International Payment Terminologies You Must Know Before Exporting Services Globally
Last Updated
May 20, 2023
Written by
Rohit
The seller must follow laws, get licenses, and understand payments, logistics, and risks. Buyers get more products but may face language, cultural, and legal risks. Exporting helps sellers grow and buyers access more goods. To succeed, businesses must know the roles of buyers and sellers and navigate international trade complexities.
If you're looking to succeed in the global market, you need to have a solid understanding of payment terminologies. This knowledge is crucial in:
- Making informed payment decisions
- Negotiating favourable terms
- Managing risk
- Ensuring compliance
Additionally, by implementing strong payment security measures and minimizing fees, you can streamline your international payments and focus on expanding your services globally.
Regarding navigating complexities, this blog will be your compass to the essential payment terminologies that you must know before venturing into the realm of exporting services worldwide.
Payment options available for international transactions
1. Major payment systems
Different payment systems exist worldwide, each with varying times and costs for transfer.
International bank transfers, also known as "wire transfers," require two pieces of information: an International Bank Account Number (IBAN) and a unique routing number.
In the USA, the largest payments market for domestic and international transactions, the primary payment systems are–
- ACH (Automated Clearing House Network): ACH is an automatic domestic fund transfer system between bank accounts in the United States which is a low-cost, efficient, and secure method.
- FedWire (Federal Reserve Wire Network): This real-time gross settlement payment system used by financial institutions in the United States allows the immediate and final transfer of funds, making it a secure method for high-value transactions. However, for international transfers, it may require the use of the SWIFT network.
- RTP (Real Time Payments): RPT is a modern payment system that enables the immediate and final transfer of funds 24/7, including weekends and holidays, providing faster and more convenient payment options. It can also facilitate foreign payments but may require the support of SWIFT to complete the international leg of the transaction.
- SWIFT (Society for Worldwide Interbank Financial Telecommunication): It is a global financial messaging network used by financial institutions to securely transmit information and instructions for financial transactions. SWIFT codes identify specific banks and their branches in international transactions.
The SWIFT network is used for a wide range of financial activities, including cross-border payments, securities trading, and foreign exchange transactions.
In the United Kingdom, FPS (Faster Payments System) is the primary electronic payment method, allowing for fast and secure bank-to-bank transfers within seconds, with 24/7 availability. On the other hand, SEPA (Single Euro Payments Area) is a payment system that is used by countries within the Eurozone for cross-border electronic bank transfers.
2. Payment options beyond the banking system
Alternative methods of payment have emerged recently with technological advancements and changing consumer behaviour. These payment options are easier, faster, and more secure than the traditional route. Often enough, third-party payment providers facilitate the transaction.
- Credit card-based settlement allows businesses to facilitate payments through credit card networks. Visa Direct and Mastercard XBS are two examples—designed to be fast, secure, and convenient, and are often used for emergency funds transfers, and other time-sensitive transactions.
Payment platforms like PayPal, Payoneer, Skydo and Stripe are digital payment systems that allow users to make online transactions. PayPal is one of the most popular platforms, with more than 325 million active users worldwide. Payoneer is another platform, especially popular among freelancers and e-commerce businesses. Stripe is used by online businesses, providing a customizable checkout process and features like recurring billing.
Some common terminologies in the context of payment platforms include the following:
Payment terms
Payment terms refer to the agreed-upon conditions under which a buyer must pay a seller for goods or services rendered. These terms typically include the days after the invoice date when payment is due and are often negotiated before the start of a contract or at the purchase order (PO) stage. Establishing clear payment terms at the outset of a transaction eliminates misunderstandings and potential payment disputes.
Fees and charges associated with international transactions
1. Service fees refer to the fees charged by the platform or service provider for using their services. Take the following examples.
Other typical terms to describe service fees include processing, gateway, and payment fees. Payment gateway providers charge these fees for their services, such as processing payments, handling disputes, and providing customer support.
2. FX markup is the difference between the actual exchange rate between two currencies and the rate offered by the bank or payment platform. This markup is how the platform or bank makes money on currency exchange.
3. The exchange rate is the value of one currency in relation to another currency, which you may know. However, there are different types of exchange rates.
- Spot Rate: The current market price of a currency is settled immediately within two business days, based on supply and demand in the global foreign exchange market.
