International Transfers: The Complete Guide For Business

Master everything Indonesian businesses need to know about international money transfers in one practical guide - importance, risks, payments, compliance, and FX volatility.

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International money transfers have become an indispensable part of doing business globally. For companies in Indonesia engaged in international trade, efficient and cost-effective cross-border payment solutions are critical to operations and profitability. A survey by McKinsey found that 75% of SMEs in Southeast Asia identified international transfers as highly important for their business growth. This indicates that cross-border transactions are crucial for SMEs in the region.

However, fluctuating exchange rates present a major risk, with the rupiah depreciating by over 10% against the US dollar in 2022 alone. High banking fees also eat into margins, with the average cost of bank wire transfers from Indonesia being $40. Compliance burdens and paperwork for cross-border transfers further hamper efficiency.

This guide aims to help Indonesian companies maximize the strategic advantages of international payments while avoiding common pitfalls. By following best practices around foreign exchange risk management, payment methods, account selection, and documentation, businesses can optimize their banking workflows for seamless overseas money movement. Moreover, the right approach to international transfers can provide a competitive edge for Indonesian companies in ASEAN and globally.

International payments refer to the transfer of funds between different countries through banking channels. For example, when a small Indonesian handicrafts business gets an order from a US retailer, it will need to receive payment from a foreign customer to fulfill the order profitably.

In order to receive global payment, the handicrafts exporter would send an invoice to the American buyer requesting an international payment. Once the US retailer makes the cross-border transfer through their bank, the Indonesian company would receive the funds in their own bank account in local currency. This allows them to cover production costs and realize profits from the export transaction. Similarly, a Singapore-based regional headquarters transferring payroll funds to employees in its Jakarta office needs to make regular international payments to Indonesia.

Companies today have access to a wide array of methods and platforms to make and receive international payments. The most common type is a wire transfer, where funds are instructed via secure messaging to be moved directly from the sender's domestic account and deposited into the recipient's foreign account, often within one business day.

Whether it is paying foreign suppliers abroad or collecting payment from offshore customers, international money movement is the lifeblood of cross-border commerce. Businesses need to master this critical process to unlock your company's global growth potential.

Apart from the obvious benefits of making and receiving international payments, as explained above, cross-border money transfers allow Indonesian companies to thrive in several key ways:

Access Wider Market Opportunities

International payments open doors for Indonesian businesses to source materials, talent, and partnerships from across the globe. A fashion startup can import sustainable fabrics from Europe to meet local demand. Or a tech firm can hire skilled developers through international freelancing platforms and seamlessly pay them. This access to global markets provides more choices, competitive prices, and innovative ideas.

Manage Currency Risk

With the rupiah fluctuating against foreign currencies, exposure to exchange rate volatility can impact international profits. Transfers through banks allow for hedging strategies to mitigate this risk. For example, a cocoa exporter may lock in rates on upcoming payments to Brazilian suppliers using forward contracts.

Expand Revenue Opportunities

Accepting global customer payments allows Indonesian businesses to boost revenues substantially. An e-commerce site selling artisanal products worldwide can grow sales exponentially if it offers international payment options.

Remit foreign earnings securely

As more Indonesian SMEs sell to other ASEAN countries, easy tools for returning revenue are important for cash flow. Wire transfers provide a safe, regulated way to access earnings from the Malaysian customers of a fashion designer.

If your business wants to fully benefit from engaging in international commerce, it is important to do international transfers the right way. And doing it right starts with understanding the different payment methods available when sending money across borders.

Wire Transfers: The Bank-Based Backbone

The most common option for international transfers is wire transfers, as previously mentioned. Wire transfers refer to direct electronic fund transfers between bank accounts located in different countries. When a business initiates a wire, the sending bank communicates with the recipient's bank via secure messaging systems to instantly deposit the funds. This allows nearly real-time transfers across borders when both accounts are with banks connected to the SWIFT network. Here are the different payment options when it comes to wire transfers

Bank Wire Transfers

The most common option is wire transfers facilitated through correspondent banks using SWIFT payments. Funds move directly between the sender's and receiver's accounts held with SWIFT-enabled banks. Companies can make transfers denominated in foreign currencies or exchange to required currency before transfer.

Domestic Wire Transfers

Some countries offer domestic wire transfers for faster in-country settlement. For Indonesian companies making frequent transfers to Singapore, the use of PayNow in Singapore or RTGS in Indonesia can save time and costs through domestic system connectivity.

International Credit Transfers

Like domestic bank transfers, international credit transfers route payments via correspondent banks in other countries. They take 1-5 business days to complete but typically have lower fees per transaction than wires. Options are available for regular standing orders or one-time transfers.

