Comparing SWIFT, VBANs and digital wallets for receiving international payments

Receiving international payments in India is often perceived to be complex, slow and expensive.

The good news is that the international payments space is evolving. New payment methods are simplifying the process of receiving funds in India. These innovative solutions are gaining popularity for their ability to reduce costs, speed up payments, and provide enhanced visibility during the transfer process.

For businesses receiving international payments, three critical factors come into play:

• Speed of receipt
• Cost of transfer
• Ease of tracking funds in transit

In this article, we'll focus on the first and third factors, diving into how modern payment solutions enable faster settlements and smoother tracking. For insights on minimizing transfer costs, check out our dedicated article on that topic.

Fast and efficient settlement of international payments is no longer a luxury—it’s a necessity for businesses. Timely transfers directly impact cash flow and operational efficiency, enabling businesses to stay agile and manage resources effectively.

Several factors influence the speed and reliability of international transfers. Among them, three key elements stand out:

1. Banking hours, time zone differences, and public holidays: Each financial institution operates on a particular schedule, and that can vary by region. Transactions initiated outside of regular banking hours, during time zone differences, or around public holidays can lead to delays, affecting how quickly funds are processed.

2. Documentation and regulation requirements: International payments are subject to a complex web of regulations, often shaped by the laws of the countries involved and the currencies being exchanged. Missing or incomplete documentation can result in significant hold-ups, as financial institutions must adhere to strict regulatory measures to ensure compliance.

3. Payment methods: The choice of payment method plays a significant role in determining processing times. From traditional bank transfers to modern digital payment solutions, the speed and efficiency of each option can vary.

Businesses can take charge of choosing the right payment method when collecting payments. In the section below, we will examine various payment methods and their impact on the timeliness of international business payments.

1. SWIFT

Society for Worldwide Interbank Financial Telecommunications (SWIFT) transfer is one of the most widely used options for receiving international payments in India.

The easiest way to understand SWIFT is to draw parallels with National Electronic Funds Transfer (NEFT)/Real Time Gross Settlements (RTGS) in India for domestic transactions. Just like NEFT/RTGS helps facilitate the movement of funds domestically, SWIFT is used for international transactions. Similar to how the Indian Financial System Code (IFSC) is used for NEFT/RTGS, there is a Bank Identifier Code (BIC) for SWIFT transfers.

Advantages of using SWIFT:

1. Global reach: Swift is a financial messaging service that connects more than 11,500 banking and securities organizations in more than 200 countries and markets. It offers over 40,000 BIC codes—making it accessible to businesses worldwide.
2. Standardized process: The SWIFT process is broadly similar in all countries. Details like name, account number, BIC code, purpose of sending funds, and recipient's currency are provided to initiate a transaction.

Despite the accessibility and set processes, SWIFT also comes with challenges.

• Long settlement cycle: While SWIFT messages are instantly communicated between banks, SWIFT transfers typically take 1-5 days for funds to settle, depending on the source and destination country. This long settlement period is because multiple banks (intermediary or correspondent banks*) work together to move funds from country A to country B. The number of banks involved in the transfer would depend on which bank the customer is sending funds from and which bank the user has their bank account with. For example, a transfer from the USA to India would take 1-3 days, whereas a transfer from Nigeria to India would take 2-5 days. (Please note: These are typical numbers and can vary)

• High costs: The typical cost for a SWIFT transfer is between $30 and $60, and there could be additional intermediary bank charges. The recipient's bank will also charge an FX conversion fee. This fee depends on the rate negotiated with the bank and could vary between 0.25% and 3%.

• Limited transparency: Tracking SWIFT transfers is challenging. However, SWIFT has been improving the issue around transparency through initiatives like the SWIFT Global Payments Innovation (GPI) and incorporating Unique End-to-End Transaction Reference (UETR). These improvements allow all parties involved in a transaction to monitor its progress in real-time. Despite these attempts, users often face challenges tracking SWIFT. This is especially true if users initiate a SWIFT transfer from a regional/local bank.

2. Domestic transfers via local virtual bank account number

Virtual Bank Account Numbers (VBANs) are local accounts in foreign countries that allow users to receive funds via domestic payment methods. The typical flow of funds is payments collected in a VBAN and then withdrawn to an Indian bank account.

To elaborate further, let us take the example of VBANs in the U.S. The two most common ways to send money domestically in the US are Automated Clearing House (ACH) and Fedwire, which are similar to NEFT/RTGS in India. To receive funds, an account number and routing number are required. ACH and Fedwire can have the same routing number, or they can have different routing numbers, depending on the bank.

Advantages:

1. Low cost: ACH is mainly free or can cost up to a few cents per transaction, while Fedwire charges range from $0 to $20. These costs depend on the bank and the banking relationship. FX conversion fees are also reasonable compared to banks or wallets, usually around 1% or lower.
2. Quick settlement time: ACH typically takes 1-3 days to settle, while Fedwire can settle in as little as 2-12 hours.
3. Easy to track: Since these transfers happen within a single country's payment ecosystem, processing is smoother, making tracking an ACH/Fedwire transaction easier than SWIFT.

How does a VBAN work? 

• The customer sends funds to the VBAN using domestic/local payment methods
• Funds are received in the VBAN 
• Funds are withdrawn to the Indian bank account
• Funds are credited to the Indian bank account in 1 business day

While the above example illustrates using a VBAN to collect payments from the US, the same is true for other major countries. Most countries support VBANs, and offer local payment rails to collect payments globally. Here are the local payment methods for other key regions:

• EU - SEPA (Single Euro Payments Area) - SEPA transfers are typically fast and inexpensive.
• UK -BACS (Bankers' Automated Clearing System), CHAPS (Clearing House Automated Payment System)
• Canada - Electronic Fund Transfer (EFT)
• Australia - Electronic Fund Transfer (EFT)
• Singapore - GIRO (General Interbank Recurring Order), FAST (Fast And Secure Transfers)

3. Digital wallets

Digital wallets offer a modern approach to international payments. They store funds digitally and facilitate quick transfers within their ecosystems. Additionally, most wallets can facilitate transactions using other payment methods. 

Advantages:

1. User-friendly: The interface of digital wallets is generally intuitive, making it easy for users to manage payments
2. Wide acceptability: Many wallets support multiple currencies and payment methods, providing options for users

But wallets can be expensive. Transaction costs for international payments can be considerably high, ranging from 3% to 8% (including wallet transaction fees + FX conversion).

Xflow's Receiving Account allows businesses to leverage domestic transfers to collect payments from the U.S. by using ACH and Fedwire. This gives complete visibility and control over funds at every process stage.

Advantages:

1. Fast settlements: With Xflow, businesses can settle funds in 1 business day
2. FX transparency: Businesses can manage FX costs with Guaranteed Live FX rates, or choose to lock in FX rates for up to 45 days
3. Wide coverage: Receive settlements from 140+ countries, making it easy to initiate global transactions 

Notes: * Although intermediary and correspondent banks are technically different, this article will consider them in one bucket.