How can Indian businesses make cross-border payments? www.deekpay.com

In a trade transaction, when the sender and receiver of funds are from two different countries, it is called aCross-border payments. In a very short period of time, with the emergence of non-banking financial companies and cutting-edge financial services, theCross-border payments in IndiaA paradigm shift has occurred.

This article is about how cross-border payments work in India and who regulates them.

India's cross-border payments landscape

In India, there has been a significant increase in the number of individuals and businesses making international trade and cross-border payments. Here is how cross-border payments currently work in India.

Cross-border settlements are made through a bank with offices in both countries (India and other relevant countries), where transfers are made and remitted to the recipient bank based on the current exchange rate.

Users must pay a commission of 10% to 15% for this seamless fund transfer.

(go ahead and do it) without hesitating RBI The regulations put in place can be a bottleneck for seamless B2B cross-border payments, but they do give some exceptions.

One of these is to allow money transfer operators such as Western Union to participate and deposit funds into bank accounts through the MTTS scheme.

In order to make it profitable for both remitters and recipients and at the same time secure the internal payment data, RBI is working with different countries to utilise the UPIPayment ecosystems.

As an example.India Paymentsand the main contributors to the implementation of the Programme of Action NPCI has partnered with PayNow to facilitate fast and low-cost cross-border payments between India and Singapore.

Similarly, RBI is constantly working to bring non-banking operators into the space, thereby helping Indians access cutting-edge digital payments infrastructure.

Another thing to note about RBI's cross-border payments regulation is that they take a one-size-fits-all approach. The paperwork and compliance for any type of cross-border payment, whether it is a small transaction or a large commercial remittance, is essentially the same.

Recommended Reading:Reserve Bank of India RBI

How do cross-border payments work in India?

In India, there are various ways to make cross-border payments. Correspondent banks act as intermediaries between the financial institutions involved.

Below is the cross-border payment process for a typical cross-border transaction between India and other countries.

Assume a scenario where a buyer in India makes an international purchase and has to remit the payment to the seller's bank account.

The remitter first deposits the money in the paying bank with the remitter and payment instructions. The disbursing bank then transfers the money to the correspondent bank in India along with the payee and payer information. From there, the remittance is sent to the Central Bank for clearing. If it passes regulatory scrutiny, it is transferred to the correspondent bank in the recipient country. The correspondent bank then deposits the money into the seller's beneficiary bank account. The cross-border payment workflow consists of a network of interdependent banks, both domestic and foreign. Since the payment process involves multiple members, it can take up to five to six business days to complete a payment.

Different types of cross-border payment settlements

To fully understand how cross-border payments work, one should also consider cross-border payment methods.

1. SWIFT

SWIFT is used by financial institutions and banks to allow funds to flow in and out across borders.

Not only banks, but also clearing houses, remittance agents, securities dealers and other organisations that handle large amounts of money. Processing B2B cross-border payments through the SWIFT infrastructure takes between one and five business days.

In order to use the SWIFT network, financial institutions obtain a NOSTRO account by co-operating with the corresponding foreign correspondent bank.

2. RDA

In order to provide super-fast international transactions to Indian users residing abroad, banks have partnered with exchanges. Customers can contact these exchanges and deposit funds, which will be quickly remitted to recipients in India.

The Exchange will use the RDA facility to transfer the funds to the payee's bank account. Remittance will be allowed only through this mode.

3. MTSS

MTSS is mainly used for inward remittances from abroad for personal purposes. The commission per transaction is very low, ranging from 0.3% to 5%.

The payment process takes three to five working days to complete. This payment ecosystem is a collaboration between Indian agents and foreign money transfer agencies so that they can easily deposit funds into the accounts of Indian beneficiaries.

Each beneficiary is limited to 30 transactions per year, with a limit of $2,500 per attempt.

4. Postal channels

The Universal Postal Union has designed a platform called the International Financial System (IFS), which allows for the receipt and disbursement of international remittances through postal channels with partner countries.

When postal channels are involved, cross-border payments work as follows. The transfer of funds takes place through an EDI (Electronic Data Interchange) exchange from the Indian postal server to the IFS national server.

