July 2, 2024
Navigating Cross-Border Payments in India: Challenges and Solutions
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There has been a recent surge in discontent faced by business players in the Indian market with regards to managing international transactions. Due to several hurdles, stakeholders in the business ecosystem are facing issues in processing foreign payments.
One of the major issues being restrictions posed by the government in the form of low transaction limits, high conversion fees and multiple regulatory requirements.
High conversion fees, set up by the government significantly impacts businesses and consumers. Banks and other currency exchange institutions involved in converting one currency into another, often charge hefty amounts, for conversion of currency, thereby significantly reducing the actual amount to be received from such transactions.
Moreover, cross-border transactions involve adhering to various rules and regulations like Know Your Customer (KYC) norms and Anti-Money Laundering (AML) regulations of different jurisdictions further increasing the compliance burden on the recipients.
The smooth flow of international transactions acts as a major factor for stability in the dynamic global market. It is critical to address this challenge as this has caused apprehension amongst the companies both large and small, leading to a chain of market withdrawals. Other than impacting market expansion, investors would also be reluctant to invest funds in start-ups with stunted growth and domestic clientele, as they can no longer foresee profits. This eventually will decrease activities in foreign markets, impacting international trade. US payment giant 'Stripe' appears to be withdrawing from the domestic payments market in India, affecting many businesses relying on their services for international transactions.
The ever-increasing cost of cross-border payments has thrown a wrench into the system and is acting as a major hindrance to market participation, potentially halting global economic growth. Financial institutions charge a huge transaction fee eating up a large chunk of the payments, often impacting small and mid-sized businesses that operate on tight budgets. Splitting large transactions to comply with limits can lead to higher transaction fees.
Unlike domestic payments that can be settled near-instantly, international payments often take up to days or even weeks to process, creating frustration among businesses. These delays also lead to production slowdowns or meeting deadlines. This lack in pace creates uncertainty, making it a difficult task for business owners to accurately measure expenses or calculate revenue.
Businesses are currently at crossroads: Secure vs Economical. They are looking for cost-effective options to identify a trustworthy channel for securing international payments without hassle.
- Government restrictions
- Market withdrawals
- High processing cost
- Slow processing of cross-border transactions
- High rejection rates of cross-border transactions
- Lack of transparency in payment orchestration platforms
- Prone to fraud
Yet, challenges are where most shy and eXtrepreneurs thrive!
The best way to handle this situation, is setting up your presence in one of the largest and most recognised markets in the world. For instance, one can incorporate an LLC/ Inc in the US, Delaware being a popular choice due to its pro-corp environment, start-up friendly ecosystem, favourable taxation regime and housing one of the oldest and most established judicial systems in the country. Post incorporation, one can open a virtual bank account. This setup allows you to accept a wide array of payments with minimum processing fees. Further, the incorporation, along with other compliance and administrative work can easily be outsourced to professionals.
Most effective solutions for the service providers:
- Incorporating a Company in a favourable foreign jurisdiction and accepting payments through its bank account
- Select gateways supporting multiple currencies and payment methods to reduce conversion costs and facilitate smoother transactions.
- Collaborating with local payment providers in target markets can help navigate local regulations and reduce costs and delays.
Tax regulation and compliance standards in the US are well established. By incorporating an LLC in the US, goods and services can be strategically priced in such a way that it provides profits to the corporation. Collecting and remitting sales tax can be complex, but clear guidelines in the US simplify the process of compliance.
Having a foreign entity can help you get access to globally recognised and commonly used payment gateways such as 'Paypal', which is available in more than 200 countries which supports 25 currencies. Such gateways act as a bridge between one’s customers and revenue, and thus selecting the right one becomes extremely important. It also creates flexibility for the customers as it allows acceptance of international payments in currencies preferred by the customers, thereby reducing the conversion costs.
Moreover, the adoption of local payment methods of the country, for example, 'Alipay' in China and 'iDEAL' in the Netherlands, further facilitates transactions by offering diverse payment options tailored to different countries. For companies that aim to expand their operations globally, it is important to choose the right and flexible gateway to boost easy transactions across diverse geographic regions.
Partnering with local payment providers in the countries where you do business can help navigate local regulatory requirements and reduce transaction costs and delays. Local payment providers have the requisite knowledge concerning their countries' laws and regulatory framework. Collaborating with them can provide ease in driving their way through complex payment mechanisms, thereby also adhering to tax laws and other regulations. Local providers may often provide competitive exchange rates and lower transaction fees as compared to international platforms or banks, which helps in avoiding huge amount reductions from the actual payment amount.