Introduction
In the last few years, the volume of services exported from India has increased significantly, translating into a growing demand for streamlined international payment solutions. India’s services exports increased to USD 345 billion in 2023, a growth of 11.4%, as per a report by UNCTAD1. As a result, demand for efficient cross-border payment solutions is also increasing as people realize that traditional methods aren’t the most efficient or cost-effective.
Picking the right payment solution is an important decision beyond the ease of adoption. Irrespective of the size of the business, picking a payment solution optimized to the company’s specific needs can be a game-changer. From reduction in transaction costs to faster processing times, several advantages come with opting for the right payment solution.
This article covers two key solutions: Payment Gateways and Virtual Bank Account Numbers (VBAN). While fundamentally, both these options serve the same purpose- facilitating cross-border payments— there are key differences that set them apart. Understanding the benefits and the differences can help businesses select the alternative that is best suited their needs.
Understanding payment gateways: Benefits and use cases
A payment gateway is a technology platform that enables businesses to accept payments from customers online, in-store, or through mobile devices. It acts as an intermediary between the customer and the business, securely transmitting payment information to process a transaction. Most people who have purchased online or in-store using a digital payment method would have had their transactions processed through a payment gateway.
Payment gateways are a popular solution for B2C enterprises, whether e-commerce platforms or a service requiring recurring subscription payments. The primary aim for these businesses is to optimize the payment process for the user's convenience and ensure real-time processing.
Payment gateways allow for seamless scaling as the business grows, in addition to enabling the business to offer multiple payment methods. This makes it very well suited for a consumer-focused business, where the ability to offer multiple payment choices securely can help close the transaction.
Challenges of payment gateways
Despite the ease of setup and use, certain factors work against payment gateways. The cost of a payment gateway depends on transaction volume, service type, and transaction amount. Payment gateways are typically used for smaller value transactions (<$5,000).
Additionally, there are other costs associated with payment gateways, which can quickly add up, making it an expensive proposition. This includes:
- One-time setup fees: One-time fee for integration (ranges from $0 to $500+ depending on provider)
- Transaction fees: Typically, a percentage of the transaction (1%–3%) + a fixed fee per transaction (e.g., $0.10–$0.30)
- Currency conversion fees: For international transactions (0.5%–3%)
Virtual Bank Account Number: Simplifying cross-border payments
A Virtual Bank Account Number (VBAN) is a local account in foreign countries that allows users to receive funds via domestic payment methods. VBANs allow businesses to collect money from international customers like domestic transactions, resulting in more efficient and faster payment processing. It also helps businesses control the margins at which they convert the foreign currency into INR, helping reduce the transaction cost.
Among the most significant advantages of using a VBAN is that it does away with the uncertainty over the final amount that will come in after the fees and other charges have been deducted. For businesses that operate across multiple geographies, virtual accounts also bring in the ability to manage cash flow across different currencies through a centralized account structure. This allows them to transfer balances across geographies or currencies through the same account.
The costs associated with setting up and operating a VBAN are relatively lower than a payment gateway. The transaction fees charged are normally a percentage of the transaction value, ranging from 0.3%-1% of the overall transaction value.
Payment gateway or VBAN–which should you pick?
Both payment gateways and VBANs have clear advantages that make them better suited for specific kinds of requirements. Here are some guidelines on what to look out for when selecting a payment solution for your business:
1. Fees
Know the payment structure and charges. Most payment processors charge a flat fee per transaction and a percentage of the value of the payment. This can be anywhere between 0.5%-3%, depending on the payment method. Payment solutions that offer currency conversion often add a markup to the exchange rate. This is often a hidden cost. Learn more about the charges here.
2. Settlement times
Most payment methods often take 1 to 5 business days to settle invoices. Understand the processing time and choose what works best for you. Along with fees, settlement time can significantly impact the cash flow.
3. Coverage and reach
Cross-border payments are routed through wire transfers or local payment methods. Ensure you can access local payment methods such as ACH or FedWire for USD to INR payments for faster and improved customer experience, cost optimization, and processing time.
4. Value-added services
The role of a payment solution goes beyond just transferring funds from one country to the other. Look out for services that offer end-to-end solutions, including access to eFIRA. These services essentially help manage compliance with ease. Players like Xflow offer additional features such as cashback on processed funds, flexible withdrawals, and more.
5. Customer support
Payments can become complex at scale, especially when multiple currencies are involved in a single transaction. Look for a provider that guarantees support through dedicated account managers or self-help tools like an intuitive Dashboard.
How can Xflow help streamline payments with VBAN?
Xflow provides VBAN in USD, which is set up with JP Morgan Chase Bank. The funds withdrawn from the VBAN are settled in the business’ bank account in just 1 business day. A FIRA for the transaction is provided 1-day post-settlement of funds. What’s more? Xflow offers a transparent fee structure at a 0% FX mark-up.
Conclusion
The final choice of payment solution provider will depend on factors suited to each business's requirements. For a B2C enterprise where the transaction sizes are smaller and providing a smooth, frictionless experience to customers buying your product/service online is paramount, a payment gateway is a good option. The added ability to offer multiple payment methods and ease of tracking and reversing transactions (in case of returns) backed with a secure system are all factors that make payment gateways attractive to businesses, especially for transaction sizes below $5,000.
For businesses with larger deal sizes and are transacting primarily with B2B customers, a VBAN offers several advantages. Enabling local payment collection methods brings the same ease and speed of funds collection to international transactions that enterprises use when transacting domestically.
If a business has recurring transactions with different customers, with a transaction size of more than $1,000, a VBAN can help offer a seamless and scalable payment experience.
Find out more about how Xflow can help you process international payments faster and more seamlessly.
References:
