SME’s guide to collecting international payments in India

New technology and favorable government policies have put Indian Small, and Medium Enterprises (SMEs) in a position to be a significant player in the global economy.

In fact, as of 2023, Indian SMEs contributed 43.59% of all exports. And, this number is targeted to hit 60% by the end of 2030. 

Indeed, offering services globally can open doors to a broader customer base, increase revenue streams, and enhance business credibility.

However, as SMEs venture into international markets, managing cash flow becomes more critical than ever. They have to navigate foreign currencies, diverse payment systems, and varying regulatory requirements of cross-border payments.

In this guide, we aim to address these challenges and provide all the information needed for Indian SMEs to get started with receiving international payments quickly, efficiently and at an affordable cost. 

We will also go over 7 factors SMEs should consider when choosing an international payment solution-–making it easy to manage the multiple aspects of international business payments and making the most of the global opportunities. 

Indian SMEs can set up for receiving international payments for several reasons, each reflecting a unique growth opportunity. Here are top 4 scenarios:

• Exporting goods or services - From exporters of goods like textiles, machinery, etc. to service providers like IT/ITES, BPO, etc., setting up international payments is a must, if you are looking at being a part of India’s growing service export base. As quoted in the Times of India, “Nasscom's latest estimates for the year suggest that India's IT exports will grow at 3.3% in constant currency to $199 billion in the 2023-24 financial year.”

• Selling products or services online to international customers - The rise of e-commerce has enabled Indian SMEs to tap into global markets by selling their products or services online. An effective and affordable payment solution is essential to facilitate smooth transactions.

• Providing consulting services to clients abroad - SMEs offering consulting services to international clients must establish a reliable payment mechanism to receive fees from overseas, quickly and efficiently.

• Transferring funds from a foreign entity to the Indian subsidiary - Several funded startups in India operate on a transfer pricing model. In this scenario, typically the Indian start-up that has raised funding from a global entity is headquartered overseas like in the US or Singapore, while the Indian subsidiary is based in the domestic market. These startups regularly transfer funds to India to cover employee payroll, vendor expenses, and taxes owed to the Indian government. Typically, the funds are moved from a USD bank account outside of India to an INR account within the country. The transfers usually occur on a fixed schedule, often monthly. 

Cross-border or international payments come in various forms, each with its own set of advantages and drawbacks. Let’s explore the popular methods used by businesses in India to collect payments:

• Wire transfers - Wire transfer or an international wire transfer allows a business to receive funds to their bank account directly from a customer's bank account overseas. To facilitate a wire transfer businesses need to share their bank account details along with a SWIFT (Society for WorldWide Interbank Financial Telecommunication) code, BIC (Bank Identifier Code) number or IBAN (International Bank Account Number).

• Virtual Bank Account Number (VBAN) -A virtual bank account number is a digital account that enables businesses to receive and manage payments from different countries. It allows businesses to receive payments in local currencies and access funds through an online platform, and without setting up an international bank account. VBANs often help in simplifying international transactions, reducing costs and settlement times.

Using a VBAN provider like Xflow can enable Indian SMEs to:

• Collect payments at 0% FX markup 
• Transact without any limits
• Receive payments in 1 business day

• Payment gateways - This is a technology that allows a business to accept payments from credit cards, debit cards, digital wallets, and more. A payment gateway is particularly advantageous for businesses with an online presence (e-commerce platforms). A business can seamlessly integrate the payment gateway into their checkout experience.

• Credit cards - Credit cards have played a crucial role in facilitating international transactions. The most common way to accept payment from a credit card is through a payment gateway. 

• International money order - A method that ranks high on security but low on convenience. These transactions can be done from your customers bank or the nearest post office. A customer would likely visit their local post office and hand in a request for a money order for the invoiced amount. They go on to then make the payment and share the recipient's details, recipient country and currency. Once the money order is received by the business, they can visit their local post office to cash it in their local currency. 

Each payment method comes with its own set of advantages and challenges. The right method for a business depends on a number of factors which we will look into in a later section.

The systems that allow people or businesses to securely and reliably facilitate cross-border payments. These systems act as intermediaries, providing a channel for secure communication between the sender and the recipient's bank. 

What is the most commonly used international payment system?

SWIFT (Society for Worldwide Interbank Financial Telecommunication)

• It is like the postal service of the financial world. This system is used in over 200 countries by 11,000+ financial institutions. The system doesn’t actually move the money but it sends payment orders that are used by the sender and receivers bank to settle transactions. 
• Preferred locations: Worldwide
• Transfer time: 2-4 business days

In addition to SWIFT, every country has a local payment system – similar to NEFT in India. For instance, in the US, here’s a look at some the preferred payment methods in the US: 

Fedwire (Federal Reserve Wire Network)

• A real-time gross settlement system operated by the U.S. Federal Reserve Banks, processing over 835,000 transactions daily with a total value exceeding $3.4 trillion
• Preferred locations: United States
• Transfer time: Real-time to a few minutes

Automated Clearing House (ACH)

• A U.S. electronic funds-transfer system that processes large volumes of credit and debit transactions in batches. 
• Preferred locations: United States, with growing adoption in some European countries
• Transfer time: 1-3 business days

VBAN providers like Xflow enable users to collect payments via their client’s preferred mode of transfer—making the experience seamless and quick.

