From a business perspective, there are two elements to any payment process. The first involves receiving money from customers. The second involves outbound payments to suppliers, partners, employees and beyond. In essence, the payment lifecycle is an ever-revolving door of inbound and outbound transactions. Though the inbound side (collecting money from customers via card, e-wallet or direct deposit) can be accomplished by a variety of providers, the outbound side is more nuanced — and usually requires the aid of a provider with outbound-specific capabilities.
Payment process 101
When you’re talking about international cross-border payments, outbound transactions will flow through the following steps:
Step 1: Determine the beneficiary
This step involves collecting all the necessary information on the payment recipient — including the name of the beneficiary (be it an individual or a company), how they’d like to receive the funds (via direct-deposit into a physical bank account or a digital wallet) and where in the world they’re located. (In other words, what country and currency will they be receiving the funds in?) The “where” aspect will in turn help determine what nomenclature is used to correctly identify the bank and branch of the beneficiary.
In the same way that a billing address or phone number will differ in format from country to country, minimum requirements for conducting financial transactions vary by region. In the United States, for example, all monetary transfers require (at minimum) a bank routing number and account number. Conversely, in most of Europe, a single international bank account number, or IBAN, will suffice. Internationally-compatible payment systems will automatically alter required submission fields to match the transaction requirements of a given beneficiary’s country.
Step 2: Approve the exchange rate
This step is unique to modern platforms which offer their clients more visibility into the transaction process. While traditional providers, like big banks, often employ a fixed exchange rate that doesn’t account for fluctuations in currency value, newer systems update in real time to provide users with the most accurate, up-to-date exchange rates. Furthermore, modern platforms allow users to approve an exchange rate before proceeding with the transaction.
Buyers should beware of a static exchange rate — it usually indicates that a hefty price markup was instituted to compensate for any fluctuation in exchange rates on the back end.
Step 3: Review transaction details
This is the stage when a payment is actually submitted for approval, pending the user’s review and acceptance of transaction-specific details. These details are critical because they represent the specific compliance standards in a given country (standards for what information must be present and confirmed before processing). From a customer standpoint, this step is often viewed as a transaction summary of sorts, spelling out the reasons for the transfer of funds, (i.e., what goods or services are being purchased) and confirms the exact amount to be released in the exchange. This amount represents an up-to-date tally of the incurred charges, taking into account factors like region-specific taxes and exchange rates.
Step 4: Compliance checks and screening
This is when the host (bank or third-party provider) first receives a payment for processing. The transaction host is responsible for conducting all region-specific screening tests, thus providing an added layer of protection against finance and identity fraud. Though each country’s compliance standards vary slightly, these screenings usually entail verifying the identity of the beneficiary and checking the transaction information for consistency against other records.
Step 5: Transaction execution
This is when funds are actually released from the paying party and moved into the beneficiary’s account. There are a few ways that a transaction can be executed. A customer can pay via credit card, for example — shifting responsibility to the card provider to transfer all necessary funds. They could also opt to pay by providing the host with bank account information — in which case the host would be responsible for pulling funds directly from the customer’s account and placing them into the beneficiary’s. It’s also possible for payments to be “pushed” — putting the responsibility in the hands of the customer to initiate the transfer from their own bank account to the beneficiary or service provider.
Even if funds are “pushed” instead of “pulled,” the transaction host is still responsible for running a full compliance check and validating that the amount received is in agreement with the stipulated transaction details. Once matched, the host is free to send the payment to banking partners across the globe, as dictated by the involved parties.
Though a payments lifecycle is considered complete when the stipulated funds arrive in the beneficiary’s account, it’s not uncommon for certain regions to experience a momentary break in the process before those funds are made available to the account holder. In China, for example, it’s not uncommon for local banks to require additional proof of a transaction in the form of an invoice before finally processing the transfer on their end.
Complications made easier through automation
Of course, this process moves quickly if it’s not being performed manually by multiple parties, and is instead simplified through automation and transparency. To learn more about the payment cycle process and how to modernize it to gain operational efficiencies, download our ebook on the topic.