A new phenomenon - the underbanked FinTech

By Anders la Cour | 16 September 2016

Accelerator programmes, sandboxes and tech labs. These are all some of the latest buzzwords in banking and FinTech.  And they present some really exciting opportunities.  

FinTech accelerators are popping up across the world, from The Bank of England  to Nordea in Helsinki and Stockholm, and The VC FinTech Accelerator in partnership with The State of Arkansas to SuperCharger in Hong Kong. 

Regulatory sandboxes have also been introduced globally, including in Australia, Singapore and Abu Dhabi in the last two months alone. Plus the latest news in technology laboratories is the signing up of eight start-ups to the Asia-Pacific FinTech Innovation Lab. 

This is all extremely exciting for development and innovation in the banking and payments industry. But are these new initiatives ignoring some of the basic fundamentals of business operation? As FinTech start-ups continue to emerge on an almost daily basis, can they access the basic banking services they need? 

It seems that the supposedly ‘simple’ process of opening a bank account is becoming increasingly difficult for start-ups and even established payments businesses – especially outside of first world markets. And this presents a real risk which is quite remarkable in this day and age of a growing community of underbanked businesses.

A less attractive proposition

Companies looking to trade abroad generally need to open accounts in the geographical region in which they wish to do business. But the appetite of the incumbent banks to offer this service is waning. Regulation, competition, even terrorism are all resulting in the incumbents finding the basic bank account a less attractive aspect of their business. As a result, start-ups including the burgeoning world of FinTechs, and established payments businesses are left searching for a bank that is willing and able to help them reach their international trading potential, by allowing them to open the necessary bank accounts. 

With access to basic banking services becoming increasingly difficult to secure, there is a growing population of underbanked businesses. And this can seriously affect their growth both locally and globally. Regulation requirements also play a part in hindering cross border growth of businesses, and these high barriers to entry can stall many companies and ultimately reduce competitiveness across the board. 

When banks are able to help FinTechs with their bank account requirements, FinTechs can find that the bank’s sheer size, and restrictions due to legacy infrastructure, mean the bank is not able to be as flexible and responsive as the FinTech might require. By nature, FinTechs are smaller, nimble and quick to adapt to changing market conditions, and can find incumbent banks to be restrictive when it comes to trading internationally. The number of intermediaries required for a traditional international bank transfer adds significantly to the cost and time involved with the process.

Blinkered banking

Worryingly, many companies – of all sizes, from start-ups to huge corporations – are putting up with these high costs and slow transfer times when there are alternatives available. 

At Saxo Payments we recently carried out an exclusive study into the payment processes of issuers, acquirers, payment service providers (PSPs) and merchants , which provided some shocking figures. 63% of businesses are not satisfied with the length of time from payment being sent to payment arriving, yet haven’t switched provider. This is mainly due to a basic lack of spare time to invest in researching alternatives (31.5%), but these businesses also stated that they are hampered by limitations on the internal resources which would be required to make a change (25%).

In addition, less than 40% (38.2%) believe they get a competitive foreign exchange rate when handling cross border transfers but again have not switched provider. The reasons given mirror those above - 32% do not have time to look elsewhere and 28% are put off because the change is so unlikely to be implemented due to the resources required to make the switch.

Finally, opinions on whether business get a good deal in terms of the rates they pay to handle cross border transfers for customers is split relatively evenly – almost half (48%) do not feel satisfied, yet are putting up with the poor service from their current provider.

These businesses are sleepwalking through the payment and transfer process, paying fees which have a serious impact on their profit margins, and putting up with delays which could see them lose potential business or suppliers if they cannot make payments occur more quickly. The payment process may seem a minor detail in the running of a business, but payments are in fact a fundamental element which should not be neglected, lest the company risks losing out in a big way.

To bank or not to bank?

So what is a FinTech to do? They need a bank account in order to send and receive payments.  And even if they do find a bank able to provide a basic account, the high cost and slow transfer times associated with cross border payments through this account could make trading abroad unfeasible, which limits growth potential. Should the business keep looking for a cheaper bank account, or accept the limitations the account places on their company?

Thankfully, there are now alternative solutions available to businesses of any size. Whilst banks will remain necessary for certain banking services, such as deposits, not all payments and transfers need to be carried out through a traditional bank as they have in the past. It is possible for a company to use more than one provider, selecting the range of solutions which best meets their specific requirements.

Banks will always play an important role in business, but alternative solutions can be employed alongside, to complement the traditional banks’ offering and maximise profit potential and international growth. The most important thing is that companies of all sizes take the time to investigate these alternatives, rather than sleepwalking through high fees, slow transfer times and poor FX rates which with they have long been dissatisfied. It is time payments worked FOR payments businesses, not AGAINST them. 

By Anders la Cour, Chief Executive Officer, Saxo Payments.

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