What goes on behind the scenes when an international payment is made? We reveal all and demonstrate the various processing stages.
Better understanding results in fewer errors. Here you will find an animated film explaining the basics of international payments.
Let's look at the four steps in the processing of an international payment
1. The customer sends the payment order to the bank
The payment order is sent to the bank via an online banking system (e-banking) or a bulk upload system, in other words a file containing a large number of payments.
- Banks have their own internal e-banking systems (such as Easy Banking Business at BNP Paribas Fortis), but there are also systems that can communicate with multiple banks, such as SWIFTNet and Isabel.
- A limited number of corporates and public institutions can send large volumes of payments to the bank directly from their own ERP systems via bulk upload (sometimes referred to as 'host-to-host').
Remember to provide all the necessary information in the payment request. For transactions outside the SEPA zone, specific rules often apply. A few typical examples:
Not sure what you're doing? Check the Currency Guide here for information on all currencies.
2. The bank validates the input and sets the payment in motion
The bank performs the necessary compliance checks. The bank has an obligation to carry out a number of checks, for example in order to prevent payments being sent to countries under embargo or to people/entities subject to financial sanctions. The EU, the US, the UN and individual countries have such embargo lists.
3. The bank chooses the appropriate routing for executing the payment
For payments in EUR in the SEPA zone, agreed clearing systems are used. Elsewhere in the world, there is no system that is able to connect with any bank in any currency. That makes things complicated, as your banker must find correspondent bankers to ensure the money is received by the final beneficiary. Banks usually have one or several correspondents in each country for the currencies they allow payments in. Matching them with one another for every payment is no small feat. When that has been done, the money can subsequently pass through each of those banks. Your bank will determine the optimal routing on the basis of a number of criteria. These are the main ones:
For payments between accounts held with the same bank. This is an accounting movement, whereby the money does not leave the bank.
The daily transaction volumes between banks are enormous. They are processed in clearing systems. These systems process payments on a 'net basis': all incoming and outgoing payments are listed per bank, and then the net amount to be paid or received ('settled') is calculated for each bank in question. This process takes place multiple times a day. This is called 'net settlement'. Depending on the clearing system, there is usually a focus on either large, relatively urgent amounts or greater numbers of smaller, less urgent transactions.
- ‘Correspondent banking’
The actual settlement can only take place in the country to which the currency belongs, i.e. via a local clearing system. Often, one of the two banks involved is not connected to the clearing system of the third country. In this case, direct routing to this system is not possible.
The solution? A 'correspondent bank' that does have access to the local clearing system. Many banks have a worldwide network of such correspondent banks. They hold accounts with them (called 'nostro' accounts) via which they can route payments. The correspondent bankers then settle the amounts so that the beneficiary bank receives the money and can pay the final beneficiary.
4. The customer receives the details of the payment
The entire process concludes with reporting: the customer sees all credit and debit information on their bank statements.
Watch out for 'restricted' currencies
Only convertible currencies can be used to make international payments. Some currencies are 'restricted': this means that in accordance with local legislation, these currencies are not permitted to leave the country. As such, it is not possible to open an account in Belgium in this currency or to use it to make international payments.
An example of a 'restricted' currency is the BRL, the Brazilian real. Banks have a workaround for this problem. They conclude an agreement with a correspondent who does have access to the currency. They send the equivalent value in EUR or USD, convert the amount into the local currency in the country (in this case BRL), and forward that amount to the beneficiary.
What is SWIFT?
To ensure routing is successful, banks communicate with one another via the SWIFT network (Society for Worldwide Financial Communication). SWIFT is owned by financial organisations worldwide. There is a specific standard for each form of communication, for example MT 101, MT 202, etc. In the case of SWIFT, a specific address is also required: the BIC (Bank Identification Code).
How to automatically get the best exchange rate
Companies working with several currencies often want to avoid exchange rate risks and administrative hassle. That is why the bank has come up with a behind-the-scenes solution: the 'embedded FX' service.
Embedded FX? You don't even need to remember the name, because the system works automatically, without you even having to think about it. FX doesn't stand for Hollywood-style special effects, but for Foreign Exchange, sometimes referred to as Cross Currency. You are guaranteed to come across this at some point if you make international payments, since they are not always executed in the currency of the debit account (referred to as 'mono-currency payments'). Sometimes, the currencies of the accounts the payment is being debited from or credited to may not be the same. These are FX payments. During such payments, an exchange takes place: one currency is sold and another bought, without you having to lift a finger.
The volumes on the FX market might be greater than you'd think. To put it plainly: they are enormous. Every day, more than 5 trillion American dollars are traded. That is 5000 billion American dollars, more than the volume involved in global equities trading...in a single day. The FX market operates day and night, and only closes over the weekend from 10 pm on Friday until 10 pm on Sunday.
