This guide is your manual to understand trade credit - the financial GPS that can keep your collaborations running smoothly, making success your constant companion.

Trade credit is an arrangement wherein a supplier allows a buyer to purchase goods or services, deferring payment for a specified period. It serves as a short-term financing option. Typically, trade credit terms outline the credit period, interest rates, and repayment conditions. Credit terms in international trade aren't uniform,&nbsp; varying across businesses and industries.&nbsp;

Trade credit is a common practice, enabling companies to maintain inventory levels, meet operational needs, and navigate economic fluctuations.&nbsp;

Credit limits are not static and can change over time based on the buyer's evolving credit history, based on assessment of the creditworthiness. Borrowers who consistently maintain a positive credit history may find opportunities for credit limit increases.&nbsp;

Consider this case study of Grasim Pvt Ltd. and US Fitness Inc.

In a <a href="https://www.skydo.com/blog/building-a-global-network-for-your-cross-border-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">cross-border collaboration</a>, Grasim Pvt Ltd., known for its custom mobile applications, engages with US Fitness Inc., a leading US fitness firm. The task involves delivering three specialized mobile apps tailored to suit the unique needs of US Fitness Inc.’s operations.

According to the terms, US Fitness Inc. commits to making payments within fifteen days of receiving each mobile application. Grasim Pvt Ltd. delivers the first app as the collaboration unfolds, and US Fitness Inc. has a fifteen-day window to complete the payment. This process repeats for the subsequent two applications, each installment with a fifteen-day payment timeline.&nbsp;

The trade-credit terms allow US Fitness Inc. to evaluate each application before making payments. This arrangement aids their decision-making process and benefits the working capital requirement.&nbsp;

For Grasim Pvt Ltd., the trade credit terms provide a stable cash flow, with staggered payments offering financial predictability throughout the transaction. This case study exemplifies the strategic use of trade credit in <a href="https://www.skydo.com/blog/cut-international-transaction-costs-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international transactions</a>, fostering a mutually beneficial relationship between the two businesses.

Open account trade credit allows buyers to receive goods upfront and defer payment within an agreed period.

Trade acceptance introduces a more formal structure where a detailed draft outlines payment terms.

A promissory note is a written commitment where the borrower pledges to repay a specific amount by a predetermined date.&nbsp;

Understanding different types of effective financial arrangements is crucial for the following reasons:

Recording trade credit involves choosing between cash and accrual accounting methods, each impacting financial statements and cash flow differently.

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The accounting of trade credit transactions is done when actual payment occurs. This provides a straightforward view of actual cash movements, making it simpler for small businesses. However, it doesn’t accurately represent the financial health as it doesn't consider credit transactions until payment.

Accrual accounting recognizes transactions when incurred, not when cash changes hands. For trade credit, this means recording transactions when goods or services are received, regardless of the payment date. It accurately represents a business's financial position, requires meticulous record-keeping, and may not align with actual cash flow.

<a href="https://www.skydo.com/blog/top-accounting-tools-for-tech-exporters?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Cash accounting</a> can make cash flow appear more stable. Accrual accounting, however, may reveal fluctuations in financial health, showing credit transactions that still need to translate into cash.&nbsp;

Larger businesses therefore adopt accrual accounting, which complies with Generally Accepted Accounting Principles (GAAP) and provides a more comprehensive financial picture.

The Cost of Trade Credit and How to Calculate It

Grasim Pvt Ltd. offers US Fitness Inc. a 2.5% discount on the project cost of 1 million USD for making payment within 7 days. The calculation of the early payment discount is as follows:

Early Payment Discount = 1,000,000 USD × 2.5% = 25,000 USD

However, US Fitness Inc. must weigh this discount against the value of their working capital. For example, if it needs to borrow funds for early payment, then the cost of borrowing must not exceed the early payment discount.

