By Jonny Nash, Global Head of EOR, Payroll & Pensions at Navro
For any business expanding internationally, the equation for calculating the cost of a distributed workforce seems straightforward: local salary benchmarks, employer social security contributions, and localised benefits. Finance and HR teams carefully model these variables to evaluate the financial viability of hiring talent abroad.
Yet, there is a substantial, hidden expenditure that’s not included in these spreadsheets. It is a cost that occurs silently between the time payroll is approved and the time the funds reach an employee’s bank account. This financial erosion is payroll leakage. It’s when a company loses money because of unclear foreign exchange rates, layers of banking fees, and hidden charges from middlemen.
In today’s global economy, where people work from anywhere and companies hire from all over the world, payroll leakage has become an expensive corporate blind spot. To really grasp how bad the problem is, finance teams need to dig beyond the overall numbers. They must examine the legacy systems they use for international payments, since this is where the problem lies.
Losses of up to 3% of a cross-border transaction
Cross-border payment infrastructure remains remarkably complex and expensive. According to McKinsey’s Global Payments Report, FX margins and cross-border transaction fees continue to rank among the largest revenue drivers in a global payments market that exceeds $2 trillion.
For a typical medium-sized company that does business across borders, this means the entity executing cross-border transfers usually loses around 1% to 3% of its money when exchanging currencies for international transactions. But when you look at the bigger picture of all cross-border transactions, the costs are even higher. According to The World Bank’s Remittance Prices Worldwide database, the average cost of sending money across borders is around 6%. This is a significant amount of money that companies are losing just because they need to exchange currencies. It’s like having a hidden fee on every international transaction.
When global payroll is forced to run through this legacy architecture, funds are chipped away at multiple friction points. Providers often execute trades using highly unfavorable retail rates rather than competitive mid-market rates, pocketing the difference. Furthermore, international wires rarely travel directly from the employer’s bank to the employee’s bank. Instead, they bounce through a chain of intermediary correspondent banks, each extracting a processing or handling fee along the way. Finally, suboptimal payment routing systems can direct currency through unnecessary, circuitous conversion paths, further compounding transaction costs.
The need for companies to regain control over international payroll costs
A common misconception is that the employee bears the burden of international payment friction. In reality, the employer absorbs almost the entire financial hit. Employment contracts and local labor laws dictate that workers must receive a guaranteed, fixed net amount in their local currency.
If a software engineer in Berlin is owed €5,000 net, the employer is legally obligated to ensure exactly €5,000 arrives in their account. If the payment route is inefficient, or should an unforeseen intermediary bank slice off a fee mid-transit, the payment arrives short. To maintain compliance and employee trust, the business must issue a top-up payment, incurring even more transaction fees.
Financial institutions make money at every stage of the process, while the employer covers the difference without a fuss. The problem is that this extra cost is not shown as a single item in the company’s financial statements, so it gets lost across different exchange rates and accounting entities. This makes it really hard to keep track of, check, and manage, which is probably exactly what was intended.
Opaque processes thrive in the absence of scrutiny. To reclaim control over international payroll costs, corporate treasury and finance teams must shift from passive participants to active auditors of their payment supply chains. That starts with demanding clear answers from financial partners to three fundamental questions.
First, what is the precise spread over the mid-market rate? Providers often boast about “low-cost” transfers while hiding substantial margins inside an inflated exchange rate. Finance teams must demand total transparency on the exact pip margin added to the real-time interbank rate.
Second, are payments routed via local rails or wire networks? Using SWIFT for cross-border wires can be problematic because banks in the middle may charge a fee. Companies should check whether their payment providers use local clearing systems such as SEPA in Europe or ACH in the US, which can help avoid these middlemen entirely. By using local clearing systems, businesses can save money and have more control over their payments. It’s an important thing to consider when choosing a payment provider.
Third, can we access a guaranteed “delivered amount” model? The most effective way to eliminate leakage variability is to adopt pricing models in which the funding currency and the final delivered local currency are locked in upfront.
Reclaiming money on payroll cycles
Accepting a 1% to 3% cut on international corporate spend as the unchangeable cost of doing business is an outdated mindset. Modern cross-border financial networks have evolved to the point where capital no longer needs to pass through multiple legacy banking layers or circuitous currency routes to reach an international team. By curating optimal, direct payment pathways and utilising localised clearing networks, forward-thinking organisations can bypass traditional intermediaries entirely.
Consolidating the payment chain dramatically compresses FX spreads and eliminates unexpected transactional friction. The financial benefits of optimisation are profound. For an organisation running multi-country payrolls, plugging payroll leakage can instantly reclaim thousands of pounds per payroll cycle, turning an administrative task into a strategic financial imperative.
