In today’s technology-driven world, we have seen manual and fragmented processes become more efficient through data visibility across an enterprise. This is especially evident within the world of payroll, as technology is helping to move many global organizations away from segregated human capital management (HCM) programs to a more centralized model. This greater overall access and visibility has helped payroll managers better organize their activities to reach their goals of ensuring timely employee paychecks.
While this is a positive step forward, payroll managers still face numerous challenges when organizing a global payroll. Be it exchange rates, differing tax regulations, or coordinating with finance for funding, they must consider a significant number of factors every time they organize an international payment. They also must take into account any language barriers or important cultural nuances surrounding employment in foreign countries that may affect the process. Consequently, despite substantial positive changes, with payroll departments operating lean and in certain circumstances working between the bureaucracies of two departments, HR and finance, it is remarkable that international employees ever receive their salaries at all.
Given the complex and comprehensive factors that consistently challenge payroll managers, it is important to identify the four key pitfalls when navigating international payroll and their potential solutions through the information their HCM platforms provide. The four key pitfalls navigating international payroll are the following:
1. Lack of Transparent Rules and Regulations
Every country has its own unique payment routing rules and regulatory requirements. From appropriately formatted International Bank Account Numbers (IBAN) and tax IDs to providing specific supporting documentation, the variations in information required for each country are innumerable. With limited visibility into most countries’ activities, their payment requirements have frequently been extremely unclear, obliging companies to decentralize and work with in-country providers. Moreover, in some countries, this information is compulsory, meaning an omission of even one item can equate to an incomplete payment altogether. As a result, delays and investigations become inevitable, leaving the employee without a paycheck, the organization with significant manual overhead costs, and staff with overall wasted time.
With significant advancements in payroll technology solutions, Deloitte’s Payroll Operations Survey found that 56% of North American companies now outsource the hosting, maintenance, and support of their payment technology in order to benefit from a more centralized model. This allows them far better visibility into both payment requirements and any restrictive regulations their organizations might need to take into account, such as the obligation to hold a local bank account. A robust payment solution can now offer the real time country bank validation tools necessary to navigate the rules and regulations set forth by each country. Supported by the technology provider’s operational and compliance teams, these validation tools can indicate whether a cross-border payment is possible to the country requested and provide the supporting data necessary to perform it. Prompted in this way, payroll managers can ensure they acquire and provide everything they need before any payment is sent. Payroll can then be delivered in a timely and effective manner during each payment cycle, while the company has better visibility into both the payroll transactions and its overall human capital management.
2. Risks of Foreign Exchange
Global organizations are no strangers to the inherent volatility of the foreign exchange market. With each currency affected by monetary, economic, and socio-political issues in its country, businesses operating overseas inevitably encounter market fluctuations at some point. The payroll manager and finance share the role of navigating through these fluctuations, ensuring both the company and its international employees are protected from a decline in the value of their currency. One key to achieving this is understanding the exposure in local currency well in advance of making international payments and mitigating that exposure on a monthly, quarterly, or annual basis before each payroll cycle. Technology has better prepared the payroll manager to work with finance on the known exposures and determine the best blend of solutions for their needs, such as a natural hedge of receivables and payables, purchasing a portion at spot, and/or using hedging instruments such as forward contracts.
The right HCM technology coupled with the right financial provider will deliver visibility to forecast exposure while also helping to build and mitigate foreign exchange risk through a flexible risk management strategy, employing a suitable combination of spot and forward contracts. In addition, the financial provider’s platform should provide tools to integrate with the HCM or financial software to eliminate manual intervention upon execution of delivery.
3. Inaccuracy of Manual Intervention
Deloitte’s survey also found that 70% of North American companies maintained their payroll in-house. However, allowing a department to manually key-in employee information, set up payroll templates, or personally execute each individual payment means that errors are unavoidable. This is doubly true when organizing international payroll. Communicating with numerous international banks and navigating complicated validation procedures requires even more manual entry of complex information than do domestic transactions, increasing the likelihood of costly human error.
What is the key to eliminating this expensive issue? Integration. The right payment technology or payroll solution will integrate directly with an organization’s existing enterprise resource planning (ERP) system or HCM platform. The solution should provide the tools to validate through an employee-facing gateway or through single file integration to the platform with validation of multiple currencies and the flexibility to manage international payroll through different bank accounts. A more straight-through process will reduce the number of errors by substantially decreasing the hours spent manually intervening with payment investigations or correcting employee information.
4. Hidden Costs of International Payroll
When branching out into new regions, payroll populations tend to be smaller. This can make the decision between establishing in-country banking versus a cross-border transaction more difficult. Opening, maintaining, and reconciling an in-country account can be cumbersome, especially in emerging markets such as Latin America and Africa. In addition, opening and operating new foreign bank accounts can present added expensive fees, alongside supplementary costs piled on by intermediary institutions that the bank deals with when processing international payments.
Cross-border transactions are easier to establish through a financial provider, especially with smaller populations. However, payroll managers are frequently surprised by expenses that have not been clearly defined, especially with significant pricing mark-ups on foreign exchange transfers. Once all of these hidden fees have been extracted, the overall cost to an organization can be extremely hefty.
Today’s payment technology has the ability to bypass all of these costly pitfalls. A reliable global payment solution provider will work with an organization to ensure that transparent pricing with no exurban foreign exchange (FX) fees is built into its service agreement. They also will be able to deliver payroll through numerous channels, including SWIFT, low-value delivery (ACH, SEPA, BACS, etc.), and other in-country channels via a strong network of international banking relationships. Eliminating the need to create a new bank account, in turn, eliminates the need to work with multiple banks, each wanting a cut of the funds.
The Bottom Line
Today, an efficient global payroll solution is possible with the help of technology. Finding the technology with the right tools and learning to use the information provided by those tools will help mitigate the effects of these four key global payroll pitfalls. Yet it is also important to remember that there is no one-size-fits-all solution when managing a global payroll. In this information age, with the internet at our fingertips and new innovations arriving every day, we have grown to expect clear-cut, automated solutions to our problems. When it comes to making payments overseas, however, every organization’s needs are unique. It is, therefore, crucial for the success of a company’s international expansion to partner with multiple experts, including a global payments provider, payroll consultants, tax consultants, and legal consultants. This will help ensure that the organization chooses a solution with the flexibility and scalability to tailor its approach to all of the current and future needs of their global human capital management program.
In the end, while technology provides the tools to deliver international payroll promptly and accurately, only through high-touch customer service and specialist compliance support can customization effectively be achieved. The proper technology paired with reliable human expertise is the true equation to avoiding international payroll pitfalls.
As published in the American Payroll Association’s PAYTECH Magazine.
To learn more connect with us at firstname.lastname@example.org
“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.
Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.
Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.
This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.
Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.
Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.
FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.
This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.
Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.
© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.