It’s estimated that global B2B cross-border payments will total US$ 150 trillion in 2022. This reflects the increasingly global nature of regional economies and the large number of small and medium-sized businesses looking to expand their reach and revenues by pursuing international markets.
It’s one thing for a business to start selling internationally. It’s entirely another to find profitable customers in new markets, deal with regional tax and legal requirements, manage currency conversions, and work through language differences. And, even if you can navigate those complexities, you might still have trouble getting paid.
We sat down with Ryan Frere, EVP and GM of Flywire B2B, to discuss the ins and outs of doing business internationally and how small and medium-sized businesses can make international B2B payments as easy as domestic payments.
What makes it so hard for a business to get paid by its international customers?
Frere: The typical, and sometimes only, option to pay an international bill is initiating a wire transfer through your bank. It works, but those payments tend to be very slow and include a lot of costly hidden transaction fees for your customer. Additionally, you are dealing with unpredictable foreign exchange rates which can lead to short payments. This makes it really difficult to reconcile those payments. And all these things increase operational costs, slow cash flow, and hurt customer satisfaction.
There are also a lot of country-specific challenges related to requirements for preferred banking relationships or local infrastructure. Certain countries restrict the amounts and nature of payments that can be made to overseas recipients. There are also important tax, compliance and anti-money-laundering considerations. All these things make it more difficult for businesses to get paid by their international customers.
How do businesses see it? Do they understand what they are getting into as they plan to expand internationally?
Frere: It’s certainly not stopping businesses from expanding internationally. In general, they understand there are a lot of unknowns, but they don’t necessarily understand the details and they may not be sure how to address them. More often than not, the finance team is charged with figuring out how to solve for new markets after the decision has been made to expand globally.
In a survey we did earlier this year with financial professionals, 88% of the people we surveyed said that the complexities involved with collecting cross-border payments was impacting their ability to grow internationally. 95% mentioned exchange rates specifically. That is, if they had an easier way to deal with them, they could move more quickly in their expansion efforts. Compliance, language, and banking issues were also cited.
Businesses have a whole host of different challenges. Is this a priority for them? Is the pain significant enough to cause them to take action?
Frere: As their international business grows, so does the volume of cross-border payments and pain that goes with them. 76% of the finance professionals we surveyed said their company had lost money due to time spent dealing with accounts receivable. Companies doing business internationally reported losing as much as 10% in revenue processing payments. That type of hit gets executives’ attention pretty quickly.
A lot of B2B finance professionals are bogged down by manual processes, complex payment reconciliation, and a lot of other ancillary issues that consume way too much of their time. They tell us that they are spending time on the wrong things, at the expense of bottom-line growth. 9 out of 10 of the finance professionals we surveyed felt that they needed to increase their focus on making A/R improvements. The same proportion agreed that if their company had a better solution for A/R, they could increase their earnings per share.
What are some of the most common mistakes you see B2B businesses making when expanding overseas?
Frere: There are many, but I’ll mention a few here that stand out. First, most have not thought about the fact that it needs to be different. They go into it assuming they can send an invoice in English, in U.S. dollars, and expect the customer to figure out how to pay the correct amount back in U.S. dollars. As we’ve discussed here, it’s not nearly that simple, and it creates a lot of frustration on the part of international customers, and a lot of extra work for finance teams.
If you listen to your banking partner, solving for cross-border invoicing is as simple as opening a local bank account in that region. What is often overlooked is the ongoing costs and operational impact associated with managing a global account structure along with the potential tax implications. There are also going to be additional regulatory and licensing considerations that will need to be taken into account (no pun intended). We estimate the baseline cost for operating an overseas account at $25k per account per year.
Lastly, most expect their existing ERP and payment systems to be able to manage their international payables problem. ERP systems hold all the information related to billing and payments, but they can’t actually move money in or out, or always keep track of where a payment is in the process. Understanding that, it’s important to make sure the system you use for international payments can integrate easily with your ERP system. This enables you to automate the sharing of payment information back and forth, simplifying reconciliation and providing everyone involved with up-to-date status on accounts.
If you can manage international and domestic payments on the same payments platform, by all means do that, but don’t assume your existing domestic payment processor can handle international. It requires a different level of expertise, a global payment network, and multi-lingual support services.
What advice do you have for businesses looking to expand internationally? What are some of the most important things for them to be thinking about?
Frere: No. 1, meet them where they are. That means invoicing them in their preferred language, if possible. In some countries, there are specific requirements in place. Provide payment terms in their currency and offer them the ability to pay online, in their local currency, via their preferred method whether that’s ACH (or equivalent bank product for that market), credit card, digital wallet, bank wire or country-specific option. You may not be able to offer every possible method, but you have to offer options that make it convenient and cost-efficient for your customer.
Secondly, support your customers throughout the payment process. Payments are an integral part of the customer experience and international payments create questions. You need to be ready to support that, in the customers’ language and time zone. If you don’t want to take that responsibility on, make sure your payment service provider can. Otherwise, you will slow down the payment process and create ill-will with your customers.
Lastly, track the same KPIs you do for domestic payments. That includes Days Sales Outstanding (DSO), Delinquent Days Sales Outstanding (DDSO), and Days Beyond Term (DBT). These are the best metrics for determining your real A/R efficiency. Other factors to consider are the number of international payments that are received in the accurate amounts, and the number that require additional manual effort. Also factor in the number of inquiries you have to field from customers asking about the best way to pay their international invoice. These are really good indicators of how efficient, or inefficient, your international payables process truly is.