Executive Summary: Companies of all sizes and types have one thing in common when engaging in international commerce: the need to implement secure and efficient payment practices in the face of a complex and evolving web of customs, processes and regulations that varies from country to country.
No matter where in the world you do business, it’s important to understand payment rules, regulations and networks in order to avoid delays and extra costs. Even cross-border payments for which information is sent via the international SWIFT network will ultimately land in a local payment system where unique banking practices such as value dating and currency conversions may delay funds’ availability and result in fees to the beneficiary.
Paper systems (e.g., check and giros) continue to decline as electronic payments become more efficient, secure and easy to use.
In addition, payment systems are evolving to real-time processing spawned by the Faster Payments Service (FPS) initiative that started in the United Kingdom in 2008. Around the world, many countries are developing “faster payment” systems to expedite the movement of money and increase the speed that transferred funds are made available to recipients, including the U.S. Also along the horizon are a number of FinTech initiatives with blockchain and distributed ledger, which potentially will transform the international payments space.
In the U.S., The Clearing House (TCH) is leading development of a ubiquitous real-time payment system designed to support the needs of businesses, consumers and government. This entirely new payments and messaging network is commonly referred to as TCH Real Time Payments (RTP). Banks participating in the TCH RTP network will enable consumers and businesses to immediately send and receive funds directly from their bank accounts, along with giving them access to robust messaging and immediate availability of transaction status. TCH RTP’s conformance to ISO 20022, the global standard for payments and related messaging, means financial institutions and customers can use the same technology and processes across borders. As TCH RTP matures in the U.S., future phases will include establishing interoperability with other real-time payment systems to support cross-border payments.
The Best Type of Account for Your Business's Payment Needs
It all starts with the account. Having the right type of account, in the right currency, with access to the right payment network is critical for an efficient payment process. Your company’s bank account structure will ultimately determine how your international payments are executed.
|Type of Account||Considerations|
|Domestic currency (e.g. PNC's USD Demand Deposit Account)||Your international USD and cross-currency transactions may be executed seamlessly through your primary bank and its payments portal.|
|Multicurrency (MCA) or specialty currency accounts (e.g. PNC's Europe Express.)||These domestically domiciled accounts can hold foreign currency and serve as a natural hedge for inbound and outbound payments. Some specialty currency accounts such as PNC's Europe Express offer access to local payment systems (SEPA in Eurozone, Bacs, and FPS in U.K.) for receivables.|
|In-country, foreign currency (e.g., PNC Bank Canada Branch account)||Establishing an in-country bank account guarantees access to local payment types and may best support the "on-the-ground" activity of a foreign sales office, subsidiary or operation in a different time zone.|
Payment Systems in Canada
There is a lot of similarity between payment types in Canada and the United States, but unlike the U.S., Canada has far fewer financial institutions. Canada’s Big Five banks and the Bank of Canada account for more than 90% of bank assets. Each of these major banks has more than 1,000 branches and coast-tocoast representation across Canada. Payments Canada, a not-for-profit organization formerly known as the Canadian Payments Association, is responsible for Canada’s essential payment systems which include:
- Large Value Transfer System (LVTS) is a real-time, electronic wire transfer system that processes large-value, time-critical payments quickly. Once a payment passes the system’s risk-control tests, it is final and irrevocable in real-time.
- Automated Clearing Settlement Systems (ACSS) is a deferred net settlement system that clears batch payments. These payments are mostly checks, pre-authorized debits and credits, and small-value electronic payment items.
What You Should Know
Although there are many similarities between the U.S. and Canadian banking systems, there are important differences. For example:
- Many companies hold both Canadian dollar and USD accounts for payables and receivables. Canada offers both CAD and USD clearing systems for wire, ACH and check. The USD system is unique and independent from the U.S. clearing channels (e.g., the Fed). For this reason, a USD check issued on a bank in Canada cannot clear through U.S. systems and is not eligible for remote deposit in the United States.
- Unlike the United States, which has separate clearing channels for different payment types, Canada’s ACSS is used for both clearing checks and ACH.
- Addenda information is very limited for ACH transactions in Canada, which can cause problems for companies trying to reconcile cash.
Future of Payments in Canada
Canada is currently undergoing an expansive payments modernization project spearheaded by Payments Canada. It will include a new core clearing and settlement system, which will replace the ACSS and LVTS systems. The many benefits of this project include faster payments, expanded and standardized information to accompany those payments, and transparency throughout the payment process.
Regardless of the country in the European Union, all payments are required to have an International Bank Account Number (IBAN) which is used in Europe and some other countries. IBANs are an international bank account identifier, which, if used correctly, facilitates straight-through processing.
Payment Systems in the United Kingdom and Eurozone
The European payment system has evolved significantly over the past few years with the elimination of many local ACH systems in the Eurozone. Innovations with SEPA and Faster Payments System have transformed the payment horizon in Europe. The following are the top United Kingdom and Eurozone payment systems.
