Why do cross-border payments often attract higher fees?

Cross-border payments often attract higher fees primarily because they involve correspondent banks that charge fees. In many cases, when a payment is sent internationally, it may not go directly from one bank to another due to differences in banking systems, currencies, and regulations. Instead, the transfer is routed through intermediary banks, known as correspondent banks, which facilitate the transaction between the sending and receiving banks. Each of these banks charges a fee for their services, which includes the handling, conversion of currencies, and compliance with different regulatory requirements across jurisdictions. As a result, these accumulated fees contribute to the overall higher cost of cross-border payments compared to domestic transactions.

While elements such as lesser-known banks, complex documentation, and transaction amounts can play a role in the fee structure, the involvement of correspondent banks is the most significant factor driving the costs up in cross-border payment scenarios.