International Payments: Foreign Currency vs INR - Which Saves More Money?

When it comes to international payments, choosing between foreign currency and Indian rupee (INR) can significantly impact your bottom line. The INR's partially convertible status in 2024 means you'll need regulatory approval for larger transactions, while smaller amounts can be exchanged freely.

This difference becomes clearer when you look at the numbers. INR contracts against the dollar show just 11,825 daily trades compared to 198,027 for Euro-USD pairs, highlighting the stark contrast in liquidity. Your choice between INR and foreign currency payments can affect everything from transaction costs to processing times.

Whether you're running a business or handling personal transfers, understanding these payment options is crucial for your financial decisions. Let's explore how each payment method stacks up and which one could save you more money in your specific situation.

Current landscape of cross-border payments

Cross-border payments have undergone substantial changes since their inception through telegraph transfers. Initially, processing these transactions took up to five days through SWIFT messaging. Furthermore, the value of cross-border payments is projected to reach INR 21095.11 trillion by 2027.

Traditional banking channels

Bank transfers remain a cornerstone of international payments through correspondent banking networks. Notably, 84% of global payments now occur either directly or through a single intermediary. Through SWIFT infrastructure, 89% of payments reach destination banks within an hour, with 80% completing them within six hours.

Modern payment solutions

FinTech companies have introduced innovative solutions to address traditional payment challenges. These modern platforms offer:

• Lower transaction fees
• Enhanced customer service
• Flexible payment options
• Reduced processing times
• Extensive global reach

Mobile payment services have gained prominence, particularly for remittances. Research indicates that 60-70% of remittance users globally prefer digital apps for international transfers. Additionally, mobile solutions help bring informal remittances into the banking system.

Regulatory framework

Cross-border payments must comply with regulations in both origin and destination countries. The Reserve Bank of India oversees these transactions, implementing guidelines for:

Anti-money laundering (AML) measures, Know Your Customer (KYC) requirements, and transaction limits. For Indian transactions, processing occurs through various channels including SWIFT/correspondent banking, Rupee Drawing Arrangement (RDA), and Money Transfer Service Scheme (MTSS).

Breaking down payment costs

Understanding the costs involved in international transfers helps you make informed decisions about your payment methods. First of all, a typical cross-border transaction can cost between 0.3% to 20% of the transfer amount.

Direct transaction costs

The fee structure for international transfers has multiple components. Your bank charges a sending fee to initiate the transfer, and the recipient's bank often applies a receiving fee. Moreover, intermediary banks may charge additional fees, ranging from INR 1,265 to INR 2,531.

• Bank transfer fees: 2% to 3% of transaction value
• Network processing fee: 1% (Visa/Mastercard)
• Account maintenance charges
• Setup or account opening fees

Currency conversion impact

Exchange rate markups present a substantial hidden cost, typically ranging from 2% to 5% of the transaction amount. Subsequently, Americans lost INR 489.41 billion in exchange rate markups in 2023 alone. The impact varies based on currency pairs and market conditions.

Processing timeframes

International transfers generally take one to five business days to complete. The duration depends on several factors:

Processing speed varies by geographic region. For instance, transfers between North America and Europe settle faster than those between Europe and Africa. Consequently, same-day transfers are possible under specific conditions, such as early initiation during bank hours and transactions without currency conversion.

Fraud prevention measures and compliance checks can extend processing times. Time zones also affect processing - a midday transaction in London might face delays due to business hours in Los Angeles.

INR payments: Benefits and limitations

The Reserve Bank of India's framework for INR payments offers distinct advantages for businesses engaged in cross-border transactions. Specifically, the July 2022 scheme permits rupee settlement of external trade, allowing surplus rupees to be invested in Indian bond markets.

Reduced currency risk

INR payments shield businesses from foreign exchange fluctuations. The RBI actively manages currency flows to maintain market stability. Through this system, businesses avoid losses from currency rate changes between contract signing and delivery dates. Rather than dealing with multiple currency conversions, companies can operate directly in rupees, reducing operational complexity.

Local market advantages

The INR payment system brings substantial benefits for domestic trade:

• Saves approximately INR 2531.41 billion on crude oil imports
• Reduces current account deficit through direct rupee settlements
• Enables investment of surplus rupee balances in government securities

Regulatory considerations

The RBI maintains strict oversight of international INR transactions. Accordingly, businesses must adhere to specific guidelines:

Under the Liberalised Remittance Scheme, companies can transfer money internationally for business expansion and acquisitions. Although the scheme offers flexibility, there are key limitations. The maximum transfer limit without RBI approval stands at INR 2109511.27 USD per financial year.

Tax implications play a crucial role in INR payments. Outward remittances exceeding Rs. 7 lakhs attract a 5% Tax Collected at Source (TCS), which increases to 10% without PAN details. Essentially, educational loan payments receive preferential treatment with a reduced TCS rate of 0.5%.