In the above example, late payments by US Fitness Inc. would incur a 1% penalty on the project cost. The calculation for late payment penalties is as follows:

Late Payment Penalty = 1,000,000 USD × 1% = 10,000 USD

To avoid these penalties, US Fitness Inc. must evaluate each delivered mobile application within the fifteen-day window, aligning with their decision-making process and minimizing the risk of late payments.

Best Practices for Extending and Utilizing Trade Credit

Implementing these best practices enhances the effective management of trade credit, minimizes risks, and optimizes financial resources for businesses.

1. Regularly Check and Analyze Customer Credit History

3. Finance Trade Receivables Through Invoice Discounting or Factoring

Trade credit is a catalyst for business expansion, fostering mutually beneficial relationships. But one must maintain a delicate balance in controlling credit and payment terms.&nbsp;

Businesses can navigate the complexities of trade credit by regularly assessing customer credit histories and considering tools like trade credit insurance. This proactive management safeguards against potential pitfalls and sets the stage for a resilient and prosperous B2B ecosystem.&nbsp;

Ans: Any business that buys and sells goods or services can use trade credit. Trade credit is particularly common in the business-to-business (B2B) context.

Ans: The cost of trade credit is the interest or discount a business may incur when it uses credit terms to make purchases. It is essentially the opportunity cost of not paying for goods or services upfront.

Ans: Trade credit can be long-term and short-term, depending on the agreed-upon terms between the buyer and the supplier. Short-term trade credit is more common, with payment typically due within a few weeks or months after the delivery of goods or services. However, some trade credit arrangements may extend to longer periods (in specific industries).

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ACH is one of the most popular electronic payment methods in the US. In 2023, it processed an astonishing <a href="https://www.nacha.org/news/ach-network-records-strong-growth-2023-same-day-ach-surpasses-3-billion-payments-inception">31.5 billion</a> electronic transactions. While ACH is popular for domestic payments, it can also be used for international transfers. If you’re an Indian exporter or a freelancer with US-based clients, you can receive payments from them via ACH.

But what is ACH exactly and is it cheaper than wire transfer to receive payments? Join us as we answer that and a lot more in this detailed blog post

ACH's full form is Automated Clearing House. It's also called Automated Clearing House Network because it can process a comprehensive list of electronic financial transactions like bill payments and ACH direct deposits in the US. The<a href="https://www.nacha.org/"> National Automated Clearing House Association (NACHA)</a> based out of Reston, Virginia is the governing body of ACH and oversees the electronic fund transfer system.

ACH payments have a wide purpose beyond bank-to-bank transfers. Let's look at a few of the types of ACH payments in this section:

With the ACH network, you can pay bills online and automate recurring expenses like utility bills, rent, and subscriptions. This way your bills get paid on time without worrying about when is the next bill due for payment. For example, you can authorize the electric utility company to deduct the bill amount each month from your bank account.

<a href="https://www.skydo.com/blog/everything-about-ach-payments">ACH payments</a> and payroll processing work great together. It's a huge relief for businesses because employees get their salaries credited to their bank accounts on time. For example, a company running its payroll every two weeks can directly deposit the due amount to the employee's account on payday.

The IRS uses ACH to credit tax refunds to the taxpayer's bank account directly. It's a quicker and more secure alternative to processing tax refunds using paper checks. In the same way, you can also use ACH to pay taxes electronically and stay compliant with the tax laws.

Loan repayments are another popular example of ACH payments. You can set up automatic withdrawals for loan repayment instalments so that the mortgage lender gets paid on time and you avoid late payment penalty charges.

Deposits Into An Individual Retirement Account (IRA)

If you're planning to contribute to your Individual Retirement Account (IRA) consistently, then ACH transactions are a great choice. Using this option, you can contribute funds from your account to your IRA account and build the corpus over time.

Using ACH for daily business transactions like paying vendors or receiving money from customers is also common. For example, if a business gets a $2,000 invoice from their vendor, they can authorize an ACH transfer so that the funds are settled quickly. There is no need to manage checks or cash to make the payment.

There are two broad types of ACH transfers: ACH direct deposit and ACH direct payments.