From this point onwards, the payment will be transferred to the recipient's postal server. If anyone wants to use the service in India, they can contact the nearest post office.

Similarly, for sending money to India through postal channels from any serviceable country/territory, the respective IFS can be contacted.

Guide to the regulation of cross-border transactions in India

The Central Government and the Reserve Bank of India have jointly formulated the following guidelines to regulate international payments between India and beneficiaries in other countries.

1. Foreign Exchange Management Act

The Foreign Exchange Management Act, passed in 1999, aims to regulate foreign exchange transactions from and into India. Under the Act, only authorised persons are allowed to engage in foreign exchange transactions.

These transactions must first be approved by FEMA. Authorised persons include commercial banks, rural banks and other financial institutions.

Other features:

Representing the public interest in restricting suspicious international transactions from India. Restricting transactions from the capital account, even if the authorised person has already processed the transaction. Authorisation of foreign exchange transactions by any citizen residing in India.

FEMA also applies to companies located outside India but managed by Indian citizens.

2. Income tax law

The Income Tax Act 1962 clarifies how different groups of individuals are taxed. It does affect the cross-border payment process in some ways.

In cross-border transactions, both domestic and foreign taxes need to be considered. Therefore, companies plan B2B cross-border payments in a tax-efficient manner.

An example of how income tax law affects cross-border transactions is how capital gains taxes are levied on transfers of capital assets.

In case of merger and acquisition of an Indian company with a foreign company, if the merger results in the formation of an Indian company, then both the companies can avail tax exemption on the transaction.

Depending on the type of merger, the situation may become more complex.

3. Anti-Money Laundering Agreements

The Act was passed by the Indian Parliament in 2002 to prevent money laundering in India. The Act applies to corporations, non-governmental organisations, general public, partnerships and any beneficiary in India.

Money-laundering is the transaction of money between one party and another in furtherance of criminal, drug-trafficking or terrorist activities.

These criminals act like ordinary consumers, moving their money from one part of the world to another, which may resemble any normal cross-border transaction.

The fact that most money laundering is done through foreign transactions is proof of the existence of the Act.

Features of the Money Laundering Act include:

Death penalty for persons involved in money-laundering The right to seize property at the director level as proceeds of crime. Adjudicative powers to determine whether any property seized or impounded is involved in money laundering Burden of proof

This penalty shall apply to any party directly or indirectly involved in the concealment, possession, acquisition or use of money-laundering.

4. Rupee withdrawal arrangements

There are two channels available in India to help send remittances. These are the Rupee Withdrawal Arrangement (RWA) and the Money Transfer Service Scheme (MTTS).

This allows banks to work with non-resident money-changing agencies to maintain their VOSTRO accounts. These bureaux de change are authorised to receive cross-border remittances by the relevant authorities of the country in which they are located.

Under the RDA scheme, there is a cap of Rs 1.5 lakh on B2B cross-border payments and trade-related transactions. However, this limit is not applicable to individuals involved in cross-border transactions.

Banks can work with exchange organisations in other countries only after obtaining approval from RBI. Please also note that RDA has no control over remittances from India to other countries.

UPI offers real-time cross-border money transfers

Reserve Bank of India (RBI) set out to promote fast, secure, ultra-high-speed instant cross-border remittances and set up theNational Payments Corporation of India (NPCI).

Recommended Reading:National Payments Corporation of India NPCI

NPCI has complete control over UPI in India and tells payment service providers how cross-border payments work here.

They also play a role in cross-border payment processes, settlement payments and disputes.UPI is one of its attempts to create a global payment system that is more robust than any other cross-border payment system combined.

The main advantage of UPI is that it is independent and not dependent on banks.

It is used in the backend IMPS infrastructure. However, unlike IMPS, UPI does not require a long dataset other than phone numbers. It is also possible to request funds using only phone numbers.

The Reserve Bank of India is in the process of rolling out UPI in 10 foreign countries through a tie-up with the IFC.Firstly, IndusInd Bank has partnered with Thailand's Deemoney to enable remittances from non-resident Indians between the two countries.

Recommended Reading:What is UPI?

