Under the hood of International Payments

Tue 07 Feb 2017

How is the international payments process evolving?

With so many new apps and payment platforms appearing, it would be easy to assume that the methods used to make international payments have changed significantly in recent times. 

However, the fact is that while the increasingly shiny and innovative interfaces may look impressive, they are very much window-dressing for what actually goes on behind the scenes – in an industry which has changed surprisingly little over the years.

So as the making of international payments can outwardly appear to be one of the more arcane arts of the financial world, it's worth lifting the hood to see what really makes it work. 

The most fundamental point to understand about international payments is that regardless of the provider, app or platform, the process will always ultimately involve facilitating a debit from one bank account and a credit to another: an action that will require the involvement of additional banks and clearing houses in the payment chain.

Cross-border wires using the swift network

To say that cross-border wires are not new is something of an understatement.

They have been a staple of international payments since the 19th century, albeit that the Swift network  - which facilitates all cross-border wire payments - now uses highly secure systems and involves some 11,000 financial institutions worldwide. 

Historically, it has been at the very epicenter of international payments, underpinning the movement of money across organisations the world over. If a business wants to send a cross-border payment via a provider that isn't part of the Swift network, it will have to use the services of another provider that is a part of it.

Whether it’s the most efficient payment method is debatable, however. Each deposit-taking bank is required to place that deposit first at the Central Bank - or Central Clearing House - of its home nation: a step that adds both time and expense to every transaction. 

Moving from wire transfers to automated clearing house payments

While cross-border wires still play a fundamental role in the international payments landscape, they are now being superceded by Automatic Clearing House (ACH) Payments, in which two Central Clearing Houses talk directly to each other, removing other banks from the process and in so doing providing both time- and cost-efficiencies for the remitter.

This system enables in-country transactions to be completed in about two hours, and while cross-border payments are less instantaneous, payments are likely to be received within one or two days, with transaction speeds increasing all the time.

The only exception to this rule is when sending money to a country without a Central Clearing Bank - such as Afghanistan or Cuba – for these payments, the Swift network, along with the services of a number of other banks is required.

Understanding the limitations of digital currencies like Bitcoin

Another common misconception in the modern world is that digital currencies such as the Bitcoin protocol  - with which transactions are executed through a database called Blockchain - are somehow separate from and far above dealing with the global banking network when processing international payments.

The main problem with this lofty notion is that Bitcoin is a virtual currency that can be used to send and receive payments only between like-minded individuals and a limited number of online platforms. 

At some stage, any Bitcoins accumulated need to be converted into more traditional currencies in order to make payments and purchases in the real world, which comes full circle back to the fact that however exotic and modern a payment type or provider may be, sooner or later it all comes down to an old-fashioned debit being made at one bank and a credit being made at another.

This will, more often than not, involve bankers stamping pieces of paper by hand and either putting them in a file or sending them off somewhere in an envelope.

Essentially, no matter how modern or sophisticated an app, tech-led payment platform or even digital currency may appear, it can only ever be a portal to the real world of international payments: where currency expertise and personal relationships between real people working in bricks and mortar financial institutions are what really drives every successful international payment.