations.
On this note, the perfect solution to your problem might be AP-1 Business Account. It is a quick and reliable cross-border payment method that you can apply for online, without any hassle.