International Money Transfers: Reducing Transaction Costs and Enhancing Efficiency

International money transfers have become a prominent feature of the global economy. The capacity to move money across geographical borders can directly affect businesses paying suppliers, and individuals sending remittances, and the efficiency of the means of payment is particularly pertinent to trade, consumption, and investment.
Yet, the transaction itself often comes with a cost and a lag, which economists refer to as a transaction cost- the costs that are incurred to partake in a market transaction. 

Making international payments faster, cheaper, and more accessible benefits individuals and allows global markets to function more efficiently. This article identifies what are the main sources of the ineffectiveness of cross-border payments, and how we can use economic principles to help find options for reducing them.

Exchange Rates and Market Transparency

Minor fluctuations in exchange rates can accumulate to create a larger differential cost on a recurrent transfer, or for a large corporate payment. Exchange rate pass-through examines how movements in the currency transaction market value to the costs of the final price paid by households and firms. 

Providers of international transfers often impose different margins above the market rate, giving an opportunity to save money by comparison. Online comparison brokerages, which provide this service, improve the informational asymmetry for a market participant, ultimately leading to a more efficient market place by allowing participants to make better decisions and putting competitive pressure on a financial intermediary. 

Fees, Charges, and Information Costs

In addition to exchange rate spreads, transfers can be subject to various charges, such as service fees, intermediary bank fees, and in some cases, obligations such as tax collected at source. A question of interest from transaction cost economics perspective is the extent to which these fees are disclosed. Transparent pricing creates less uncertainty and lower search costs, allowing individuals and firms to better anticipate the true cost of sending money abroad.

The Role of Financial Intermediaries

Conventional banks continue to be significant institutions in global finance, but they frequently lack the efficiency needed to accommodate today’s cross-border flows. Banks usually rely on legacy systems which produce costlier, sluggish settlement processes. Alternatively, online money transfer providers leveraging the benefits of scale and a digital infrastructure process transfers that are faster and cheaper.

This suggests a larger trend in the financial economics literature: the emergence of fintech providers to encourage competition with banks and enable the development of innovation in the provision of financial services.

Accuracy and Settlement Speed

Incomplete or inaccurate account details are a common cause of delays. Tools such as a SWIFT code lookup illustrate how standardized identifiers reduce coordination failures. In economic terms, these systems act to lower coordination costs within international financial networks, ensuring funds reach the intended recipient without avoidable disruption.

Currency Designation and Risk Exposure

Settling invoices in a supplier's local currency can eliminate transaction costs for the firm and hedge foreign exchange exposures. It will improve confidence in the timing of fund use particularly, for small and medium-sized business which do not have logistic and fund capacity to cope with unexpected disruption. By allowing the transaction to occur in the counterparty’s local currency, firms are systematically decreasing their exposure to short-term fluctuations in the forward market and exchange rate uncertainty.

Institutional Frictions and Collateral Delays

Cross-border payments often involve multiple intermediary banks before reaching the recipient. Each step adds a transactional cost as well as complication of initiator/beneficiary coordination on the timing of final payment. Coupled with time zone and banking operating hours, calculated steps can slow a timely payment. Institutional frictions are regulatory and practical definitive factors that unify to slow, and educate, financial-flow across borders. The ongoing movement toward avenues for remittance suggests obvious market opportunities for intermediaries to help financial flows bypass institutional frictions but are also the consequence of costly transactions that result in bureaucratic inefficiencies in financial systems, reliability and risks.

The Transfer Limits and Rehabilitation

While there are no global legal limitations on the amount to be transferred internationally, banks will often set their own limits for compliance purposes or other risk structures. For example, banks tend to weigh the elements of compliance risk, liquidity exposure, and streamlined fraud reduction against the limits that they are setting in this transaction to mitigate risk. Still, the limits set by the bank limits do create some friction in efficiency, thus creating a trade-off between prudent regulation and market efficiency.

For the economic agents, simply clarifying those limits beforehand helps to reduce uncertainty and avoid any possible delays.

Conclusion

International payments and transfers are good examples of three fundamental concepts in economics: transaction costs, information asymmetry, and the role of institutions. Households and firms can reduce the cost and time required to deliver cross-border payments, by enhancing transparency, adopting fintech innovations, and reducing failures of coordination.

At a systemic level, the efficiency of international payments and transfers is relevant to global supply chain efficacy, remittance flows, and systemic financial stability. Policymakers and practitioners have strong interests in supporting innovations that reduce the cost and/or time needed to make cross-border payments.