In this type of ACH transfer, the funds are electronically deposited into the recipient's bank account. This is most commonly used by a business and government entity to transfer money into consumer's accounts.

Here's a list of the most popular ways of using ACH Direct Deposits:

Paychecks: Businesses use direct deposit to process payroll payments of employees. Salary is credited to their employees' bank accounts according to the payday

Employer-Reimbursed Expenses: Apart from salary, businesses also use direct deposit to reimburse their employees if they have incurred expenses for work-related activities

Government Benefits: Government benefits like disability payments or unemployment compensation are directly credited using this transfer method

Tax Refunds: If a taxpayer is liable for tax refund, they have the option to receive the amount directly to their checking or savings account using ACH direct deposit

Annuity Payments: Annuity payments are made to investors at a set interval consistently. You can ask the insurance or the asset management company to use ACH to transfer the annuity to your account directly

Interest Payments: Similar to insurance companies, banks also make interest payments using the ACH direct deposit route.

Individuals, businesses or other entities use ACH Direct Payments to make payments from their bank account directly. This is a popular technique for making bill payments and loan repayments.

Here's the expanded list of the most popular ways of using ACH Direct Payments:

Bill Payments: With the user having the freedom to set automatic payment instructions, ACH direct payment is the most popular way to manage recurring expenses like utility or credit card bills

Vendor Payments: Businesses use ACH to pay their vendors and suppliers. The money is directly cut from their account and credited to the receiving bank account without manual work

Charitable Donations: Many charitable organizations give donors an option to set ACH direct payments to make money transfers consistently.

Online Purchases: If an online retailer accepts ACH direct payment, then you can complete the transaction by paying the money directly from your bank account.

There are two ways to make payments using ACH: one-time payments and ACH mandates. Let's understand each of them individually:

One-time payments are single transactions initiated when you receive the notification for bill payment. For example, when you receive a credit card statement, you decide how much to pay and then authorize the amount to be deducted from your bank account.

ACH mandate is useful when the billing amount is fixed and recurring. As you know how much amount will be auto-debited from your bank account, you can enter into a recurring payment arrangement with the billing company. In this payment arrangement, you authorize the company in advance to deduct the amount from your bank on a specific date. This is useful for paying regular expenses like car loans, mortgages or subscription services.

What Are The Charges For ACH Payments and Transfers?

Typically, you don't have to pay any charges for ACH payments and transfers. However, some service providers can charge fees for initial set-up. If you're receiving money in India through ACH bank debit, platforms like<a href="https://www.payoneer.com/en-in/about/pricing/"> Payoneer</a> can charge a 1% fee on the amount. Other payment platforms like Skydo, allow you to receive money in India through ACH bank debit without any additional cost.

ACH return charges are levied when the funds return to the originator's account for reasons like not having enough balance, incorrect account information or non-existent accounts. The charges for debit returns differ from one bank to another but typically range between $2 to $5. However, a bank may charge even more in case of repeated returns.

What Are The Advantages Of ACH Transfers?

ACH transfers come with a long list of advantages, but here are the top three that you must know:

Using ACH direct deposits and direct payments are mostly free for individuals. Even for businesses, ACH is a cost-effective technique for managing payments and receiving money from others. According to the NACHA, ACH costs businesses between<a href="https://www.nacha.org/news/ach-costs-are-fraction-check-costs-businesses-afp-survey-shows"> $0.26 to $0.50</a> which is a lot less than issuing checks which costs between $2.01 to $4.

In ACH transfers there are no physical transfers of money or checks involved, so there is less risk for theft or loss. Besides there are ample security measures implemented like following strong encryption to protect sensitive information. There are other protocols like Multi-Factor Authentication (MFA) which adds an extra layer of security to protect your data from unauthorized access from bad actors.