Wim Grosemans (Head of Product Management Payments and Receivables at the BNP Paribas Cash Management Competence Center):
'On the FX market, banks essentially play the role of a wholesaler: they buy and sell currencies on the international market, and then sell them on to the customer with a mark-up. BNP Paribas is one of the biggest players, ranking among the global top ten. There is no official market rate in this over-the-counter market. Each bank determines the rate at which it wants to buy and sell currencies itself. Unofficial market rates can be found in publications from a number of public institutions (such as the European Central Bank) and private organisations (Reuters, Bloomberg etc.). These are based on the average rate offered by a number of major banks.'
The rate is always determined per currency pair, for example the euro versus the American dollar: EUR/USD = 1.1119. The most traded pair is EUR/USD, which represents 25% of daily trade. Second on the list is the pair American dollar/Japanese yen
(USD/JPY) with 18%, with British pound/American dollar (GBP/USD) coming in third at 9%.
Alwin Vande Loock (Product Marketing Manager Payments and Receivables at the BNP Paribas Cash Management Competence Center):
'As for the rate, banks offer a number of options. The rate can be a live market rate that is continuously being updated. The EUR/USD rate, for example, is adjusted more than 50 times per second. Another option is a daily rate. In this case, a rate is offered that will apply for a certain period.'
For many companies, all of this hassle with exchange rates is a real headache. Too complex, too expensive in terms of administrative costs and too many exchange rate risks. For those customers, banks have a solution: embedded FX.
Wim Grosemans (Head of Product Management Payments and Receivables at the BNP Paribas Cash Management Competence Center):
'When you make a payment in a currency you do not hold an account in, the bank will immediately retrieve a good exchange rate from its colleagues in the dealing room of the Global Markets department. The rate is usually confirmed within one hour after the customer has sent the payment. Unless large amounts are being transferred, the entire process is automatic. The IT systems used are much more efficient than they were just a few years ago, meaning that the bank is less exposed to volatility and can offer its customers a competitive rate. Embedded FX is an efficient and simple alternative for anyone who doesn't want to hold accounts in different currencies and run the exchange rate risks that entails. For the customer, it no longer matters what currency they use: the process is exactly the same. What's more, it gives them peace of mind, because they know that they'll always get a great rate.'
Working capital: far more than just an accounting term
Working capital, also known as net operating capital, presents a picture of the operational liquidity of a business. But there is more to it than meets the eye.
The success of a business actually depends to a significant extent on how it deals with its working capital needs.
The difference between working capital and working capital needs
Within the financial analysis, working capital is just one of the indicators that present a picture of the operational liquidity of a business. It not only affects general management, but also the access to bank credit or the valuation of the business, for example. This is calculated as follows:
Equity capital and other resources in the long term - fixed assets
This allows you to see whether sufficient long-term funds are available to finance the production chain. Where there is a positive result that is indeed the case, whereas with a negative result it is actually the production chain that must safeguard the long-term financing.
It is therefore useful to calculate the working capital needs as well:
Current assets (excluding cash) - current liabilities (excluding financial liabilities)
The result shows the amount the business needs in order to finance its production chain, and may be both positive and negative:
- where working capital needs are positive, the commercial debts no longer cover the short-term assets (excluding the financial). In that case, a business can rely on its working capital. If this is insufficient, it will need additional financing for its operational cycle in the short term;
- where working capital needs are negative, a business can meet its short-term liabilities without any problem. Nevertheless, it is advisable to reduce working capital needs (further).
In short, working capital presents a picture of the operational liquidity of a business, whereas working capital needs represent the amount the business needs in order to finance its production chain.
In other words, it boils down to limiting working capital needs as far as possible, thus increasing liquidity. This is crucial, especially in times of economic or financial difficulty. After all, customers tend to pay later then, while your stocks are increasing and your suppliers are imposing stricter payment terms. As a result, more and more working capital gets 'frozen' in your operating cycle, precisely when circumstances make it more difficult to attract additional financing.
Optimising working capital is not only a question of long-term considerations. In the short term, too, the business can release cash that is not being used optimally, or is being used unnecessarily, more specifically in the purchasing, production and sales processes within the operating cycle.
The working capital and the working capital needs must, above all, be geared effectively to each other. The working capital needs must be structurally less than the working capital itself, preferably with an extra buffer. However, there is no mathematical truth regarding the amount of working capital and working capital needs. Sector, activity and business model can affect this, for example.
The (near) future of payments up close
Evolve or disappear: players in the payment sector have to predict the future in order to adapt to a constantly changing market. The future is bright for those who are up to the challenge. That was the conclusion of a study carried out by Accenture.
Generation Z will have the power
According to Accenture, young people born after 1995 will have a great influence over changes to payment methods.These future adults, who were brought up digitally and raised "by" Google and Facebook, want everything straight away and easily. Currently, 69% of them already use banking apps (in comparison with 17% of baby boomers). More than ever, payments will have to meet their ultra-connected needs.