Alternative Payment Methods

While bank wires are best for speed and security, there are alternative international payment methods that may be more appropriate depending on transaction size, urgency, and recipient location:

  a. Checks: These are written drafts that draw funds directly from the payer's bank account. It can take 4-6 weeks to clear internationally as they must be processed through multiple banks. Additional fees may apply if funds are drawn from a foreign currency account. Recipient banks sometimes charge high fees to deposit or cash checks from abroad.

  b. Banker's Drafts: These are guarantees or pre-paid checks issued directly by the sender's bank to the recipient's bank. Processing drafts takes 1-2 weeks, but no risk of returned unpaid checks. Recipient must deposit locally for funds availability. Some banks charge fees to issue and purchase drafts.

  c. Digital apps: These are digital wallet payments that allow individual transfers but take a higher percentage fee than bank options. Fast settlement in seconds to minutes makes it suitable for small transfers. However, it may have monthly transfer limits and charges on currency conversion rates

Choosing the Best Option

As an SME engaged in cross-border trade, it's important to evaluate several criteria when deciding on a payment solution. Transaction volume, value, and timing requirements are key.

For routine, lower-value payments to overseas suppliers, international credit transfers may be most cost-effective due to lower per-transaction fees compared to wires. However, for urgently needed payments or larger transaction amounts, the speed and security of bank wires versus exchange rate uncertainty with other options make them preferable.

Additional factors include foreign exchange fees, which can be negotiated down with some businesses that may find it beneficial to use multiple methods - for example, using wires for urgent payments but scheduled credit transfers for regular invoices.

Monitoring constantly changing regulatory rules is also important, as some destinations have currency transfer restrictions. Consulting with your Indonesian bank can help optimize costs based on your specific transfer needs and the payment infrastructure in partner countries.

Setting up efficient international payments requires coordination with your bank in Indonesia. The basic steps are:

Open a Business Bank Account

Start by opening an interest-bearing Rupiah or multi-currency business bank account with a financial institution that supports international transfers such as wire transfers and international credit transfers. Larger domestic and foreign banks typically offer the most robust cross-border payment services.

Complete KYC Requirements

As with any new account, know-your-customer (KYC) documentation will need to be provided. This includes business registration documents, identification materials for authorized signatories, and details on expected transfer activity.

Link Foreign Bank Accounts

Instruct the bank to set up beneficiary account linkages in relevant foreign currencies for any regularly transferred-to-bank accounts. Verify account names and numbers carefully to avoid errors. This speeds up future transfer requests and helps you to track and unify your cross-border transfers across various banking functions

Specify Exchange Rate Preferences

Define whether exchange rates should be fixed at the time of transfer or left floating based on transaction type and currency volatility tolerance. Better rates may be available for larger transfer volumes.

Set Payment Controls

Configure transfer authorization rules and limits aligned with role-based access to initiate, approve, or reject money movement. Strict controls protect funds from unauthorized use while permitting normal business operations. Properly establishing these settings simplifies carrying out secure, compliant international payments from Indonesia as business needs dictate.

For any business engaged in cross-border transactions, successfully managing international payments requires not only understanding transfer methods but also mitigating currency risks that arise from operating in multiple currencies. While electronic transfers and funds transfers provide convenient solutions for moving money globally, fluctuations in exchange rates can still introduce uncertainty into financial projections and profitability.

However, trade financing instruments provides vital tools to mitigate payment risks and ease cash flows for Indonesian businesses when trading overseas. For small and medium enterprises (SMEs), assessing costs against benefits is key in selecting suitable instruments.

Letters of Credit

A letter of credit from the importer's bank assures payment, providing security when trading with new partners. However, costs range from 1% to 3% based on tenor and account for extra diligence needed by banks. SME exporters should assess if the LC provides enough additional assurance over advance payments to justify costs.

Bank Payment Guarantees

Guarantees legally bind the importer's bank to pay up to a set amount in case of importer default. This provides another layer of payment security. But bank charges from 2% to 5% of guarantee value are typical. Useful for large export contracts above $500,000.

Trade Credit Insurance

Insurance covers 90% of invoice values in case buyers fail to pay. Premiums range from 0.5% to 2% of insured receivables based on country risk ratings. Optimal for SMEs trading with higher risk regions. Business banks in Indonesia offer export credit insurance products tailored for Indonesian SME needs.

Invoice Discounting/Factoring

Banks or fintech firms purchase receivables at a discount of 1% to 3% over the base lending rate, unlocking cash faster. No collateral required. Factoring costs should be weighed against cash flow benefits for SMEs.

Evaluating tradeoffs will help Indonesian SME exporters pick the most suitable solutions to safely grow global trade.

Conclusion

For Indonesian companies seeking growth opportunities overseas, mastering international payments is fundamental yet fraught with risks. Following best practices around foreign exchange management, compliant transfer methods, strategic account selection and leveraging trade instruments can optimize cross-border commerce. With the right global financial foundations, Indonesia's emerging multinationals and nimble SMEs alike can turn worldwide payments into a competitive advantage.