The RBI has established Special Vostro Rupee Accounts with banks from 22 countries. This framework primarily facilitates trade settlements and allows partner countries to use surplus rupee balances for investments in Indian government securities.

Foreign currency transactions: Pros and cons

Foreign exchange markets process over INR 632.85 trillion in daily transactions, making them the most accessible financial markets worldwide. This vast scale creates unique opportunities and challenges for businesses handling international payments.

Global market access

The foreign exchange market operates 24 hours a day on weekdays, enabling transactions across time zones. Indeed, this continuous operation creates a highly liquid marketplace where currencies can be converted instantly. The market connects traders, businesses, and financial institutions worldwide, primarily through electronic trading platforms that have reduced transaction costs.

Currency fluctuation risks

Foreign exchange risk emerges from three main sources:

• Transaction risk: Changes in currency values between contract signing and payment date
• Translation risk: Fluctuations affecting financial reports of international subsidiaries
• Economic risk: Overall market value changes from currency movements

Nevertheless, you can protect your business through forward contracts, which lock in exchange rates for up to one year. These contracts help shield your transactions from unexpected currency movements that could affect costs or revenues.

International trade benefits

International currency transactions offer substantial advantages for cross-border trade. In fact, foreign exchange markets enable businesses to access goods and services that might be unavailable or more expensive domestically. The market's high liquidity ensures cost-effective trading, with lower transaction fees compared to other financial markets.

Overall, foreign currency transactions expand your market reach and boost competitiveness. The digital revolution has simplified global expansion, while modern payment solutions have streamlined processes and increased transparency. Ultimately, these benefits must be weighed against currency risks through careful planning and risk management strategies.

Making the right payment choice

Selecting the optimal payment method requires careful analysis of your business structure and operational needs. The choice primarily depends on factors such as transaction size, frequency, and geographic reach.

Business size considerations

Small businesses often benefit from modern payment solutions that offer lower setup costs and flexible terms. Upon reaching certain thresholds, companies need payment methods that can handle larger transaction volumes. The payment infrastructure must scale with your growth, as businesses expanding internationally require systems that process payments in multiple currencies.

Transaction volume analysis

Your transaction patterns shape the ideal payment strategy. Businesses handling high-value B2B payments exceeding INR 4219022.54 typically rely on traditional banking networks. Yet, for companies processing numerous smaller transactions, aggregator models prove more cost-effective.

The digital payments market is expected to reach INR 972.91 trillion by 2024. Therefore, businesses must consider:

• Processing capacity requirements
• Settlement timeframes
• Fee structures across different volumes
• Integration with existing systems

Geographic factors

Market-specific elements heavily influence payment choices. Throughout emerging markets, mobile wallet usage is projected to increase from 22% to 30% by 2023. Similarly, e-commerce wallet adoption is expected to grow from 42% to 52%.

The choice of payment method varies by region. B2B international payments are projected to grow by 10% from 2022 to 2030, reaching a market size of INR 181139.51 billion. Hence, businesses must consider local payment preferences, regulations, and infrastructure in target markets.

Comparison Table

• 0.5% TCS for educational loans | - 0.3% to 20% of the transfer amount
• Bank fees: 2-3% of transaction value
• Network processing fee: 1% | | Processing Time | Not specifically mentioned | 1-5 business days 89% reach destination within an hour | | Key Benefits | - Protection from forex fluctuations
• Saves ~INR 2531.41 billion on crude-oil imports
• Direct rupee settlements reduce current account deficit | - 24/7 market access (weekdays)
• High liquidity
• Global market accessibility
• Cost-effective trading | | Regulatory Framework | - RBI approval needed for large transactions
• Special Vostro Rupee Accounts with 22 countries
• Maximum transfer limit of USD 2109511.27 per year | - Less restrictive
• Forward contracts are available for up to one year
• Operates through global forex markets | | Primary Risks | - Limited convertibility
• Stricter regulatory oversight | - Transaction risk
• Translation risk
• Economic risk from currency movements |

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Looking ahead

The choice between INR and foreign currency payments depends largely on your specific business needs and transaction patterns. Foreign currency transactions offer wider market access and higher liquidity, though they come with currency fluctuation risks. Meanwhile, INR payments provide better protection against forex volatility and support direct settlements, albeit with stricter regulatory oversight.

Small businesses might benefit from modern payment solutions with lower setup costs, while larger enterprises often need robust systems that can handle multiple currencies. Your transaction volumes, geographic reach, and risk tolerance will shape the optimal payment strategy.

Consider these key factors when making your decision:

• Transaction size and frequency
• Geographic markets served
• Processing time requirements
• Cost implications, including fees and exchange rates
• Regulatory compliance needs

Both payment methods effectively serve different purposes. Foreign currency payments excel in global market access and liquidity, while INR payments offer stability and reduced currency risk. The best choice aligns with your business goals, operational requirements, and growth plans.

Disclaimer: This guide provides general strategies, not personalized professional advice. Consult healthcare/HR experts for tailored solutions. Results may vary based on individual implementation. We assume no liability for outcomes.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.