Traditional ACH transfers take one or two business days to process. Banks and other financial institutions have also started offering the<a href="https://www.nacha.org/same-day-ach"> Same Day ACH</a> for making bill payments or receiving money up to $1 million on the same day. The swiftness of the ACH infrastructure is mostly beneficial for businesses as they can make urgent payments or have better control over managing funds.

What Are The Disadvantages Of ACH Transfers?

ACH transfers also come with a list of disadvantages, here are the top three:

Banks and other financial institutions usually impose transaction limits on ACH transfers. These limits can vary as daily, weekly or monthly depending on the institution. If your ACH transfers hit that limit, you are not allowed to make further transactions within the specific time frame

Penalty for frequent transfers and breach of limit

In addition to transaction limits, the bank or financial institution may impose other thresholds. If a user, breaches these limits frequently, the bank might charge penalties or even stop the account from making further ACH transactions. This could be a matter of hindrance for companies that have to make many frequent online payments.

It Can Be Slow Due to Bank Processing Time and Batch Payments

ACH payments are mostly processed in a batch. It means several ACH transactions are batched together in a particular time frame and settled individually. If you are initiating an ACH transfer after the cut-off time, it might be settled on the next business day.

Here's a quick comparison of ACH and Wire transfer:

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Every business wants speed and convenience. It is the mantra In the contemporary world of commerce, and cash transactions have naturally taken a backseat. Even outside the capital markets, we see the reign where credit and trust are a currency. Transactions of all sizes are hinging on a fundamental pledge—the buyer commits to settling the bill later.&nbsp;

Today, physical currency only changes hands with this financial choreography, the bill of exchange.

A bill of exchange is a written, unconditional commitment by one party, known as the drawer, to another party, the drawee, to pay a certain sum of money to a third party, the payee, either on demand or at a specific future date. This financial instrument serves as a guarantee of payment for goods or services provided.

The bill of exchange has been a fundamental legal instrument in global trade, binding the exporter and the importer and enabling smooth transactions between parties across international borders.&nbsp;

In case of dishonor, the payee can seek legal recourse to enforce payment, utilizing the legal provisions outlined in the governing framework to ensure the settlement of the outstanding amount and any associated damages or penalties.

Let's consider a scenario where a Bengaluru-based software company (Exporter) is providing software services to a Silicon Valley company (Importer). The Bengaluru company, acting as the exporter, creates a Bill of Exchange. This document includes details such as the total amount due, the due date, and other relevant terms.

The Bengaluru company is the drawer, the Silicon Valley company is the drawee, and the bank may be involved as a financial intermediary. The Silicon Valley company reviews the document and, if satisfied, accepts the Bill of Exchange, acknowledging its commitment to pay the specified amount on the due date.

On the due date specified in the Bill of Exchange, the Silicon Valley company makes the payment to the Bengaluru company or through the bank. The transaction is considered complete, and the Bengaluru company delivers the software services as agreed.

A bill of exchange offers several key advantages, making it a valuable tool in commercial transactions and international trade.

A bill of exchange comprises several key components that define its structure and functionality, ensuring clarity and enforceability within commercial transactions.

A bill of exchange involves three parties: the drawer, drawee, and payee, where the drawee must pay the payee. In contrast, a promissory note is a two-party instrument in which one party unconditionally promises to pay a specified sum to the other party.&nbsp;

A bill of exchange is suitable for commercial transactions involving the sale of goods or services on credit, providing a structured framework for payment and trade. On the other hand, a promissory note is more appropriate for individual lending arrangements, personal loans, or informal credit agreements, facilitating clear repayment terms between the lender and the borrower.

<a href="https://www.skydo.com/blog/guide-for-tech-exporters-on-global-compliance?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Regulatory compliance</a> is essential when handling bills of exchange formats involving stringent legal requirements and documentation practices.

The bill of exchange is crucial for managing credit, fostering trust, facilitating international trade, providing financing opportunities, and offering legal protections. Thus, it streamlines complex financial transactions and contributes to the smooth functioning of global trade networks.

By integrating a bill of exchange into their operations, businesses can enhance their financial flexibility, minimize risks, and foster stronger relationships with their trade partners, thereby ensuring a seamless and secure exchange of goods and services on a global scale.

Q1. What do you mean by a bill of exchange?

Ans: A bill of exchange is a written order from one party to another, directing the second party to pay a specific sum of money to a third party on a specific date or demand.&nbsp;

Q2. What are the legal provisions regarding bills of exchange?

Ans: The negotiable instruments law of a specific country typically governs the legal provisions for bills of exchange.&nbsp;

Q3. Who is an acceptor of a bill of exchange?

Ans: An acceptor of a bill of exchange is the individual or entity formally agreeing to honour the obligation stated in the bill. The acceptor assumes the primary liability for paying the specified amount indicated in the bill, either on a fixed date or upon demand.

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With the introduction of online payments, both you and your clients have become more comfortable with digital payments in the last few years. But if you have to pay Rs. 5 lakh to a supplier today, what payment mode should you use: NEFT or RTGS?

You frequently encounter two seemingly similar yet distinctly important methods in the complex web of financial dealings. But are they just interchangeable acronyms, or do they <a href="https://www.skydo.com/blog/how-you-can-streamline-international-transactions-for-your-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">streamline your financial operations</a>?

This question is best answered by understanding the difference between NEFT and RTGS.&nbsp;

NEFT (National Electronic Funds Transfer)

National Electronic Funds Transfer (NEFT) is an Indian nationwide payment system that allows individuals to transfer funds online from one NEFT-enabled bank to another. The Reserve Bank of India introduced the payment system in November 2005 as a digital alternative to depositing money in someone else’s bank account at a bank branch.&nbsp;

Previously, there were several restrictions on the timings of money transfers through NEFT, which the RBI removed by updating the payment system in November 2019. Now, individuals can transfer money through NEFT 24x7 and 365 days a year.&nbsp;

We need some basic information to conduct any RTGS or NEFT transaction

Here are some features and characteristics of financial transactions executed through NEFT:&nbsp;

Financial transactions made through NEFT have a minimum transfer limit of Rs 1. RBI has not set any maximum limit for NEFT transactions but a per-transaction limit of Rs 50,000 for cash transactions. However, there is no upper limit on the total amount individuals can transfer using the NEFT facility.&nbsp;

This means you can transfer as much money as you want, but you must limit the amount to Rs 50,000 per transaction and use multiple transactions to transfer money above Rs 50,000. However, few banks have set their own maximum daily limit on the amount you can transfer using the NEFT facility.&nbsp;

There are no transaction charges for the recipient of funds sent through the NEFT facility. Individuals who execute financial transactions through NEFT online also don’t have to incur any money transfer fee. However, if you are initiating an NEFT fund transfer offline by visiting the bank, it may charge the following (these costs vary depending on the bank and type of account:&nbsp;

Real-Time Gross Settlement (RTGS) is a nationalized electronic fund transfer system used by Indian banks and financial institutions to execute time-sensitive and high-value transactions. Financial transactions executed through RTGS are considered the safest among payment systems as the transactions are done in real-time and in full rather than in batches.&nbsp;

The term ‘gross’ in Real-Time Gross Settlement (RTGS) signifies the payment execution process done individually without offsetting and netting against other transactions. Individuals can transfer money through RTGS 24x7 and 365 days a year. The <a href="https://www.skydo.com/blog/real-time-tracking-of-international-payments?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">real-time payment</a> process ensures that the financial transactions are highly secure and independent of other financial transactions.&nbsp;

Here are some features and characteristics of financial transactions executed through RTGS:

RTGS transactions are meant for high-value transactions, and the RBI has set the minimum RTGS limit to initiate a transaction at Rs 2 lakh. RBI has not set any maximum limit for financial transactions that individuals can make through RTGS. However, banks may set their own upper limit for the maximum funds that can be transferred through RTGS in a single day.&nbsp;

There are no transaction charges for the recipient of funds sent through the RTGS facility. However, individuals making the payment through RTGS must incur a certain money transfer fee, which banks may adjust at their convenience. Mostly, RTGS transaction charges are around:&nbsp;&nbsp;

There are numerous differences between NEFT and RTGS based on their transaction processing speeds, minimum and maximum transaction limits, applicability for different types of transactions, etc.

