SMEs can no longer rely on tradfi to meet cross-border needs

SME Publications/ SME XPO 2024

By Laurent Descout, below, Founder and CEO, Neo

There is an increasing demand for payments to be reconciled faster, particularly from SMEs that are conducting more cross-border payments than ever. Here, I explain how new technologies are leading SMEs away from their traditional banking partners towards fintech disruptors.

WHILE cross-border payments have improved for consumers, standards in the B2B market have largely remained the same. Payments are still slow, fees are hidden and tracking is largely non-existent for many firms. SMEs are an underserved part of the market that is increasingly conducting business with suppliers and customers overseas, thanks to digitalisation and the growth of eCommerce. As a result, they particularly struggle when it comes to cross-border payments.

Last year, a borderless payments report from Mastercard highlighted that 77% of SMEs saw above-global-average growth in online sales and over half (51%) are doing more business overseas. Not only that but 58% of SMEs are making more cross-border payments now than before the pandemic and this trend is expected to continue.

Traditional finance firms are finding it increasingly difficult to meet this growing demand, let alone scale to meet an increasingly digitalised global market. This is in part due to the slow and costly processes of working with traditional banks. Unlike global firms, SMEs can’t afford to wait days for payments to land in their bank accounts.

However, new technology is emerging which can offer SMEs secure, speedy payments as well as a full view of their treasury operations. This is levelling the playing field and allowing SMEs to grow and compete globally.

The difficulties of working with tradfi

When working with traditional corporate banks, opening an international bank account is a difficult, long and painful process – and the subsequent transactions can take days. As SMEs continue to expand and do business in different countries, many end up having different accounts for each country or currency, which adds complexity. If a business needs to onboard a supplier in a different market, it can take weeks to get the infrastructure in place. Time and money which SMEs simply can’t afford to lose out on.

When making cross-border payments, banks also don’t just heavily mark up the exchange rate and the FX margin, but they also inflate the overall price, hampering profits. Our research of SMEs with cross-border operations found that this unfair pricing (55%) was their main pain point when working with banks.

Worst of all, many banks offer limited and incomplete payment information, making it difficult to reconcile payments. This has led many SMEs to look for new approaches and partners for their international business needs.

How technology is making a difference

Today’s plethora of fintechs offer alternative solutions to payment pain points that traditional banks simply can’t. And more and more are exploring alternatives, our research found that 92% of CFOs and treasurers at SMEs with cross-border operations are having conversations about virtual account solutions.

The emergence of virtual or digital wallets is allowing businesses to make same-day payments. These, in turn, enable businesses to organise their funds and store multiple currencies, ready for making rapid payments or a currency exchange.

For example, using just an International Bank Account Number (IBAN), SMEs can set up an international account with their own multi-currency, allowing them to manage cash flows and view trading data, all in one place.

Fintechs have helped many SMEs address regulatory and political concerns that Brexit had upon payments. By helping SMEs set up EU-based accounts they were able to make cheaper transactions through SEPA and avoid the complex, drawn-out process of directly creating an EU business account.

Another issue for SMEs is that traditional banks are less likely to take on clients who need predominately USD-dominated accounts due to the risk of market volatility. Because digital wallets can support multiple currencies, SMEs whose businesses require the use of dollars over or in addition to euros and pounds can set up these accounts with relative ease and receive and convert various currencies seamlessly.

Not only are cross-border payments being made easier, but digital wallets also provide enhanced security through encryption, multi-factor authentication and real-time fraud detection mechanisms – securing the business’ activity and assuring international customers that their purchase is being conducted safely.

The democratisation of cross-border payments for SMEs 

Traditional banks simply can’t compete with the faster, easier, and more secure service that fintechs provide, and many SMEs are beginning to rethink their traditional banking partnerships as a result.

There is a multitude of companies that can provide SMEs with a single holistic view of the entire payment and cash flow activity through one platform. Opening accounts in hours rather than months, getting up-front transparency on costs, making same-day payments through virtual wallets, and accessing different currency accounts on the same platform.

SMEs no longer need multiple bank accounts in different countries to operate internationally, or to rely on traditional currency conversion methods, which can be extremely costly and time-consuming.

As the need for cross-border payments grows, so too do new fintech advancements that can help SMEs safely, quickly, and successfully expand their business.

SME Publications/ SME XPO 2024