The Reserve Bank of India (RBI) sets the rules for international money transfers in India. 

These rules are derived from the framework provided by the Foreign Exchange Management Act (FEMA). Here are some rules you need to be mindful of when receiving international payments:

• Foreign Inward Remittance Certificate (FIRC) - When receiving an international payment, businesses must also receive a FIRC or e-FIRC as proof to establish the purpose of the payment.

• Importer-Exporter Code (IEC) - This is a unique code issued by the Director General of Foreign Trade (DGFT) to Indian businesses engaged in imports or exports. An IEC is mandatory for receiving international payments.

• Goods and Services Tax (GST) - International payments too can be subject to GST depending on the nature of goods or services provided. SMEs must ensure they comply with GST regulations.

SMEs preparing to receive international payments or those already on track can follow this simple checklist to make sure nothing slips through the cracks. 

1. Gather and verify essential information 

• Share accurate details with customers, including:
• Full name
• Address
• SWIFT Code
• Payment method
• IBAN
• BIC
• Check for discrepancies in the above information

2. Check with customers on their preferred payment method

• Provide multiple payment options like:
• Wire transfers
• Local payment methods
• Payment links (card, wallet payments)
• Payment gateway

3. Exchange rates

• Check for providers offering a favorable exchange rate
• Check for the best FX rate or a possible lock rate 

4. Secure payment solution

• Partnered with a reputable and secure payment solution that prioritizes data protection and fraud prevention
• Payment solution complies with international security standards

5. Regular account monitoring

• Accounts checked regularly for unauthorized transactions
• Set up alerts for large or suspicious transactions
• Reconcile transactions weekly or bi-monthly

6. Accurate records of transactions

• Detailed records of all international payments received, including:
• Transaction dates
• Amounts received
• Exchange rates applied
• Correspondence with customers
• Add records to accounting software

7. Tax law compliance:

• Report all international payments
• Secure FIRA within 1 day of payment withdrawal 
• Pay applicable taxes on time, considering:
• Goods and Services Tax (GST)
• Foreign Inward Remittance Certificate (FIRC)
• Import Export Code (IEC)
• Consult with a tax advisor to stay updated on any changes in tax regulations

• Sharing incorrect details - It's not uncommon to make a mistake when manually entering long identification numbers and codes like SWIFT, IBAN or BIC. The repercussions could be quite severe as the wrong recipient could receive the payment leading to unnecessary costs, processing delays and dissatisfied customers.

• Overlooking sender country holidays - Customers' bank holidays might cause payment processing delays. Not keeping a tab of these can lead to unnecessary stress and strapped cash flow. 

• Ignoring the hidden transaction fees and exchange rates - International payments are filled with hidden transaction fees and exchange rate markups. In most cases, the payment providers do not share this information up front. Businesses can end up losing 3-5% of the transaction value as these fees are passed onto the recipient. 

• Choosing the wrong payment solution for your business - Most SMEs end up going to their bank because that’s what they are familiar with. While banks are trustworthy, they also have higher transaction fees and longer processing times.

Picking the right payment solution can translate to cost savings, positive cashflow, improved transaction experience and lesser compliance headaches. Here are some key factors to consider: 

Picking the right payment solution can translate to cost savings, positive cashflow, improved transaction experience and lesser compliance headaches. Here are some key factors to consider: 

• Transaction cost - Dig deep into the fees associated with every payment solution. This includes setup fees, transaction fees, and GST. Check on the currency exchange rate offered and how it compares against other options.

• Foreign exchange rate - Choose a provider that offers mid-market or near mid-market exchange rates. Some options providers also allow a lock on FX rate, protecting businesses from fluctuations in exchange rates.

• Settlement time - Cash flow management is crucial for any SME. The time taken for international payments to reflect in your account becomes important in this case. Choose payment solutions that enable settlements within 1-2 days. Traditional bank transfers can take anywhere between 5-7 days.

• Transaction limits - Ensure the payment solution can handle the volume and size of transactions that is typically seen by your business. With providers like Xflow, businesses can transact without any limitations in a single transaction, and with full compliance.

• Security - Check for all security related documentation. The payment solution provider must at all times follow anti-money laundering (AML) and know-your-customer (KYC) regulations. 

• Compliance - The payment solution should send your business a Foreign Inward Remittance Certificate (FIRC) no less than 1 day after receiving the international payment.

• Invoicing and reconciliation - Seamless integration with accounting software, in-built invoice generation, set up with e-commerce platforms can additionally streamline finance management and reconciliation. These are often additional features, but they do add to the overall experience of simplifying cross-border payments.

Navigating the world of international payments can seem daunting but it's a crucial step in expanding business globally. 

From understanding various payment systems to avoiding common pitfalls, this guide has tried to cover everything Indian SMEs need to know about receiving international payments.

The key to success lies in choosing the right payment solution that aligns with business needs. Consider factors like cost, settlement time, safety and compliance when making your decision. 

Solutions like XFlow offer a blend of efficiency, security, and convenience that can streamline your international transactions.