The major difference is the settlement type. Let’s say you have to transfer Rs. 2,50,000 to your supplier. If you send it by RTGS, your bank A will send it to their bank B, and they will receive it almost immediately.

However, if you send it through NEFT, then Bank A will block these funds from your account. At the end of the settling window, they will check if Bank B owes them any money. If Bank B has to pay them Rs. 1,00,000, Bank A will only transfer Rs. 1,50,000 to them. This ‘netting’ of what one bank must give vs what they have to get is the core mechanism of an NEFT transaction.

Here are the key differences between NEFT and RTGS: 



Understanding the key differences between NEFT and RTGS is the best way to understand which payment mode suits you best.

If you want to transfer money lower than Rs 2 lakh without the urgency of instant settlements, you can use NEFT online as it offers a free-of-cost way. For example, if you are a freelancer and want to transfer or receive fees of Rs 40,000, you can opt for NEFT as a <a href="https://www.skydo.com/blog/cut-international-transaction-costs?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">cost-effective way</a>.&nbsp;

On the other hand, if you want to make high-value transactions higher than Rs 2 lakh, it is beneficial to ensure that the payment is settled instantly and in full. You can opt for RTGS as the payment mode in such a case. For example, if you want to execute a business transaction, which is generally high-value and above Rs 2 lakh, you can opt for RTGS, as it will instantly confirm a fund transfer. It is deemed that on such a large amount, you will be comfortable incurring the cost of RTGS payments.

Money transfers are one of the most critical aspects for any business, whether as a freelancer or an entrepreneur. Facilities such as NEFT and RTGS have made it easier for customers nationwide to send and receive payments anytime and with the utmost security.&nbsp;

It is common for individuals making payments lower than Rs 2 lakh to use NEFT, while individuals looking to transfer funds higher than Rs 2 lakh choose RTGS. However, it entirely depends on your business type and the urgency of financial transactions’ settlement to make an informed choice between NEFT and RTGS. That being said, if you want to receive international funds in foreign currencies, look no further than <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a>. With a Skydo payment platform, you can <a href="https://www.skydo.com/blog/seamless-payment-experience-with-international-bank-accounts?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">open an international bank account in just five minutes</a>.&nbsp;

Q1.&nbsp; Which mode of payment, NEFT or RTGS, is faster?

Ans: When compared based on their settlement speeds, RTGS is a faster mode of payment as it settles the funds in full and instantly. On the other hand, NEFT takes around 30 minutes for payment settlement and settles them in batches.&nbsp;

Q2. Is it compulsory to have an Indian bank account to transfer funds through NEFT and RTGS?

Ans: Yes, you need to open a bank account with an Indian bank and opt for Internet banking to transfer funds through NEFT and RTGS online.&nbsp;

Q3. What security measures are in place for NEFT and RTGS transactions?

Ans: The Reserve Bank of India has made it mandatory to create a beneficiary before making payments through NEFT and RTGS for extensive security. The bank requires you to enter the recipient's bank account details, such as the recipient's name, bank and branch name, account number, and IFSC code. The bank matches and cross-checks the details for utmost security.&nbsp;

Q4. Can I reverse a transaction made through NEFT or RTGS?

Ans: No, you can not stop or reverse a payment once made through NEFT and RTGS. However, you can inform the bank immediately if you have sent the money to the wrong recipient. In fact, if the bank finds some mismatch in the account name and number details, they shall reverse the transaction by themselves, too.&nbsp;

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The traditional banking experience was a revolution upon discovery. However, the integration of technology in banking has resulted in the need to continuously innovate to make the entire transacting experience easier.&nbsp;

Imagine a financial world where you have the power to mix and match services from various providers, creating a truly personalised banking experience. Enter open banking – the current revolution in the financial industry where the talks around the utilities, possibilities, and risks associated with open banking are reaching a fever pitch.

