Increased globalisation paired with rapidly evolving technology has altered the landscape in which companies operate. While quicker travel times and improved communication have made the world a much smaller place, this has not necessarily eased pressure on businesses. This changing environment means businesses now need to adopt new technologies and align with international trading expectations.
Being nimble, fast and responsive are now key traits of a successful company that is looking to operate on an international scale. This is reflected in cross border payments: traditional methods have been slow, time consuming and costly. As a result, international payments have undergone significant change, driven by companies and suppliers who expect transactions to be processed quickly. Companies today must embrace emerging trends and technology to overcome the risk and challenges of international trade.
Associated risks of international payments
The complexity of making international payments has historically been a challenge for companies looking to grow overseas. Cross border payments for example, have traditionally been secured through letters of credit, which act as a guarantee to suppliers that they will receive payment for their goods upon receipt and also offer businesses a degree of protection in the event of non-delivery. While a letter of credit acts as a means to managing the risk of international payments and delivery of goods, it requires the involvement of multiple parties, making the process complicated and slow.
Payment and delivery of goods aren’t the only risks associated with operating internationally. Improved technology has made it easier to communicate any changes globally, whether they are political, economic or market driven events, which can quickly create uncertainty in a market and lead to sudden changes in foreign exchange rates.
In the past, companies have been able to negotiate deals in a single currency when making a cross-border payment. In theory, this eliminates the risk of currency fluctuations, instead, it actually transfers the risk onto the person receiving the payment as they are still required to convert the payment into their local currency.
As a result, this kind of agreement can lead to the agreed party ending up worse off, this may lead to suppliers, for example, charging higher costs for goods and services in a bid to cover themselves from lost income.
Is international trade worth the risk?
Despite the associated risks, businesses recognise that international trade offers them potential growth opportunities: according to the UK Department of International Trade, total exports saw year on year growth of 27% between March 2016 and March 2017. However, in order to do trade competitively, businesses require access to tools and solutions to support them in making cross-border transactions.
In line with changing business requirements, payment solutions and service providers have simplified the process of making international transactions. Thanks to new technologies and alternative systems, businesses are less burdened by traditional processes and are less exposed to the risk of currency fluctuations as they were previously. This has led to a range of modern payment options available to businesses to transfer funds abroad quickly, securely, efficiently and at a lower cost than ever before.
Online solutions are increasingly disrupting traditional models, with providers challenging the notion that individual international payments are difficult and time consuming. American Express FX International Payments provides businesses with a range of options to pay suppliers and offers forward purchase contracts of exchange rates to help manage exchange rate risk.
The benefit of being agile
Having the ability to make international payments quickly and easily allows businesses to be more agile and nimble in their operations. For example, the ability to pay suppliers quickly puts businesses in a better position to negotiate the cost of goods or early payment discounts.
The potential for greater control and flexibility also means businesses can make more strategic currency transfers, taking advantage of changing market conditions and favourable currency fluctuations. Similarly, businesses no longer need to hold working capital or stock up in advance on necessary materials; they can quickly make time-sensitive payments when they urgently require goods instead. From a supplier point of view, working with a company that can make payments on time helps develop trust and a strong working relationship.
As the world becomes a smaller place and technology continues to advance, the speed, ease and safety of international payments across borders is helping more businesses operate on a global level. Ensuring quicker payments mutually benefits suppliers and helps to foster international relationships that are more like those between traditional domestic suppliers and buyers, and limits the risks traditionally associated with doing business overseas.