OnPay November 17, 2021

Cross-border collection is a complex process that involves several intermediaries. Various problems arising from this complexity often hamper foreign trade enterprises’ normal operation.  As a part of our market research, we contacted senior foreign traders from Zhejiang and Guangdong. We learned about the pitfalls they encounter and found out which issues concern them the most.

Local currencies exchange problems

"The traditional transfer channels support only a very limited number of currencies for cross-border collection. Most currencies can’t be transferred, they must be exchanged first.’’

——— A textile foreign trade company in Zhejiang

Out of 180 legal tenders currencies, only 10 are supported by traditional cross-border collection channels. Developing countries in Africa, Latin America, the Middle East and other regions have a great trade potential, but a limited access to foreign exchange

Nigeria, for example, is the most populous country in Africa and China's second largest export market in Africa. However, many Chinese traders face difficulties when comes the time to collect monies from that country.

The director of a textile company in Yiwu, Zhejiang Province, said: "We export almost 20 million US dollars worth of textiles to Nigeria every year. Many customers there have neither RMB nor US dollars. They can only pay with Naira (the local legal tender tender currency). Because the traditional money transfer channels don’t support Naira, we must find a way to exchange it to RMB which involves high intermediate fees, foreign exchange losses and delays.  Those costs can easily add up to 3% of the value of the trade.”

Friendly tip: When it’s not possible to use RMB or US dollars to settle a trade, clarify the payment due date and the collection channel as well as which party shall bear exchange losses and pay the handling fees. Pay close attention to transaction risks including compliance issues.

Long delays slow down the business cycle

"Collection takes a long time. Various documents must be reviewed by multiple parties. During this time, funds can’t be utilized. Delays hurt our rate of utilization of capital."

——— A furniture manufacturer in Zhejiang

Capital turnover is a crucial element in the success of a trading business. To this day, banks and other traditional payment services offer no alternative than old-school, slow and expensive transfers. 

The director of a furniture manufacturer based in Yiwu, Zhejiang Province, said: "We used TT wire transfers and letters of credit before. Payments often take three to five days to arrive; if there are multiple transit banks, the handling fee is deducted by each one. Certain banks sometimes require supplementary documents, making the delay even longer. The cost and speed of third-party transfers are slightly better, but this collection method isn’t regulated. If something goes wrong,  there’s no recourse.”

Friendly tip: To optimize capital utilization, choose a collection method that suits your business model from angles such as timeliness, cost, risk management, and compliance.

Safety of funds and compliance

"Frozen funds are our biggest headache."

——— A machinery foreign trade company in Guangzhou

Since 2020, many Chinese international trade companies had their bank accounts frozen. Mr. Wang, who manages an international trading company specialized in machinery parts in Foshan, Guangzhou, said that the two local Agricultural Bank cards he used to collect money were frozen by authorities in Yancheng, Jiangsu Province, in July 2021 because the sending account had been flagged for suspected fraud and money laundering.

"In the past, only the four major Chinese would freeze clients accounts. Now this also happens with small banks." said Mr. Wang. "We have 7 million RMB of enterprise funds frozen in an account, and over 3 million RMB of payments we can’t receive. There’s also a 4 million RMB bank loan that has nothing to do with the case, but it’s frozen as well." We provided authorities with all supporting documentation, all we can do now is wait for the result of the investigation.

Friendly tip: For reasons of cost and convenience, foreign traders often use underground channels to settle transactions. However, funds coming coming from underground channels are at a high risk of being flagged as suspicious and could cause the receiving account to be frozen indefinitely.

Collecting money in high-risk areas

"It’s difficult to collect money from customers in high-risk areas. Transfers are often denied."

——— A foreign trade company in Zhejiang

The links and processes of cross-border payment are complex, and it is easy to infiltrate illegal and criminal funds, especially for sanctioned countries or entities, money laundering and crime high incidence areas, banks and financial institutions in various countries will have relatively strict supervision and risk control measures. Reflecting on the level of domestic and foreign traders, for the capital transactions in high-risk areas, banks and payment institutions will ask for more review information, and some foreign traders will also encounter the situation that customer remittances are returned.

The manager of an international trade company based in Yiwu, Zhejiang Province, said: "The new AML rules make it much harder to do business with developing countries. Customers in these areas are subjected to a stricter bank risk control than in Europe and United States. Collection can be quite a challenge. Funds are often returned".

Friendly tip: In high-risk countries or regions, banking supervision is more stringent. Traders must be aware of that risk when receiving cross-border transfers. Document and keep a record of every transaction to better deal with the authorities scrutiny. Whenever possible, use RMB instead of US dollar as a remittance currency. Use only reputable third-party payment agencies to transfer US dollars in order to reduce the risk of review.

A glimpse of hope for high-risk regions

The path to international collection is still treacherous in high risk regions. Traders will inevitably encounter trouble on the way. They must keep a balance between capital security and compliance with regulation when choosing a collection method.

Fortunately, new solutions for cross-border collections are now emerging. OnPay uses the blockchain technology to build a new way of transferring assets, allowing for collection and exchange of foreign currency a fast as 1 day. OnPay’s reserves are held in licensed trusts safeguarded by internationally renowned banks. OnPay supports local currency collection in more than 150 countries in Europe, America, Southeast Asia, the Middle East, Africa, and Latin America.