Open banking attempts to break the monolithic structures of conventional banks and institutions and bring a ‘mix-and-match’ of services from multiple financial providers catered to the consumers. It is a system where customers can securely share their financial data with authorised third-party service providers through APIs to allow greater collaboration and foster the development of innovative, tailored financial solutions.&nbsp;

Open banking shifts the focus of financial services from a single-bank model to a collaborative approach. It helps securely and effectively <a href="https://www.skydo.com/blog/make-data-driven-business-decisions-with-customer-level-revenue-analysis?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">leverage consumer data</a> to foster an ecosystem based on data portability and interoperability.&nbsp;

This article aims to address some of these opportunities in the context of cross-border payments and international banking.&nbsp;&nbsp;

Open Banking and Global Payments: Bridging Distances

When expanding globally, businesses face major constraints while navigating payment cultures in different countries. For instance, corporate credit cards are most prevalent in the US, but most of Europe relies on wire transfers.&nbsp;

Payments through ACH (Automatic Clearing Houses) can take days to get authorised. The constant back-and-forth between multiple banks and clearing houses painfully limits and slows the process. There are also specific regulatory abidance for each country that businesses need to adhere to.&nbsp;&nbsp;

Open banking makes it possible for fintech services to serve customers at their homestead. It addresses the fundamental problems in traditional payment mechanisms and eases bank-to-bank payments. It automates manual processes to help customers authorise payments in a few clicks.&nbsp;

Open banking further cuts the fluff involved in <a href="https://www.skydo.com/blog/benefits-of-multi-currency-accounts?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international banking transactions</a> to help businesses attain global growth.&nbsp;

For instance, assessment, interchange, and processing fees cost<a href="https://www.bankrate.com/finance/credit-cards/merchants-guide-to-credit-card-processing-fees/"> 1.5% to 3.5% of every credit card transaction</a> to merchants in 2020. Open banking cuts out the intermediaries and directly connects customer’s bank accounts. This arrangement saves considerable time and costs for businesses with slimmer margins.&nbsp;

Open Banking: A Pathway to Financial Innovation

Earlier, customers were at the mercy of the banks. Most of the banks provided similar services, often limited in nature. The open banking framework has turned the tide in favour of customers. Fintech service providers compete to build a wide range of products and services that deliver a stupendous experience, ease of use, transparency, and cost efficiency.&nbsp;

Stripe and Braintree have disrupted the payment scenario by granting access to the underserved. In China, WeChat and AliPay are the new digital finance ecosystems serving customers based on their needs.&nbsp;

UPI and mobile wallets are among India's biggest use cases for domestic payment solutions based on open banking. In the US, large banks have struck data-sharing deals with third-party providers. Chase partnering with Intuit and Wells Fargo with Xero and Finicity are a few examples.&nbsp;&nbsp;&nbsp;

Customer Empowerment Through Open Banking

Open banking further empowers customers through data ownership and control. Fintech startups, technology companies, and financial institutions are synergising their efforts to enhance the overall customer experience by leveraging banking data.&nbsp;&nbsp;

Customers can enjoy seamless transactions, personalised financial insights, and transparent pricing frameworks while fully controlling with whom they share their financial data and to what extent.&nbsp;

APIs allow seamless integration of financial services such that businesses get a personalised suite of services for international dealings and cross-border payments. Many fintech service providers provide the dual benefit of the ease and simplicity of bank transactions and cutting-edge services like e-wallets, easy remittances, and currency exchanges.&nbsp;

In fact, the focus of such services and platforms is to provide their customers with the best user experience and innovative financial solutions. Yet, the pressing question remains about the regulatory and security aspects of this revolutionary banking avenue.

