How do international business payments work?

An international business payment works as a chain of account entries, not as one transfer: the payer's bank debits the payer, banks that hold accounts with one another pass the value along, one of them converts the currency, each checks the payment against its compliance rules, and the payee's bank credits the payee. No money leaves one country and enters another. A balance goes down in the first country and a balance goes up in the second.

This article is the map of the subject. It follows the bank route from instruction to credit, shows where each cost and delay comes from, then sets out the other routes a business can use. The rules on charges, disclosure and screening differ from one country to the next, so the article says which body a rule comes from. It is general information, not legal or tax advice.

What actually happens when a business pays a company in another country?

When a business pays a company in another country, an account is debited in the payer's country and a different account is credited in the payee's country, and the banks in between settle the difference among themselves. The currency never travels: pounds stay in the United Kingdom's banking system and dollars stay in the United States'.

The Bank of England puts it this way: currencies operate as closed-loop systems, and domestic payment systems are generally not connected to those of other countries. Banks therefore hold accounts with banks abroad and keep accounts for them. A payment is made by crediting an account in one jurisdiction and debiting the corresponding amount in the other, so the currency itself is never sent overseas.

A domestic payment needs none of this, because every bank of a country can settle with every other through the same national system, usually across accounts at the central bank. Across a border there is no shared system and no shared central bank. Two banks that want to pay each other need a third bank where both have an account.

That third bank is a correspondent bank. The Bank of England describes it as the intermediary two banks use when they have no direct relationship, and calls correspondent banking an essential component of the global payment system. The same source notes that each additional intermediary adds cost and delay.

The instruction and the money are two separate things. The instruction is a message, sent in most cases over the SWIFT network, that tells each bank in the chain whom to debit and whom to credit. The money is the set of balances that change as a result.

What path does a cross-border bank payment follow from start to finish?

A cross-border bank payment passes through seven stages: the payer's instruction, the payer's bank, one or more correspondent banks, the currency conversion, compliance screening, the payee's bank, and the credit to the payee's account. Conversion and screening are not fixed in the sequence: the conversion happens at one point chosen by the banks or the payer, and screening is repeated by every bank that handles the payment.

Each stage runs on its own clock. A bank processes payments during its business day and up to a cut-off time; a domestic payment system has opening hours; a compliance team works office hours. A payment that reaches a stage after its cut-off waits for the next business day in that time zone, so a transfer between two distant countries can lose a day at each end without any fault.

Where does the currency conversion happen, and who decides?

The currency conversion happens once, at the payer's bank, at the payee's bank or at an intermediary, and the currency of the instruction decides which. A payer who instructs the payment in the payee's currency has it converted by the payer's own bank; a payer who sends their own currency leaves the conversion to a bank further down the chain.

The difference matters because the party who converts sets the rate. A rate quoted to a business is the wholesale rate between banks plus a margin, and the margin is rarely shown as a separate line. When a bank further along converts, the payee discovers the rate from the amount credited.

The invoice settles the question before the payment does. An invoice in the supplier's currency puts the conversion, and the exchange-rate risk between invoice date and payment date, on the buyer. An invoice in the buyer's currency puts both on the supplier. An invoice in a third currency can mean two conversions.

How a rate is built and how to compare two quotes are covered in the article on currency conversion.

Who pays the fees along the way?

The payer chooses, in the instruction, one of three ways of sharing the charges: the payer bears everything, the payee bears everything, or each side pays its own bank. On bank transfer forms the three options usually appear under the codes OUR, BEN and SHA.

• Payer bears all charges (OUR). The payer's bank charges the payer a higher fee and settles the intermediaries' charges itself. The payee should receive the full amount of the instruction.
• Shared charges (SHA). The payer pays the sending bank's fee. Intermediaries deduct their charges from the amount in transit, and the payee's bank charges the payee.
• Payee bears all charges (BEN). Every charge, including the sending bank's, is deducted from the amount. The payer pays the face amount and nothing more.

With the shared and payee-bears options, the amount credited is lower than the amount instructed, and neither side knows by how much until the payment lands. That is the usual reason an invoice shows as underpaid by a small amount.

