Cross-border payments hold promise for expediting international payroll - National Automated Clearing House Association's Cross-Border Payments program

HR Magazine, March, 1998 by Timothy A. Lavery

HR systems and payroll professionals in multinational companies may profit from a new and evolving electronic funds transfer system.

As the number of U.S. companies involved in international business increases, our need for efficient, safe financial transactions across borders continues to grow. That need has been the main impetus for development of an automated system for cross-border payments by the National Automated Clearing House Association (NAGHA), a trade group for the banking industry based in Herndon, Va. The association's Cross-Border Payments program was started in 1996 and currently includes the NAFTA partners - the United States, Canada and Mexico - in an agreement allowing direct deposits to be transmitted electronically between the three countries.

Because all nations are becoming economically interdependent through travel, trade and investment, the need to move money across borders securely, quickly and inexpensively can only intensify. Thus, the association has activities under way to extend its program to more countries. Last year, trade volume between Canada and the United States totaled more than $1.42 trillion. Currently cross-border pilot programs between the United States and Canada are processing about 10,000 transactions per month.

To develop and administer an effective system of batch-oriented cross-border payments, NACHA created a subgroup, the Cross-Border Council (CBC). As new countries are added to the system, the technical issues will become more complex. In anticipation of such problems, the council is working on an international template, or standard, for cross-border payments so that future expansion can be accomplished with little trouble.

As more companies upgrade their systems and expand globally, the use of electronic cross-border payments will become more widespread. In addition to the many employees of multinational companies, an increasing number of retirees are living in other countries and need to receive recurring payments in their local currency. Payroll and pensions are only two of the many kinds of corporate financial transactions handled electronically.

Before cross-border payments, there was no really simple way to send payroll deposits for multiple employees working in Canada or Mexico-not to mention any other nation. Many companies either transferred money by wire or dealt only with international banks having branches in both countries. But those solutions are not practical for all employers. For example, wire-transfers can be expensive, because banks will charge about $10 per transfer to both the sender and the receiver of the transfer. In comparison, cross-border payments will cost no more than current domestic Automated Clearing House (ACH) fees, which are typically 8 cents to 15 cents per transaction on top of a one-time batch transmission fee ranging from $10 to $20.

Because most employers typically bank with local or in-state banks, dealing with international banks is usually an option only for employers located in large U.S. cities. The primary focus of the CBC is to provide a framework so that any company, regardless of size, may initiate and receive nonwire electronic payments internationally with the same ease and security as domestic transactions.

Use of cross-border payments is allowing some multinational employers to truly centralize their payroll operations as well as automate other transactions such as purchasing. For HR professionals, the cross-border payment system can provide an answer to some of the problems they may have with international payroll operations. The electronic payment system can provide a way to transfer payroll dollars faster and more cost-effectively.

HOW DOES THE SYSTEM WORK?

The cross-border payment process includes the following eight key participants:

1. The customer originating the request (Originator).

2. The customer's bank, or Originating Depository Financial Institution (ODFI).

3. An ACH Network Operator.

4. The Originating Gateway Operator (OGO), which acts as an intermediary to the receiving country.

5. The Receiving Gateway Operator (RGO), which receives the information from the OGO and acts as the intermediary in the receiving country.

6. An ACH Network Operator.

7. The Receiving Depository Financial Institution (RDFI), which credits the appropriate Receiver's account.

8. The organization or individual receiving the electronic funds transfer (Receiver).

Except for the Gateway Operators and the application of an exchange rate to the money, this model is exactly like the U.S. domestic ACH system. A company may originate payment in U.S. dollars, but when a Canadian employee receives the money, it will be in Canadian dollars. There are several exchange rate options available to the employer, such as variable to fixed, fixed to variable, or variable to variable.

The OGOs and RGOs function as the exit and entry points to the domestic payment systems. Currently, there are three Gateway Operators - two in the United States, Norwest Bank and VISA, and one in Canada, Toronto-Dominion Bank. The banking community in Mexico is preparing to set up one or more Gateway Operators.