The B2B international payments sector is already huge and continues to grow. According to estimates, the B2B money transfer sector is 10 times larger than the B2C transaction volume and three to four times larger in dollar volume. Yet, despite non-bank alternatives making serious in-roads into the B2C sector, traditional banking still dominates the B2B landscape, leaving businesses paying high transaction fees for slow payments and high FX rates.
It’s clear that fintech start-ups have an opportunity to enter the market and shape the future of the industry. Fintechs are able to provide companies with financial services options to suit their specific requirements, challenging the out-dated status quo of using a traditional bank for every financial service required.
The poor relation
In terms of innovation, the B2B payments sector continues to lag behind the consumer market and much of the blame has been laid at the door of the traditional banks. Their accusers claim that high costs, combined with legacy systems that see payment transfers take days, rather than seconds, are reasons for a reluctance to change, on the part of banks. But could it be that the reality is somewhat different?
The fact is that the infrastructures and processes that underpin the traditional banking proposition are not built to make fast changes. The advent of digital payments means businesses and consumers expect instant, real-time payments, regardless of international borders. But the traditional banks – hampered by regulation and compliance and by their sheer size - aren’t equipped to change their processes as quickly as we would like.
Added to the slow movement on the part of banks, businesses are living in the shadow of current regulations, a hangover from the 2007 crash. This makes firms risk adverse and fearful of breaking the rules or trying anything new. Each country has its own rules concerning overseas payments and transactions. And for small businesses, navigating the rules of every market can be a headache they’d rather avoid.
Currently, making international payments incurs high average fees; combined with often high FX fees, as well as limited control over FX rates. Although many businesses want a better deal, they are reluctant to move away from the security and expertise that traditional banks offer, maintaining a status quo. Businesses seem far happier to live with high fees and slow transactions than consumers, partly because that’s the way it’s always been and partly because it’s ‘better the devil you know’. They are also, of course, often too busy to research new solutions, whilst many are not even aware that alternatives exist.
However, in a world where customer service and reputation are crucial to success, businesses can’t afford to allow slow payments to hold them back. They need a solution that can help them maximise international trade opportunities.
Innovation for change
Innovation is, therefore, essential. More and more small and mid-sized businesses now have a global reach, meaning they are working with customers and suppliers worldwide to drive growth. This is driving the demand for cross border transactions, which is estimated to grow to $38 trillion by 2020. Global trade flows reached $26 trillion in 2012, with forecasts expecting it to triple by 2024. Improving the B2B cross-border payments landscape will be crucial to meet this growing demand.
When something as simple as making or receiving an international payment stops businesses from competing on the world stage, it’s time to look for an alternative to traditional banking payments. Faster international payments at reduced rates, in any currency, give businesses a strategic advantage in a competitive market. And a solid payment solution also provides a firm foundation for growth into global markets, reducing the risk of payment delays.
Complement, don’t compete
Fintechs are in the perfect position to bring innovation to the international B2B landscape. With no legacy infrastructures, lower running costs versus incumbents and increased transparency, the new breed of challengers can finally get payments moving. But this isn’t just a question of charging less than traditional banks and cutting them out of the picture. In fact, banks remain extremely important, and are absolutely necessary for services such as deposits and clearing. Fintechs should therefore be looking to complement the services provided by traditional banks, and offering a specific solution that is carefully and expertly designed to meet a need not currently being met effectively, if at all.
By Anders la Cour, Chief Executive Officer, Saxo Payments.