Some jurisdictions restrict the choice. The second Payment Services Directive of the European Union states in its recitals that, for payments it covers, charges are generally levied on the payer and the payee by their own providers, that the full amount sent should reach the payee, and that intermediaries should not be able to deduct from it. Those provisions apply where both providers are in the Union; a payment with one end outside it falls back on the options above.

Whatever the option, the conversion margin is not a "charge" in this sense. It sits inside the rate and is borne by whoever's bank converts.

Why do international payments cost what they cost and take the time they take?

International payments cost more and take longer than domestic ones because each bank in the chain adds its own fee, its own checks, its own opening hours and its own cost of holding money abroad. The Bank of England notes that a cross-border payment can in some cases take several days and cost up to 10 times more than a domestic one.

The same source lists seven frictions behind that result:

• Fragmented and truncated data formats. Messages lose information between systems, which forces manual repair.
• Complex processing of compliance checks. The same payment is screened several times.
• Limited operating hours. Settlement systems close overnight and at weekends.
• Legacy technology platforms. Many systems process in batches.
• High funding costs. Banks must hold balances in each currency in advance.
• Long transaction chains. Each intermediary adds a fee and a delay.
• Weak competition. Few banks serve some corridors, so prices there stay high.

The G20 made the improvement of cross-border payments a priority in 2020, and the Financial Stability Board published quantitative targets on 13 October 2021, which G20 leaders endorsed. The targets are set for three segments: wholesale payments between financial institutions; retail payments, which in the Board's wording include business-to-business payments; and remittances.

The Board's targets also cover access and transparency. On transparency, they ask that every provider give payers and payees a minimum list of information: the total transaction cost, showing all charges, the exchange rate and the conversion charges; the expected time to deliver the funds; tracking of the payment's status; and the terms of service.

The targets are goals for the market as a whole, measured as averages. They bind no bank on a given payment and give a business no right to a price or a delay. Their practical use is as a yardstick for a quote and a promised delivery time.

What are the alternatives to a correspondent bank transfer?

A business can pay abroad through five other families of route: local-to-local networks run by payment institutions, multi-currency accounts, card networks, links between national instant-payment systems, and stablecoins. Each replaces a different part of the bank chain and leaves the rest in place.

A local-to-local network turns one international payment into two domestic ones. The payer makes a domestic transfer to the institution in the payer's country; the institution pays the payee from funds it already holds in the payee's country. The institution squares its own positions later, in bulk, through the banking system.

A multi-currency account does not move money across a border by itself: the payment that follows may still travel by bank transfer or over a local network. A card payment puts the cost on the payee as a percentage of the amount, which is why cards are rarely used for large supplier invoices.

Linked instant-payment systems are the newest family. The Bank for International Settlements notes that domestic payments are near-instant in over 70 countries, and its Innovation Hub published in July 2024 a blueprint for connecting those systems through a single hub, so that an operator makes one connection in place of a custom link to each country. According to the same source, connecting instant systems can enable cross-border payments within 60 seconds in most cases.

A stablecoin payment replaces the chain of bank accounts with one ledger. A business that holds a dollar stablecoin sends it to the payee's address, and the transfer is final once the network has confirmed it. What it does not replace is the step at each end: a business that keeps its books in bank money converts in and out through a regulated provider, with its own fee, checks and banking hours. Whether a business may hold or accept such tokens depends on the law of its country.

What documents and data does a business need to send and receive an international payment?

To send an international payment a business needs the payee's exact legal name and address, account number, bank identifier, the amount and currency, and a reference; to receive one, it has to give the payer the same details about itself, without error.

The data requirement comes from the standards of the Financial Action Task Force, whose Recommendation 16 asks countries to ensure that financial institutions include required and accurate information about the originator, and required information about the beneficiary, in the payment message, and that this information stays with the payment through the chain. The same recommendation asks institutions to watch for payments that arrive without it.

For the payer, the list to collect before the first payment is:

• the payee's full legal name, exactly as it appears on its bank account, and its address;
• the account number, in IBAN format where the payee's country uses it;
• the payee bank's identifier, the BIC used on the SWIFT network, and any local routing code the destination country requires;
• the currency of the account, which may differ from the currency of the invoice;
• the invoice or contract the payment relates to, and a short reference the payee can match;
• any purpose code or supporting document the destination country requires for incoming foreign payments.