European Payments Systems
|Type of Payment||Description|
|Clearing House Automated Payment System (CHAPS)||A U.K. payment system used by more than 20 direct participants, including the Bank of England, which offers real-time gross settlement.|
|Bacs||A high-volume U.K. payment system managed by Bacs Payment Schemes Limited, which includes members from 16 of the U.K.’s leading banks and building societies. Bacs include two types of payments, Direct Debit and Bacs Direct Credit, which clear in a three-day cycle.|
|Faster Payments Service (FPS)||A U.K. banking innovation that brought real-time payments for GBP to the consumer and corporate market place for both web and mobile.|
|Cheque & Credit Clearing Company (C & CCC)||A U.K. system used for clearing paper-based payment instructions. It has been in long-term decline in favor of electronic payments.|
|TARGET2||A Eurozone real-time gross settlement system used for high-value euro payments. It is also an interbank payment system for clearing cross-border Eurozone transfers.|
|Single Euro Payments Area (SEPA)||A Eurozone payment-integration initiative that offers simplified bank transfer when the transaction is denominated in euros. It offers cross-border, next-day, guaranteed payments.|
What You Should Know
The new SEPA format aims to make crossborder euro transfers equal to any domestic transfer within any European country. SEPA covers the whole of the EU along with additional payments in euros to other European countries including Iceland, Norway, Switzerland, Liechtenstein, Monaco and San Marino. With this unified system, companies can benefit from a single payment system for domestic and crossborder bank transfers while ensuring a cheaper, faster and safer cross-border payment.
Future of Payments in Europe
Soon the Payment Services Directive 2 (PSD2) will enter into EU law, increasing competition by allowing new and emerging payment services to participate via EU payment platforms, as well as promoting pricing clarity, improved consumer protection and tighter security. The new regulation allows payment service providers and banks to bypass existing proprietary digital channels to access customer banking data and payment services, creating more innovative payment methods through mobile and online.
Brexit is also a hot topic as the strategy for the U.K.’s withdrawal from the EU evolves. One important effect this may have is the U.K.’s access to the euro payment systems such as SEPA and TARGET2. This could impact the flow of funds and create higher fees and longer settlement times.
Payment Systems in China
The banking and payment systems in China have expanded significantly over the past few years in line with market reforms and the development of economic and financial systems. RMB internationalization has been one of the major catalysts driving the payment system development in China: CNAPS (China National Advanced Payment System) had undergone an upgrade in 2012-2014 to “CNAPS2” to better facilitate cross-border trades in RMB, while CIPS (China Interbank Payment System) was rolled out in October 2015 to create a “clearing superhighway” for cross-border RMB going forward.
Main Interbank Payment Clearing Systems
|Type of System||Description|
|CNAPS-HVPS||China National Advanced Payment System-High Value Payment System|
|CNAPS-BEPS||China National Advanced Payment System-Bulk Electronic Payment System|
|LCHS||Local Clearing House System is a regional payment system clearing paper-based credit and debit payments|
Additional Payment Systems
|Type of System||Description|
|CDFCPS||Real-Time Gross Settlement-based Foreign Currency Payment System covers: Australian dollar, Canadian dollar, Swiss franc, euro, British pound, Hong Kong dollar, Japanese yen and U.S. dollar.|
|CIPS||China Interbank Payment System is an RTGS-based payment system dedicated for cross-border RMB payments. The current payment infrastructure overall allows cross-border RMB to be cleared through both CNAPS-HVPS and CIPS, with the objective of all cross-border RMB traffic to be cleared through CIPS in the future|
|Super e-banking||Online Payment Interbank Settlement System provides for real-time internet payments and account inquiries.|
|Commercial drafts||Important for business-to-business payments. Commercial drafts have a supply-chain finance feature. Invoices are considered paid when commercial drafts are received by the payee, though funds do not settle until the payment date on the draft, which can be up to six months for paper-based acceptance drafts and 12 months for electronic commercial drafts.|
What You Should Know
Unlike markets such as the United States, Canada and Europe, where cross-border payments can be made or received without any submission of documentation to the bank, all cross-border transactions need to be supported by documentation (invoice, contract, etc.).
This is required by banks based on the banking regulations and the banks’ own KYC/KYCC policy. Meanwhile, the banks need to upload the related data to a regulators’ system that allows the regulators in China to manage the crossborder funds flow, which is still strictly monitored today.
Future of Payments in China
Over the last few years, the Chinese government has undertaken an extensive process to liberalize and internationalize its currency, slowly relaxing rules to become more equal trading partners with other developed countries. This includes expanding the use of the RMB for global trade settlement, encouraging a robust offshore renminbi environment and, more recently, liberalizing access to on-shore RMB accounts and the bond market.
Decline of paper-based instruments: Similar to other international markets, usage of paper-based instruments in China has decreased dramatically, while electronic payments continue to pick up steam, according to People’s Bank of China statistics. An area that has grown exponentially in the last few years are mobile payments and internet financial services by non-bank payment services providers and FinTech companies, and its growth will likely continue.
Depending on the market environment, the documents required by the bank may change, as well as the review conducted. This allows the regulators in China to manage the cross-border funds flow, which is still strictly monitored today.
Ready to Help
PNC offers local accounts and payment types that can be managed through PINACLE, PNC’s corporate online and mobile banking portal. And our PNC Bank Canada Branch, Shanghai Representative Office and U.K. Office are ready to help you with your international banking needs.
PNC offers ideas, insight and solutions to help you grow globally. You can also access the Association for Financial Professionals Country Profile Reports covering 30 countries with detailed payment and cash management information available on PINACLE. Find out how from your PNC Relationship Manager.