Regulatory Navigation in the Open Banking Era

Most apps and platforms based on open banking are built on robust security protocols and comply with their country's stringent data protection regulations. The General Data Protection Regulation (GDPR)&nbsp; is an important EU law that governs data sharing.&nbsp;

PSD2, another set of data protection rules in Europe, explicitly grants the authority to share data to account holders instead of banks. India also passed its new data protection bill in the recently concluded monsoon session. Many regional <a href="https://www.skydo.com/blog/mastering-compliance-a-step-by-step-guide-to-data-protection-payments-laws-and-industry-regulations-for-tech-exporters?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">regulatory frameworks</a> mandate consumer protection and privacy to the highest degree.&nbsp;

Third-party service providers need to ensure compliance at multiple levels as different data requires different levels of security. Data sharing is mostly risk- and permission-based in financial services. It must have proper audit trails per the regulations and risk management guidelines.&nbsp;

Fintech services can follow enhanced KYC procedures, identity validation, and fraud detection for compliance and regulatory adherence.&nbsp;

Addressing the Risks: Security in Open Banking

Open banking is based on data sharing of personal and sensitive information. Securing such information is the elephant in the room, which needs addressing. It poses risks in the form of increased exposure and vulnerability of data toward potential breaches, frauds, misuse, and hacks.&nbsp;&nbsp;

Fintech services and platforms must implement robust security measures and data protection guardrails such as encryption, monitoring, authorisation, and authentication. Measures like two-factor authentication, KYC norms, in-built security walls, etc., enhance data protection and eliminate manipulation or tampering.&nbsp;

The Horizon of Open Banking: Glimpse into the Future

<a href="https://assets.kpmg.com/content/dam/kpmg/ua/pdf/2019/09/future-of-digital-banking-in-2030-cba.pd.pdf">A KPMG report</a> states the banking industry will see more changes in the next decade than it has in the past 100 years.&nbsp;

The Integration of IoT (Internet of Things) and AI (Artificial Intelligence) with open banking will help customers embark on a journey of autonomous financial experiences. Fintech services and banks will have a greater insight into their customers’ lives, which calls for greater trust and robust security mechanisms. New business models and use cases for financial services will emerge to redefine the service provider-customer relationship.&nbsp;&nbsp;

Consolidation of services into a ‘super app’ will occur as AI and other emerging technologies interface with open banking solutions. AI will play a critical role in helping customers overcome their low levels of financial literacy. Technologies such as IoT and Distributed Ledger Technologies (DLT) will create trustless models of customer engagement and automation in financial services.&nbsp;

Businesses need to accept the change if they seek growth and relevance readily. Along with this technology adoption, IT exporters and international businesses need to be at the forefront of compliance and security to provide their customers with the best experience and smoothly functioning business processes.&nbsp;&nbsp;&nbsp;

Currently, the world relies on heterogeneous modes of payments, and abiding by all can get time-consuming and expensive for small-scale IT exporters and businesses. Open banking is revolutionising the banking sector and creating opportunities for businesses to grow globally.

Furthermore, cross-border payments are expected to reach<a href="https://www.bankofengland.co.uk/payment-and-settlement/cross-border-payments#:~:text=The%20value%20of%20cross%2Dborder,trillion%20in%20just%2010%20years."> $250 billion by 2027</a>. Consequently, the need to smoothen the creases and bumps in the international payments process is more pertinent than ever.&nbsp;

Fintech solutions like <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a>, driven by open banking, will be crucial in building and streamlining collaborative <a href="https://www.skydo.com/blog/seamlessly-accept-international-payments-in-india?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international payments</a> infrastructure from scratch.

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India has witnessed an impressive surge in its startup ecosystem in recent years. Factors such as a large and diverse consumer base, a burgeoning middle class, access to talent, and increasing investor interest have contributed to this growth. Indian startups are making strides in various sectors, including technology, e-commerce, healthcare, and fintech.

As this ecosystem continues to evolve, Indian startups are poised to play a pivotal role in shaping the future of India and the global business landscape.

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