Having just released member research on the subject of B2B cross-border payments, I figured it is good timing to comment on this posted blog in Finextra. The piece was written by a member of Form3, a 2016 startup based in London that offers payments solutions. The point is made in the first paragraph.
‘The economic scale of the SME market is substantial, contributing £2.0 trillion (52%) a year to the UK economy alone and growing. But for SMEs wanting to trade internationally, they’re met with highly complex infrastructure and a myriad of lenders, brokers, FIs, processes and systems in place that lack sufficient integration or none at all.’
The piece goes on to point out that the traditional methods of making cross-border payments do not work for SMEs (it’s not great for almost all business sizes, by the way) given the lack of speed, transparency, and relatively high cost. Although most cross-border payments are initiated as wires, which have a relatively high unit cost, smaller businesses make smaller payments, so the cost to value ratio is much higher. For example, if you need to make a $1 million payment and the wire costs $30, your ratio is 0.003% versus a 0.12% ratio for a $25,000 payment. Such marginal costs can make a big difference annually to an SMEs bottom line.
‘There is a stream of new products or partnerships being publicised by financial institutions to improve the user experience across both domestic and international payments…One common theme rings true, the existing system is failing to meet the demands and realities of cross-border payments, especially for SMEs. In a market that continues to grow and now worth over $22 trillion , the challenge is to make international payments more accessible to businesses and set a new standard of trading without borders…What businesses are screaming for is faster access to data, fewer intermediaries, transparent transaction times and most importantly, reasonable fees.’
However, the author goes on to suggest that banks can ease the burden on SME clients by collaborating with fintechs for not just payments, but other portions of international trade services, including cash management, risk, FX and trade finance. All good points and worth a quick read.
‘Financial institutions can embed this capability into their existing customer channels and mobile apps. Once connected, financial institutions will then be able to provide services that traditionally only global organisations and specialist Fintechs could offer to their SME customers.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group