International commerce has evolved significantly over the years. Today there are numerous methods of transferring funds across borders, each with its own unique characteristics, benefits, and drawbacks. It’s easy to feel overwhelmed by the options available to businesses, so let’s demystify the key differences between more traditional international payment methods such ACH (Automated Clearing House), RTGS (Real-Time Gross Settlement) and Telegraphic Transfers, and newer methods such as Cryptocurrency.
ACH (Automated Clearing House) payments
ACH payments are electronic transfers primarily used for domestic transactions within the United States and sometimes Canada. However, they are increasingly being adopted in other countries under different names, such as SEPA (Single Euro Payments Area) in the European Union. ACH payments are known for their cost-effectiveness and ease of use, making them a popular choice for businesses and individuals.
ACH payments are typically processed in daily batches, which means they can take longer to process compared than RTGS payments. Because ACH payments take a few business days to settle, they may not be suitable for time-sensitive international transactions. However, ACH payments are often more cost-effective than other methods, especially for high-volume, low-value transactions.
When do businesses use ACH payments?
Businesses that make frequent and low-value transactions will often turn to ACH payments as a cost-effective way of transferring funds internationally. In addition, ACH networks are well-established in many countries, which makes it a readily available payment method. Despite their lack of speed many businesses prefer ACH payments because they offer automated processing which reduces the need for manual intervention and helps to minimize errors.
RTGS (Real-Time Gross Settlement) payments
RTGS payments are known for their speed and accuracy. Typically operated by central banks and financial institutions, RTGS payments settle within a few hours (if not instantly) which makes them ideal for time-critical international transactions. They are also secure and irreversible once initiated, providing a high level of confidence in the settlement process.
When do businesses use RTGS payments?
Due to their unparalleled speed and certainty, RTGS payments are an excellent option for high-value international transactions that require immediate settlement such as corporate payments. However, this benefit comes at a price, with RTGS payments being more expensive than alternative methods, particularly for low-value transfers.
The appeal of RTGS payments also stems from their secure and irrevocable nature which helps to minimize the risk of payment fraud or disputes.
EFT (Electronic Funds Transfer) payments
EFT payments represent a broad category of electronic payments that encompasses credit card transactions, direct deposits ACH, RTGS and more. They are commonly used for both domestic and international transactions, providing the flexibility and convenience to accommodate a wide range of transaction sizes and purposes.
Settlement times and costs can vary widely for EFT payments depending on the specific method used. However, EFT payments can be initiated online and easily tracked which makes this method highly convenient and transparent.
When do businesses use EFT payments?
The appeal of EFT payments stems from their flexibility, which allows businesses to balance cost verses speed depending on their needs at the time of transaction. For example, if a small business in the United States needs to pay a supplier in Germany for a shipment of goods ACH payments may be cost-effective but too slow, while an RTGS payment might be too costly for the transaction’s value. In situations like this the flexibility of an EFT payment could provide a balanced solution.
Telegraphic Transfers (TT)
A TT payment, sometimes referred to as a Wire Transfer, is an electronic method of transferring funds from one bank account to another and is commonly used for international transactions. TTs offer extensive global reach, being available in nearly every country worldwide, and support a wide range of currencies. They are also considered a secure method for transferring funds because they are processed through established banking channels, which helps to reduce the risk of fraud or unauthorized transactions.
When do businesses use TT payments?
With their global reach and expansive currency options, TTs are a popular method for companies that operate on an international scale and need to transact in multiple currencies. TTs are also easily traceable, with banks providing receipts and confirmations, which offers a level of assurance to companies sending large amounts of foreign currencies across borders.
However, it is important to note that fees are often applied to TT payments on initiation, and by intermediary banks along the way. Currency fluctuation can also detract from the amount of funds that reach the beneficiary. Businesses must carefully consider the total costs involved before choosing TTs as a payment method.
Cryptocurrency
Cryptocurrencies such as Bitcoin and Ethereum have grown in popularity as a form of digital currency in the world of international business. Cryptocurrencies are decentralized, which means they aren’t controlled by a central authority (bank or government). Instead, they operate on a technology called Blockchain that is maintained by a network of participants called nodes. This reduces the need for intermediaries, such as banks, to be involved in transactions, which enables fast delivery of funds and reduced costs.
The Blockchain technology that Cryptocurrency operates on records all transactions in a public ledger that is visible to anyone and isn’t easily altered or deleted. This transparency makes Cryptocurrencies less susceptible to fraud than more traditional payment methods.
When do businesses use Crypto payments?
While not a mainstream method yet, an increasing number of businesses are beginning to see the value of Cryptocurrency for international payments. Unlike traditional payment methods, which often involve high fees and unfavorable exchange rates, Crypto offers a cost-effective and fast way to transact internationally. Cryptocurrencies are also viewed as ‘borderless’, bypassing the need to navigate different banking systems which helps simplify the complexities of international trade.
However, it’s important to note that despite these advantages, cryptocurrencies also come with a set of considerations such as regulatory compliance, price volatility and the requirement for businesses to manage their private keys. Additionally, the adoption of Cryptocurrencies are an evolving payment method, and businesses should carefully assess its suitability for their needs.
Navigating the world of international payments
In the realm of international payments, choosing the right method is a fine balance between speed, cost, accessibility, currency requirements and security. ACH payments are a widely accessible, cost-effective option for low-value, non-urgent transactions. RTGS payments excel in speed and security, making them ideal for high-value, time-sensitive international transactions. EFT payments offer flexibility and versatility, while TTs offer extensive reach and security. As the newest kid on the block, Cryptocurrency has the potential to offer a fast and cost-effective alternative to traditional payment methods.
Ultimately, the best payment method for any given transaction will depend on the unique circumstances and priorities of the parties involved, emphasizing the importance of understanding all the available options to make informed choices in an ever-changing financial world.
Ready to learn more about the latest in cross-border payments? Sign up for Currency Convo and get currency news, FX guidance, and market insights from our team of experts.
Plus, dive deeper into the trends shaping cross-border payments with our podcast, Converge.
