By Victor Hinojosa
As with most things in the modern world, digital has become the preferred format for most payments, whether it be personal or business, domestic or international. A Payments Canada survey showed that electronic payments accounted for CAD2.9 billion in payments made in 2018, and it is quickly becoming the preferred method of payment for the majority of Canadian businesses, growing exponentially year-over-year.
While technological innovations have made payments faster and more secure, there is a major gap that still exists between two closely linked banking systems: that of Canada and the U.S.
In Canada, digital or electronic payments are referred to as Electronic Funds Transfers (EFT). In the U.S., this system is called the Automated Clearing House (ACH). While these two networks are essentially used for the same thing — to transfer funds quickly between bank accounts — they are still incapable of “speaking” to each other.
The result is that Canadian or U.S. businesses making payments cross-border do not have the ability to send or receive electronic payments that are cleared locally without using a third-party provider. For businesses not holding an account in each country where they operate, wires, cheques and credit cards are the only payment options available.
Unfortunately, the currency of the account is not the primary issue; you can open USD accounts around the world. The primary issue is where the account is located. There is no such thing as an “international ACH or EFT”. When a business is based in the U.S., there are tremendous challenges to opening an account with a Canadian bank without a local area presence. The same Catch-22 applies in reverse.
While cheques can still accomplish the task, they are less efficient, less secure and more expensive. Cheques are one of the most common sources of financial fraud to date and can take weeks or even months to finally be cleared through the recipient’s bank depending on which country the cheque is drawn on. The time it takes to process these cheques and the cost to mail or courier them are also undesirable.
Even so, many businesses still prefer cheques. That is because they don’t like to and/or they lack the capacity to store their payees’ banking instructions and worry about the security of housing this data.
Wire transfers are a common solution for businesses sending money cross-border, but these also present their own set of issues. Wires are more expensive to send and while third-party payment providers have found ways to lessen the cost of these wire payments, they still recommend sending local payments whenever possible.
The challenge is also understanding how much in fees the incoming bank may take off the payment to credit it to the payee’s account. Any conversions or intermediary banks that handle the payment in transit may also deduct fees.
Credit cards and PayPal are also viable options if a more instantaneous payment is required, but the conversion rates charged are astronomical in comparison to a traditional EFT/ACH payment and can quickly add up to a major budgetary shortfall if payments are made frequently.
So, what can be done for the plethora of businesses operating cross-border between Canada and the U.S.?
The way to bridge this chasm is to work around the Canada-U.S. banking structures which create the problem in the first place. Since lacking a local bank account is the source of this issue, then finding a way to open a Canadian bank account from the U.S. or vice versa is the easiest path to solving the problem.
But solutions are offered through many FinTechs and third-party payments providers. These are usually in partnership with larger banks and are often called “Virtual Accounts”. Virtual Accounts belong to the institutions that own them, but are accounts held in your name in the local country. To someone paying you, they look like a local account that you have opened.
Virtual Accounts allow businesses to set up bank accounts, complete with unique account numbers listed in their names, in countries where they do not have physical presences. Because these accounts are held in the U.S. and in the businesses’ named, they can receive ACH payments from the U.S. even if the business is not based in the U.S., and funds can then be transferred or converted into other currencies or held for future payments.
This solution is simple but effective in connecting cross-border businesses more efficiently and reducing costs associated with sending those payments. At my own company, Ascendant, we use Virtual Accounts to help businesses send and receive cross-border payments quickly and move away from costly cheques or wire transfers. This gives them control on exchanges rates as well. While some set up is required at the outset, long-term these solutions drastically reduce the time, effort and expense required to send and receive digital payments cross-border.
Many companies, my own included, have also implemented technology to make the capturing of payee banking data digital. These tools allow payees to enter their data into a portal where it is securely stored. This takes the onus of capturing and storing this information away from the client while reducing risk of fraud and speeding up the process of going digital.
Hopefully, a day will soon come when global banking networks find a way to bridge this gap more seamlessly, but that doesn’t mean you need to sit on your hands. Research third-party payments providers or FinTechs to find a solution that works best for your environment. No business is identical, so the key to success is finding agile and customizable solutions which are secure, efficient, and cost-effective.
With over 20 years of experience in foreign exchange (FX) markets, Victor Hinojosa’s previous employers include Thomas Cook, Western Union Business Solutions and JPMorgan. Currently, he lends his expertise to clients across North America at AscendantFX Capital as vice president of digital solutions and partnerships.