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How to Pay International Contractors

By Frances Coppola

Many U.S. businesses use international contractors to help them deliver projects and sell goods and services in foreign countries. But paying international contractors can be a headache. International payments are traditionally slow and expensive, and there may be FX risks to be managed. The good news is that the growth of new payment forms means that businesses now have a range of options for reducing the costs and risks of paying international contractors.

There are many considerations for businesses deciding how to pay their international contractors:

 

  • How many contractors will the business need to pay? If there are only a few, then making individual payments may be the most cost-effective and efficient approach. If there are many, businesses may find bulk payments easier to manage even if they’re not the cheapest or fastest option.
  • How large are the payments likely to be? Some types of international payment have size limits.
  • Do the contractors have access to banks? In some countries, workers may not have bank accounts, or there may be no facility to draw down payments made via non-banks into bank accounts.
  • Can the contractors be paid in U.S. dollars, or will they expect payment in their own currencies? If the latter, then the business will need to obtain foreign currency to pay them, and will need to use multi-currency payment methods.
  • Which countries are the contractors based in? Some payment methods can be restricted to a limited range of countries.

Here’s a rundown of some methods businesses can use to pay international contractors, with their pros and cons.

 

Paying International Contractors via Wire Transfer

 

For many businesses, wire transfers are the simplest and least risky method of paying international contractors. The business can initiate them through a bank or a payment services provider, and the payment can go directly into the contractor’s bank account. They are typically in U.S. dollars, with the receiving bank converting to local currency at an FX rate of its choosing. However, wire transfers can also be used to make payments in foreign currency.

 

  • Pros: Can be used to make large payments. Secure (though relies on bank intermediaries).
  • Cons: Can take up to five days for the payment to arrive. Fees can be high (depending on the country and the currency), especially for small payments. Payments are irrevocable.
  • Outlook: Improving. International wire transfers typically use the international messaging service SWIFT, which is currently upgrading its service and plans to offer instant international payments to many countries by 2021.

Checks and International Money Orders

 

It might seem simple for businesses to send U.S. dollar checks by post to pay their international contractors. This can give contractors slightly more control of their FX risk than a wire transfer, since they can choose when to deposit the check. However, not all foreign banks will allow U.S. dollar checks to be deposited directly into local currency bank accounts, and even if they accept them, they may charge high fees. It might be wise to ask contractors whether they are able to accept U.S. dollar checks.

 

A better solution might be international money orders. This is the oldest type of international payment, and it is still a convenient, inexpensive and relatively secure way of sending money overseas. It is in effect a prepaid international check drawn on a bank. Usually, the business does not need to have an account with the bank to buy an international money order: the order can be purchased with a credit card or cash. The bank provides a physical paper draft, which the business mails to the international contractor. The contractor then can either deposit into their local bank account or cash it out, typically at a Post Office. U.S. international money orders are accepted in 27 countries.

 

  • Pros: Inexpensive and convenient for businesses. International money orders don’t need either the business or the contractor to have bank accounts. Relatively secure (subject to the reliability of postal services).
  • Cons: Cannot universally be cashed out (only 27 countries accept U.S. money orders, probably fewer for USD checks). Slow—may take days or weeks to arrive depending on postal services. Risk of it getting lost in the post. Inconvenient for the contractor, who must physically take the check or order to a bank or Post Office. FX spreads can be wide and there may be fees for cashing out. Low payment limit.1
  • Outlook: Declining, due to growth of digital and online international payment services, including wire transfers.

Digital Payment Services

 

Making international payments with digital app-based payment services (for example, Paypal) typically is straightforward, and the payments usually reach their recipient quickly. Both the business and the recipient must have accounts with the same digital provider, though these are easy to set up using an email account. They are available in many countries and some handle multiple currencies.

 

To pay an international contractor in USD using such a service, the business must pre-fund its account with USD, either by receiving funds (e.g., from a customer) or by bank transfer. Once the payment is made, the contractor must convert to local currency at an exchange rate of the digital provider’s choosing in order to draw down funds into their own bank account.

 

  • Pros: Fast, convenient and secure. Widely available. Easy to use.
  • Cons: FX spreads can be wide, and fees can be substantial (and not always clearly disclosed). In some countries, drawdowns from digital services to local banks are not yet available, so the contractor can only access the money by spending it from its digital account. Balances are not usually covered by deposit insurance. Transfer limits can be low (e.g., $10,000).2
  • Outlook: Growing.

Simultaneous Payments

 

Some payment service providers don’t wire or digitally transfer money to recipients. Instead, they accept payment from the business in U.S. dollars, and simultaneously pay into the contractor’s overseas bank account the equivalent amount in foreign currency. Payments are thus instantaneous.

 

Providers of simultaneous payments typically handle multiple currencies. However, local regulations can restrict payments in certain currencies. Simultaneous payments providers may publish a list of the currencies they can handle.3

 

  • Pros: Instantaneous, inexpensive and secure. Typically, a high transfer limit. Fees and FX rates may vary by country. Payment directly into contractor’s bank account. Some providers offer a bulk payments service.
  • Cons: Both business and contractor must have bank accounts. No cashouts. Payments restricted in some countries.
  • Outlook: Becoming mainstream.

Platform-based Payment Services for International Business Teams

 

Some payments providers specialize in platform-based payment services for businesses that use international contractors.

 

For example, Bitwage requires a business set up a Bitwage account and fund it using ACH, wire transfer, credit card, or cryptocurrency. Payments to workers with access to the platform are then made instantaneously from that account. FX rates can be close to mid-market rate.4

 

  • Pros: Fast and efficient. Fees and FX rates can be advantageous.
  • Cons: Contractor must have a bank account. Business must have an account on the platform, and contractors must join it. Payments must be pre-funded. May be a restricted range of currencies.5
  • Outlook: Developing.

Cryptocurrencies

 

Businesses can use cryptocurrencies such as Bitcoin, Litecoin and Ethereum to pay international contractors. Both the business and the contractor must have a cryptocurrency wallet. Payments can be instantaneous, but at times of high traffic may be a few hours.

 

  • Pros: Payments are fully secure, irrevocable, usually fast and can be made to any country. Fees vary with traffic but are usually low.
  • Cons: Payments must be pre-funded in cryptocurrency. Cryptocurrency prices are volatile, so maintaining wallet balances incurs FX risk. Contractors must either use cryptocurrency payments for spending or cash them out at a cryptocurrency exchange at the prevailing FX rate. There is no deposit insurance for cryptocurrency balances.
  • Outlook: Developing rapidly — new cryptocurrencies being created all the time.

The
Takeaway:

The international payments landscape is changing rapidly as new digital services and mobile apps are born and developed. Although wire transfers are still many businesses’ preferred choice for paying international contractors, there is a widening range of secure, fast and low-cost alternatives. Businesses may wish to keep an eye on developments in this fast-moving space.

Frances Coppola - The Author

The Author

Frances Coppola

With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.

Sources

1. “The 5 best ways to pay international contractors and employees abroad,” Transferwise; https://transferwise.com/us/blog/payments-to-foreign-contractors
2. Ibid.
3. “What countries can I send to?”, Transferwise; https://transferwise.com/help/11/getting-started/2571942/what-countries-can-i-send-to
4. “For companies,” Bitwage; https://www.bitwage.com/for-companies/
5. “How to pay Independent Contractors and Remote Employees,” Hubstaff; https://blog.hubstaff.com/best-ways-pay-outsourced-remote-employees/

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