The payee keeps ready what its own bank may ask on receipt: the invoice, the contract and evidence of what was supplied. In countries with exchange controls, the bank may hold the credit until those documents are filed.

An IBAN is a standard format for an account number that lets the sending bank validate it before the payment leaves. A BIC identifies the bank, not the account. Both have their own articles.

Details received by email deserve one control before first use, and again whenever they change: confirm them with the payee through a channel already known to be theirs, such as a phone number on file. A cross-border transfer sent to the wrong account is difficult to bring back, because recalling it depends on the cooperation of a bank in another jurisdiction.

Which route fits which international payment?

The route that fits depends on four things: the amount, the urgency, whether the destination is covered, and whether the payee must receive an exact sum. Many businesses use two or three routes.

One case is about the number of payments, not the route. When a single cross-border payment must be shared among several parties in several countries, such as an agency fee divided among co-agents, the bank route means one incoming transfer followed by as many outgoing ones, each with its own conversion, charges and delay. On a blockchain, an onchain payment router can make the division part of the payment. Shaka is one such router: each party's share is set as a percentage and can be signed by each recipient before the client pays, the client pays once, and every party, up to 20 recipients, is paid at the same moment in one final transaction. It routes the payment and never holds the funds. It is not a bank, an exchange or an escrow service, and it does not suit parties who need to be paid in bank money directly or a payment that must be held until a condition is met.

The table is a starting point: a bank that prices conversion keenly for a client with volume may beat a specialist network on a large amount.

What does one international payment cost, deduction by deduction?

On the illustrative payment below, a $60,000 invoice costs the payer and the payee £1,042.19 between them, or 2.17% of the amount, and £979.59 of that is the conversion margin. Every fee and rate in this example is an assumption chosen to make the arithmetic visible, not a market quote.

A company in the United Kingdom owes a supplier abroad $60,000 and holds pounds. The assumptions: a wholesale rate of 1.2500 dollars per pound; a bank rate 2% below it, at 1.2250; a sending fee of £25; two correspondent banks that deduct $20 and $15; a receiving fee of $12 at the supplier's bank; and shared charges.

At the wholesale rate, $60,000 is worth £48,000.00. At the bank's rate it costs £48,979.59. The company's account is debited £48,979.59 plus the £25 fee, or £49,004.59. In transit, $35 is deducted, and the supplier's bank takes $12, so the supplier is credited $59,953: $47 short of the invoice. Valued at the wholesale rate, that $47 is £37.60.

The visible fees, the ones a business tends to argue about, come to £62.60. The line that carries 94% of the cost appears on no statement as a fee. Set against the Financial Stability Board's retail target, a 1% average would be £480 on this payment and the 3% ceiling £1,440.

The margin is also the line that moves most. With every other assumption unchanged, a rate 1% below wholesale brings the total to £547.45, or 1.14%, and a rate 0.5% below brings it to £303.81, or 0.63%.

The charge option changes who bears the fees far more than it changes their total. The same payment under the three options, with an assumed £30 surcharge for the payer-bears-all option and the £25 sending fee deducted as $31.25 where the payee bears all:

Only one row settles the invoice in full. With the other two, the supplier's ledger shows a balance of $47.00 or $78.25 still owing, to be chased, written off or added to the next invoice.

What should the two parties agree before an international payment leaves?

Before an international payment leaves, the payer and the payee should agree six points in writing: the currency, the amount that must arrive, who bears the charges, the route, the reference, and what counts as proof of payment.

• Currency. Name the currency of the invoice and the currency of the receiving account. If they differ, say who converts.
• Amount to be received. State whether the invoice amount is what the payer sends or what the payee must be credited.
• Charges. Name the charge option. If the payee must receive the full amount, the payer bears all charges, or the invoice is grossed up.
• Route. Agree whether the payment goes by bank transfer or by another route both sides can use, and check that the destination is covered.
• Reference. Agree the exact text of the payment reference.
• Proof and timing. Agree which document shows the payment was made, and count the due date in business days of both countries, allowing for cut-off times and public holidays at each end.

Ask the bank or provider two questions as well, ahead of the first payment to a new country: at what rate and with what charges the payment will be made, in total, and how long it is expected to take. Those are the items the Financial Stability Board's transparency target expects every provider to disclose.