What You should Know when Making International Payments
Ask anyone who has dealt with overseas clients or suppliers: there’s always an element of risk involved, whether it’s related to the exchange rate, a country’s political or economic stability, or the payment itself. It is particularly risky if you haven’t transacted with the other party before. Fortunately, there are international banking mechanisms – as well as a few expert tips – that will help give you peace of mind. The key is knowing which options are best for you, and how to make the most of them.
Here some factors to consider when making international payments – some involving the intricacies of cross-border trade, others the simple, often forgotten details like checking the time.
1. Ask an expert
“From a South African perspective, international banking is highly regulated and all cross-border transactions (flowing in and out) are therefore subject to exchange control regulations,” says Trevonica Naidoo, COO, International Banking South Africa at Absa. “Before you do any international payments, you have to consider the Regulator’s obligatory requirements.”
THE MESSAGE: Get expert assistance
Absa’s team of International Banking Specialists can holistically solution your international banking needs, including foreign exchange, international payments and risk mitigation. This includes the available digital platorms and regulatory requirements.
2. Consider your options
“An inward or outward international payment via the SWIFT interbank network is often the most common method of payment. However, given some of the risks involved with cross-border trade, a letter of credit or some type of foreign guarantee would give you some comfort that you will receive your goods, while at the same time giving the supplier comfort that they will get their payment,” says Naidoo.
THE MESSAGE: Dot your i’s and cross your t’s
“As a bank we don’t deal with the underlying goods or service, we deal with documentation,” says Naidoo. “So, provided the documentation and all terms and conditions are in line with what was requested as part of the contract and the payment instrument, all obligations should be met on either side.” This is in relation to the foreign guarantee or letter of credit.
3. Go Digital
“For us, the COVID-19 lockdown emphasised the need to drive digital migration because our customers were not necessarily able to go into a branch,” says Naidoo. “If you were able to sit in your office, upload documents and process payments, you were in a good space because you could still facilitate your obligations. As the lockdown has eased, digital remains the preferred method, because when you make an international payment via an online platform, it reduces risks and creates efficiency.”
THE MESSAGE: Transact online
As Naidoo explains, when you make payments online you take the responsibility of ensuring the correct details have been input. “You’re not relying on an operations person on the back end to input the info, where they could potentially make a mistake and delay a payment.”
4. Watch the clock
If it’s 09:00 in Johannesburg, it’s 03:00 in New York … and 15:00 in Beijing. “If you come in at noon our time and want to do a same-day payment to China, it’s not going to happen,” warns Naidoo. “China’s closed for business by then.” That’s why it’s best to allow about two days for certain international payments, for the back-end process of clearing and settlement to take its course.
“Your supplier in China may also want payment in US dollars,” says Naidoo. “South Africa doesn’t deal in dollars, and China doesn’t deal in dollars, so the payment will have to go via New York, where our US dollar correspondent banks are based.”
THE MESSAGE: Check your time zones
International payments to countries in our time zone and those to the west can usually be done on the same day (provided the instruction is received timeously, your regulatory obligations have been met and funds are available), but eastward transactions will take longer.
5. Take the correspondents into account
Time zones are one complication; correspondent banking arrangements are another. “Aside from the applicant bank and the beneficiary bank, there might be one or two more banks involved in the transaction,” Naidoo explains.
Let’s say you’re sending money to a supplier or service provider in the UK. “Say their bank is XYZ Bank in London, and you’re sending money from Absa in Cape Town. Now Absa might not have correspondence with XYZ Bank, so we would have to send the money to another correspondent – let’s call it ABC Bank London – and they would forward the money on to the beneficiary’s bank.”
THE MESSAGE: Factor that string of transfers into your timing
It might take an extra day or two for the payment to reach the beneficiary, depending on how many correspondent banks are involved and their respective clearing and settlement processes.
6. Decide whether to pay at spot or hedge
“When it comes to international payments, a key factor to consider is the foreign exchange component,” says Naidoo. You can pay in rands and receive money in rands, depending on your agreement with your client or supplier. If you’re paying in foreign currency, though, you’ll need to decide whether to hedge or pay at spot.
“You might get an urgent order and need to pay the ‘spot’ at today’s exchange rate,” she explains. “However, you may also have an order that only requires you to make the payment at a later stage, in which case you could wait and pay at spot on the date on which payment is due. Or,if you think the rand exchange rate is too volatile, you could hedge your risk now and take out forward cover for that obligation.”
THE MESSAGE: Get FX support
Whether you pay at spot or hedge is entirely up to you. Luckily, Absa has a wealth of in-depth FX research to guide your thinking, and our FX Team is always on hand to offer expert advice.