The rush towards "customer experience"
Already under the influence of new generations, the payment universe will no longer be able to limit itself to transactions. Consumers want more, including more services (in a wider sense) throughout their transactions. Companies that are capable of offering a "complete journey" to their customers will hold their attention and gain a real competitive advantage.
Mobile payments take off
Apps and open banking will continue to necessitate mobile payment as a rule, but only so long as the sector's players are able to meet the expectations of their consumers. How will they get there? The race for a unique app that can group all the information and banking transactions in one place is well and truly on. The first company to capture this market will have a great head-start.
A revolution in benefits
Rewards and benefits linked to payment cards now seem outdated and unsuited. In fact, American customers say that they are ready (48%) to change banks just to take advantage of offers that are better, more accessible (online) and fit in with their lifestyles. What will the rewards of the future be like? They will be based on customer experience!
In the face of the challenges that await them, the players in the sector will have to rely more than ever on the strength of their networks. This is an indispensable condition for remaining agile, flexible, connected and effective enough to respond to changes in the market, without increasing investment or the risks.
Fintechs and banks: an engagement announced
In the same vein (regarding increasing collaboration), Accenture points out that banks and fintech start-ups will inevitably work more closely together (and that they complement one another). While the former will bring to the table their brand's legitimacy, expertise and market size, the latter will provide agility and technological innovation. The fruits of this union will produce innovation in payments.
The power of technology
Will coding see off credit and debit cards? This is one of the predictions of the study. For example, thanks to advances in computing, account numbers will be replaced by unique temporary codes. The widely-used token is just a taster of what is to come before a revolutionary surge of several technologies hits payment methods (biometrics, blockchain, augmented reality, etc.).
The relationships between technology and transactions are also going to change, in particular through the increasing number of payment terminals and methods. The digital revolution will therefore affect the way in which payments are accepted, but also the stakeholders in these transactions. This will see the emergence of a new kind of bilateral relationship, where anyone can become a seller.
The constant battle against fraud
As the study points out, the technological methods used for fraud are also evolving at top speed. The stakeholders in the payment sector will therefore have to be extremely innovative in order to fight the fraudsters.
Accenture's message is clear: traditional companies will not survive without completely overhauling and modernising their current payment infrastructure. What should replace them? Systems that are flexible, open and agile.
Cash continues to charm Europeans
Contrary to widespread belief, on the continent, cash is here to stay. This is according to the findings of an ECB study. Despite significant geographic disparities, euro area consumers still hugely favour using cash to make low-value purchases.
At the end of 2017 the European Central Bank (ECB) published an extensive study on the payment habits of European citizens from the 19 euro area countries. The aim? To shed light on consumers' payment behaviour at points of sale, particularly concerning the use of cash, bank cards and other payment instruments. The main result of the study was that cash continues to reign supreme, as it represents 79% of all transactions carried out and 54% of the total value of exchanges. Bank cards come in second (19% of transactions and 39% of value). However, the report — which is based on data from 2016, segmented by country, but also by other criteria, such as type, age and level of education — highlights significant geographic disparities.
Cash in the south? Not necessarily!
More than 124 billion payments were made in cash, compared to 30 billion by card and 3 billion using other instruments (cheque, bank transfer, smartphone, etc.). Contrary to what you might think, southern European countries are not the only ones favouring cash, particularly in terms of the number of transactions. In fact, Germany, Austria and Slovenia achieve record levels with at least 80% of transactions being made in cash. In terms of value, Greece, Cyprus and Malta come out on top, with more than 70% of amounts settled in cash at points of sale. And at the other end of the spectrum? The Netherlands, Estonia and Finland, where the majority of purchases are made by card. France, Luxembourg and Belgium join these countries, where only the lowest payment amounts are made using cash (33% or less).
No significant profile type
The ECB study also sheds light on the demographic characteristics of European consumers who prefer cash to other payment methods, even though there are not really any significant differences. Nevertheless, men aged over 40 of all levels of education take the crown. In fact, women are more likely to use bank cards; much like the younger generations (under 40), except for 18 to 24-year-olds (probably because there are more students of this age). More surprisingly, a large proportion of consumers say that they prefer bank cards to cash – information that is contradictory to what this analysis has found. The explanation provided by the ECB is that those surveyed tend to forget low-value payments and only think about the larger payments. However, 81% of transactions observed in 2016 involved values below €25 for the purchase of daily consumer goods, while only 8% were above €50.
Access to card payments does not explain everything
According to the report, European consumers have rather high access to card payments on average (almost 72%). However, the level of card support at points of sale does not explain the huge use of cash. Nevertheless, an undeniable correlation can be determined for countries where retail chains are less likely to accept card payments, such as Greece, Germany, Portugal, Spain, Italy, Slovakia and Malta – all of which are below the European average. Another interesting element is the low level of contactless payment provision throughout Europe. However, for most European consumers, the speed of the transaction is one of the most decisive criteria when deciding on a payment method. No doubt the increase of cards equipped with contactless technology — which will certainly speed up transactions — will compete with the use of cash...