4 key strategies to understand how cross border payments work

Cross border payments are perceived as one of the most complex topics in payments. And that is true to some extent. It involves many countries and currencies. And the transactions usually go through tens of systems in interbank networks, Banks and Corporations. When many start in Cross border payments or when they are introduced to it, the tendency is to directly go through the SWIFT standards and start looking at message types like MT103 or MT202 that are used for cross-border payments.

After working with many consultants in business requirements, design and testing, my view today is that this is not the right approach. It is not the path of least resistance simply because many crucial things that must be understood, are not presented in the SWIFT standards. I had to struggle with cross border payments myself. But with the time I discover 4 key strategies that I think can help you to avoid the frustrations and the pains I had to go through. Today I am starting a series of articles, where I will share these key strategies in a structured way with my readers. What I want to share with you is the result of many years of studies and discussions, the result of my own experience with consultants that I worked with.

I want to show you, what I consider to be the path of least resistance, when it comes to growing yours skills in cross border payments. I am convinced that this approach is easier and brings results faster. Once you grasp these principles and strategies, you will see that cross border payments are not as complex as you may think and you will be able to analyse many scenarios and cases that you will encounter in your projects with confidence. At least you will be able to ask the right questions. And if at the end of an article, you have any question or remark, just leave a comment or send me a mail through the contact form available on the blog.

Before I dig into each of the strategies, let me briefly summarize what they are.

The 4 key strategies to understand how cross border payments really work are:

Strategy #1 – Get an overview of payments systems models and specifically the open loop models

Many people working in payments have never really considered payments systems models. If that is your case, then I strongly recommend you to pause and take a look at payments systems models. They are the foundations, the basis upon which to build our payments knowledge. In payments, it is crucial to get an overview of payments systems models and specifically the open loop models because they are the prevailing models in all countries. So once you understand the underlying concepts, you can easily analyze the payments systems of any country.

Model of open loop payments system

Model of an open loop payments system

 

Strategy #2 – Grasp the principles of Correspondent Banking and account relationships between banks located in different currency zones

You have probably already heard that Banks settle cross border payments through accounts open with correspondent banks in the different countries. What does it mean exactly? What is correspondent banking? What is an account relationship and how does it work? These are important questions to answer you start looking at SWIFT MT messages. I think this is probably the most important of all the strategies. Take time to really study this article when it will be available. You can subcribe to the newsletter to be informed when the related post will be published.

Image of different currencies in the world

Different currencies in the world – source Wikipedia

Strategy #3 – Understand the role of the SWIFT Network and the SWIFT standards

SWIFT is by far the largest player in payments globally. It owns the network called SWIFTNet, which enables banks and corporations to exchange payments information faster and in a secure way. Why is that network so crucial? And why are standards needed? You will have answers to these questions and much more in this third strategy. Furthermore, SWIFT has a fascinating story and it is interesting to see how the SWIFT project evolved. More in this post.

Image of SWIFT Global Network

SWIFT Global Network for cross border payments

Strategy #4 – study the basics of Foreign Exchange markets and how banks use them

The foreign exchange market, simply called FOREX, is the place where supply and demand of currencies meet. Forex trading consists in the buying of one currency and the simultaneous selling of another. That is why when trading currencies we always see them quoted in pairs. The FOREX is subject to certain rules that have an influence on the way currencies pairs are traded. In addition, currencies are not equal. There major, minor and exotic currencies. How do all this impact the way X border payments are processed? In this part, you will have the introduction that will help you connect the dots easily.

Image of different currencies

FOREX – the market of currencies trading

The next article will be about the first strategy to easily understand how cross border payments work: Get an overview of payments systems models and specifically the open loop models.

Do not hesitate to share any  comment or remark you may have on this exciting topic. If we can improve the ways payments is taught and help others save precious time and reach their goals faster, then every contribution is appreciated. If you knows books that are worth reading, please do share them with your review if possible. Many readers of this blog are interested in books that matter. Thanks in advance 🙂

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2 Responses to 4 key strategies to understand how cross border payments work

  1. Rouble Saha June 18, 2018 at 11:11 am #

    Great Going JP 🙂 Love your content.

    • Jean Paul June 18, 2018 at 1:14 pm #

      Thanks Rouble! I am happy to see that you love the content. This topic is pretty interesting, so I am preparing future articles.

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