Understanding the Total Cost of Payments for cross-border business transactions

Global trade and commerce are heavily dependent on cross-border payments, yet their multi-layered fee components can result in immense true payment costs that may surprise you.

Photo of an iceberg at the waterline, showing the small ice-cap above the water and the large iceberg mass below the water.
When it comes to international payments, institutions like banks tend to levy a premium rate (mostly hidden) on foreign exchange transactions, adding costs that are not always easy to spot.

Deconstructing the myriad of fees and (often hidden) costs of a cross-border payment

The cost components of cross-border payments can be broken down into several categories: bank fees, intermediary fees, compliance fees, operational costs and FX rate margins.

  • Bank fees
    Financial institutions levy fees for handling cross-border payments, which may consist of transaction charges, currency exchange costs, and correspondent bank expenses.
  • Intermediary bank fees
    International payments may move through multiple intermediary financial institutions, each of which charges a fee for the service they provide. This additional cost is incorporated into the total price of your payment
  • Compliance fees
    Cross-border payments must adhere to a variety of regulations and laws, leading to compliance expenses associated with anti-money laundering observance and other statutes. These fees cover the costs incurred for meeting these legal requirements
  • Operational costs incurred by businesses
    Businesses incur operational costs to manage and track their cross-border payments via opaque systems, increasing the effort required to reconcile
  • FX rate margin
    When calculating the cost of purchasing foreign currency, banks will add a margin on top of the mid-market exchange rate to make profits. This FX rate margin differs drastically between banking institutions and can be difficult to identify. As such, it is important for individuals seeking out foreign currency exchanges to do their research in order to ensure they are getting the best deal possible.

As you can see, this makes comparing like-for-like costs incredibly challenging. To help simplify the process, we are introducing the Total Cost of Payment (TCP) model that incorporates all connected expenses associated with a particular product or service plan - a concept we've borrowed from the Total Cost of Ownership analysis often used in technology.

The Total Cost of Payment (TCP) model

When looking for an efficient way to compare the costs of cross-border payments, then using a Total Cost of Payment comparison is your best bet.

Banks and money transfer companies often hide their fees by incorporating them into the FX rate margin. This practice can make it difficult for businesses to compare rates and understand the actual cost of their cross-border payment. As a result, businesses often end up paying significantly more than they need to.

For example, a bank may charge a seemingly low £25 transfer fee, but the margin percentage added onto an FX transaction can often exceed 2% of the total transaction value, making high-value payments very expensive, with up to £25K cost on a £1M transaction (plus the £25 transfer fee).

Consider the comparison below of sending £500k from the UK (GBP) to India (INR) via Lloyds Bank:

In this scenario, the customer may believe it would only cost them £35 to make the payment.

However, when the bank's FX margin is taken into account, we can see that this transaction has an actual TCP of £5,535.00 — considerably higher than the customer is expecting - over 150x higher! This is an opaque banking approach, where customers are not aware of the true costs they are actually paying.

DANIEL has a Total Cost of Payment of 0.3% in this example, making it significantly more competitive.

A bar graph showing the  Total Cost of Payment (TCP) comparison of total payment fees including FX margin for banks vs DANIEL
DANIEL has a Total Cost of Payment of 0.3% in this example. *Data from Lloyds

Innovative technologies are changing the game

By adopting cutting-edge Web 3.0 technologies, such as DeFi payment rails and machine-learning-based orchestration, DANIEL can significantly reduce the Total Cost of Payment for cross-border payments.

DeFi payment rails are built on blockchain technology and provide users with a decentralised system that can circumvent traditional channels, such as the decades-old SWIFT network, offering an innovative alternative to businesses. By removing middlemen and decreasing operational costs, De-Fi payment rails enable a step-change improvement in the cost and speed of international payments.

Furthermore, DeFi payment rails provide transparency and traceability for enterprises, allowing them to know the exact cost of their payments upfront and to track payment progress. There are no hidden costs or extra fees from intermediaries either; so businesses can be confident that they will receive the lowest Total Cost of Payment possible.

The future

The cost of international payments can be hefty and complex, with banks often concealing their true fees by adding an inflated margin to the exchange rate.

Fortunately, innovative technologies such as DeFi payment rails are offering an encouraging alternative – reducing total expenses while rendering cross-border transactions more visible and traceable.

DANIEL is striving to reduce the cost of payments for businesses and will be offering one of the lowest Total Cost of Payments services in the market.

As the world becomes increasingly interconnected, it is essential for us to continuously build solutions that make cross-border payments simpler and more efficient.

Interested in low-cost, fast, transparent payments?
Join DANIELGlobal

First published
April 3, 2023
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