Requirements for making cross-border payments

For any typical B2B cross-border payment, the following data, setup and infrastructure is required. You will need the supplier's personal and banking information.

They are IBAN (International Bank Account Number) and Bank Identification Code (BIC) which are used to complete B2B cross border payments. However, if a customer from India purchases goods from an international e-commerce site, they do not need these details.

E-commerce merchants may have partnered with a country-specific payment solution provider to take care of the cross-border payment process.

Users can also initiate SWIFT payments, but will need to provide the supplier's beneficiary account details, their bank's postal address and the SWIFT code.

Recommended Reading:SWIFT Code

The Importance of Address Verification Systems for Cross-Border Payments

Businesses receiving cross-border payments are always concerned about the legitimacy of the payment and whether it is coming from someone who actually has a bank account.

This is where fraud and unauthorised transactions start to appear. That's where Address Verification Systems (AVS) come into play.

Typically, banks process B2B cross-border payments by verifying the account number, card details and CVV, in addition to which AVS verifies the billing address and name of the paying cardholder.

When AVS identifies a fraudulent transaction, it may reject and cancel the cross-border payment process. Address verification systems are important in the context of cross-border payments for the following reasons:

There is no second factor authentication other than OTP when shopping online on international websites. Potential for anti-money laundering risks If a customer disputes a refund when they have not received their order, this can affect the business as they lose revenue from the transaction.

In India.Razorpay Became the first financial intermediary to introduce AVS to help businesses process B2B cross-border payments.

Recommended Reading:Indian Payment Gateway Razorpay User Guide

Importance of FIRC for receiving international payments

If you are a merchant in India receiving payments from foreign customers, you must have a FIRC (Foreign Exchange Remittance Certificate). Sellers and service exporters are required to obtain this certificate for every foreign exchange transaction they receive in India.

1. What does the FIRC file contain?

- Name of beneficiary

- Method of payment (cash, account transfer, etc.)

- Name and address of the bank processing the transaction

- Purpose of the transaction

- exchange rate

- Name of recipient

2. What are the types of FIRC?

- Physical FIRC

When a foreign customer deposits money into their bank account to send to an Indian merchant, their bank sends a notification or NOC to your home bank.This document is a way of instructing your bank to complete the e-FIRC process.

- e-FIRC

Once the remitting bank has completed the above steps, it is the responsibility of your home bank to complete the process further. They obtain the remitter information and complete the required documentation process.

There is a government portal called EDPMS (Export Data Processing and Monitoring System). Once satisfied with the payment information, the national bank uploads the remittance information into this system and generates an inward remittance number, known as an e-FIRC number.

3. How to get FIRC certificate?

Merchants must pay an issuance fee to the processing bank to physically or digitally issue FIRC documents

They must provide the following information, including the account number, the amount transferred, the date of the transaction and the reason for the transaction.

However, if you wait 15 days or more, e-FIRC will be delivered directly to your account and you can download it.

Legal Entity Identifier - mandatory for cross-border transactions

For any B2B cross-border payment or transaction generally exceeding Rs 50 million, RBI has mandated the use of a Legal Entity Identifier (LEI).

Risk management is the main reason why parties involved in block trades have this number. In addition, the number was introduced to make the financial data reporting system more accurate.

The requirement will come into effect in October 2022.

Identifiers such as LEI are mandatory for regulation between legal entities, non-governmental and governmental agencies trading globally.

Since a parent company has many sister companies and subsidiaries, the potential for fraud and confusion is very common. As a result, there is always the question of who initiates a transaction or who receives it.

The Legal Entity Identifier is a unique 20-digit number with alphanumeric characters. Entities can obtain this information from local operating units supported and recognised by the Global LEI Foundation.

Therefore, when banks process transactions exceeding Rs 50 million, they have to obtain LEI from the account holder and store it in the Centralised Repository of Large Credit Information (CRLI).

Atpay - we are a professional provider of payment solutions and have been deeply involved for many years inIndia PaymentsWe have successfully provided payment functions for countless customers at home and abroad. We are fully confident in payment integration and high-risk payment processing, and welcome inquiries and exchanges.