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International Payments: Key Insights by Stein Gulbrandsen

Stein Gulbrandsen, Senior Vice President and Co-founder of ZTL speaks in detail about the differences between domestic and international transactions

Tell us about yourself

I’m Stein, and I’m a co-founder of ZTL Payment Solution. We founded our company in 2018. My background is from decades of activities in the foreign exchange market, working for Nordic banks both in Norway and domestically and internationally.

We had the ambition, when we started ZTL, to provide small to medium-sized enterprises with product development and technical improvements for international payments. We believe this segment has been underserved by the banks for a while now, so that was the main goal when we founded ZTL.

Could you tell us the difference between domestic and international payments?

Domestic payment is a payment that is performed within one country, with the same currency, between two bank accounts. It is very often possible these days to make the transaction within the same day, with the same value date. However, in some banks or countries, you still have a one-day delivery time. But it's becoming more and more common to deliver the funds on the same day as the payment.

When it comes to international payment, there are several steps involved. The exchange rate between the currency you hold and the currency you want to buy or sell is determined by what they call an exchange rate. This rate is constantly changing, and the delivery time is typically two days as it stands today. Additionally, you need to connect the payment infrastructure to a different country with a different currency. Each currency has different infrastructure systems, and you must partner with a member of the infrastructure in the country you want to deliver the money to.

The main difference between domestic and international transactions is that you have an exchange rate and a different payment infrastructure to connect the funds into.

Why does it usually take two or more days to settle an international payment?

The traditional time period for making and accepting an international payment says that it's normally two days from when you enter into the exchange agreement until the money is delivered to the other country where you want to send money. There's a historical reason for this. First of all, you have domestic infrastructure that moves the money within one country, and then you connect it to another infrastructure in a different country. The central banks are responsible for guaranteeing the settlement risk between the countries and the banks. They need one extra day to sort out the settlement risk and balances between the countries. That is historically the reason why there are two days.

This is changing these days. For example, within the Euro area and the UK, it's becoming more common to have a one-day delivery time, even for cross-border payments. However, it's not standardized, and it's not guaranteed. They are trying to shorten it to one-day delivery, but currently, having same-day delivery without extra cost is very difficult. This is because there is a credit risk when you move funds without going through the central banks' settlement systems. It is possible to have same-day delivery, but it is more costly because the banks have a credit risk. It is mostly used for large amounts of transactions.

What is the difference between forward and spot?

A spot payment is two banking days from the day you make an exchange agreement. The delivery of the currency is normally two days forward, and it's two common working days for the two different currencies involved in the exchange. A forward is any other value date than two working days or two bank days, and it has the same exchange rate. However, you make some adjustments depending on the difference in interest rate levels between the two currencies involved in the exchange.

So, the longer time you want to wait for the payment, the more days there are with different interest rate levels for the two currencies. This results in either an additional cost or a reduction from the spot exchange agreement you have made with your partner. For example, if you have an invoice and you want to fix the exchange rate today because it matches the expectations and the partner's agreement, you can adjust the delivery. Instead of delivering it in two days, you can choose to have a payment due three weeks from today. However, you have locked in the exchange rate today.

The time difference between the due date on your invoice and the spot date involves interest rate differentials that need to be factored into the exchange rate. This can lead to either a deduction or an increase in the price, depending on the interest rate of the currency you want to buy compared to the currency you hold.

So, that is the difference between a spot and a forward transaction: it's the time difference between two-day delivery and delivery on the due date you have on your invoice.

Why are there stricter risk mitigation requirements for international payments?

One important part of transactions is anti-money laundering (AML) and the efforts to prevent crime and fraud. In a domestic transaction, all the parties involved are familiar with the rules and society, and they have a better understanding of where the money comes from and its intended use.

As soon as you go international, there is a higher risk for the parties involved in a transaction to not have the same knowledge about the origin of the money and the recipient. Therefore, there is a much higher degree of AML surveillance in international payments. This is the case regardless of the country you look at. In Norway, we have security measures in place around the Norwegian way of doing things, and in other countries, they have similar measures for domestic transactions. However, all countries, banks, and payment institutions place a greater focus on AML in international transactions compared to domestic ones.

What is the difference between banks and what ZTL offers in terms of pricing and convenience in international payments?

When it comes to invoice payments for international transactions, banks collect orders from many clients throughout the day. They also engage in currency buying and selling activities. So, when it comes to invoices and other financial flows, banks aim to maximize the flows by matching buying and selling orders for the same currency in order to maintain their profit margins.

As far as we know, all banks set the exchange rate or foreign exchange rate, which is the price for the transaction, at several points during the afternoon. Clients will see the exchange rate they have for the invoice day afterward.

At ZTL, we offer clients a live rate that is agreed upon when the client accepts the exchange rate and confirms it within their ERP system. This rate will not change afterward, and you can lock it in on a spot date or choose a due date one, two, or three weeks ahead with a locked foreign exchange price when you accept the invoice. This is the biggest difference between the pricing from banks and what ZTL offers.

Could you tell us about ZTL's fees in international payments?

In addition to the transparency of the exchange rate, we at ZTL do not have any charges for making international payments. We do it free of charge.

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