- TOM Rate: Also known as Tomorrow Next rate—the exchange rate for settling a trade on the next business day. It is used in currency trading and quoted by banks. Traders use it to calculate the cost of trading and manage their risk exposure.
- Cash Rate: The exchange rate for settling a trade on the same day. The cash rate is quoted by banks and financial institutions and is used by traders to calculate the cost of trading and manage their risk exposure.
Based on the fluctuating rates, you need to engage in currency risk management when engaging in international transactions. Financial instruments like hedging, forward contracts, and options can help mitigate the risk of currency fluctuations. By using these financial instruments, your business can protect itself from adverse currency movements and confidently plan future payments.
Mastering payment regulations
Global service exporters must ensure compliance with regulatory requirements to avoid legal and financial repercussions. Here are four critical regulatory aspects that businesses must take care of.
- KYC (Know Your Customer): Businesses use a crucial process to verify customer identities, prevent fraud, and comply with anti-money laundering (AML) laws. It involves obtaining identification documents, verifying their authenticity, and conducting background checks to ensure customers are not involved in criminal or terrorist activities.
- KYB (Know Your Business): Similar to KYC, KYB is the process of verifying the identity and legitimacy of other businesses that a person engages with. This includes obtaining documents such as registration certificates, licenses, and tax identification numbers to ensure compliance with local laws.
- AML (Anti-Money Laundering): AML laws are in place to prevent using illegal funds to conduct financial transactions. Businesses must follow these laws by implementing policies and procedures to prevent money laundering, reporting suspicious activities to authorities, and maintaining records of financial transactions.
- Tax and Customs Compliance: To export services globally, businesses must ensure compliance with local tax and customs laws. This involves registering with tax authorities, remitting taxes, obtaining necessary permits, paying duties and tariffs, and meeting safety and quality standards. Failure to comply can result in legal and financial consequences.
By taking care of these regulatory aspects, businesses can operate legally and avoid legal and financial risks associated with non-compliance.
Regulatory authorities involved in ensuring compliance with KYC, KYB, and AML laws are typically the banking/payment regulators in the respective countries, such as the Reserve Bank of India (RBI) in India. These authorities ensure that banks and payment platforms have the necessary KYC/KYB information on file for both the sender and receiver and conduct AML checks for every transaction to prevent illegal money laundering activities.
By adhering to tax and customs compliance regulations, such as the GST, and obtaining the necessary documents, businesses can establish proof of exports and claim the export benefits they are entitled to.
- The highly coveted GST (Goods and Services Tax), is a value-added tax on goods and services sold domestically in India. However, exporting services are considered a zero-rated supply under GST, meaning that exporting businesses do not have to pay any GST on export invoices, resulting in significant savings.
- FIRC (Foreign Inward Remittance Certificate) & FIRA (Foreign Inward Remittance Advice) are documents issued by Indian banks to confirm the receipt of foreign currency from abroad. These documents are necessary for businesses to claim export benefits and comply with foreign exchange regulations.
Businesses may also be eligible for trade incentives and benefits from government agencies.
- STPI (Software Technology Parks of India) is one such agency that provides infrastructure and services to businesses engaged in software development and IT-enabled services. Businesses located in STPI facilities may be eligible for tax benefits and other incentives.
- DGFT (Directorate General of Foreign Trade) is a government agency that regulates and promotes foreign trade in India. It is responsible for issuing import and export licenses, authorizing special economic zones, and administering trade-related policies and schemes.
- The RoDTEP (Remission of Duties and Taxes on Exported Products) is a new scheme introduced by the Indian government to reimburse exporters for various taxes and duties paid on exported products. It replaces the earlier MEIS (Merchandise Exports from India Scheme).
Understanding international payment terminologies is essential for businesses looking to export services globally. By mastering the language of payment regulations, you can avoid potential legal and financial mishaps. Keeping up-to-date with global payment trends is crucial for staying ahead of the game. Compliance is key to success, so make sure to cross all your t's and dot all your i's. Apply these key takeaways to your business strategy, and unlock the full potential of the global market.
If you seek a reliable payment partner to help you navigate through the web of international payments for your service export business, Skydo is a unique platform that charges a flat fee instead of a commission on a percentage basis and provides the necessary FIRA documents to ensure absolute compliance. Its simplicity of use and faster international payment processing make it a suitable choice for every business.