A bank employee discusses services with a customer. The SME market presents particular opportunities … [+]
Over the past decade, the world of cross-border business-to-business payments has seen an acceleration of innovation, development and market shifts. Companies that have traditionally catered to the consumer space have increasingly moved into the sector, while those that are long-established have increasingly digitized and enhanced their offerings in response to changing customer expectations.
Although the banking sector has sometimes been slower to respond than fintechs, it has also expanded its B2B offerings. However, one area that remains under-addressed is small and medium-sized businesses.
Traditionally seen as generally having little need for cross-border transactions or sending values too low to use through a business product, SMEs have often fallen through the cracks when it comes to cross-border payments offerings. These businesses have typically been offered either stripped-down versions of business banking products or consumer products, neither of which meets the needs of a typical SME customer.
The industry is starting to realize the needs and potential of SME customers, and for good reason. My own company, FXC Intelligence, estimates that in 2023, SMEs will send $10.4 trillion in cross-border payments globally. However, much remains to be done to cater to this unique segment, especially as SMEs around the world increasingly seek their customers beyond borders.
The challenges of serving SME customers in cross-border payments
For banks, serving SME customers effectively can be challenging, not least because the total amount they typically send and the support required can put a lot of pressure on margins, particularly if in-person branch support is required. Therefore, responding effectively can be costly.
A potential solution to this problem is to provide a digital-led or digital-only service, enabling large numbers of SME customers to be served at scale. This approach has found success with some fintechs, with money transfer player Wise having a large and growing SME customer base.
However, not everyone in the industry agrees with this approach. In a panel I moderated at this year’s Sibos conference, one of the most important events on the banking industry calendar, speakers from Mastercard
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It is certain that certain types of SMEs will be better suited to a digital-first cross-border solution than others. Some SMEs tend to have high levels of digital expertise that extends to marketing, customer communications and beyond, making digital products a natural fit. However, more traditional businesses may be less comfortable with such solutions and prefer the assurance of agency support, particularly when it comes to sending large sums internationally.
Such divisions are also notable in certain industry verticals, especially as the nature of some businesses creates very different cross-border payments needs than others.
The global evolution of SMEs
One of the reasons why SMEs represent such a significant cross-border payments opportunity for banks today compared to the past is that many more SMEs now operate internationally than before. Changes in working practices, the rise of online marketplaces for products and services on both the consumer and B2B sides, and the continued proliferation of digital tools and infrastructure have all contributed to a world in which small businesses can look beyond borders more than ever.
For some, particularly – but not only – businesses that would previously have been located in Western countries, this results in an increasingly dispersed workforce. For these SMEs, employees are based in multiple countries or, in some cases, travel regularly, allowing these companies to access a larger talent pool without the constraints of distance from a physical location.
These types of companies are likely to be headquartered in a single country for operational reasons, but may consider themselves ideologically associated with multiple countries from the outset, or even without borders, interacting with multiple markets from the outset. Here, the expectation is that money can be sent, stored and received as easily as in a single domestic market, with businesses seeking to pay their employees and contractors locally while accepting and making payments across several corridors and currencies.
Similarly, some SMEs cater to an international clientele from day one, rather than reaching a certain size domestically before expanding internationally. This type of business is found all over the world, but particularly thrives in countries where domestic demand is low. These companies often sell through marketplaces or more generally online, and support their efforts with marketing and other related activities in their target markets.
This not only creates a need to enable them to access their payments, but also to make payments and even access working capital in different currencies in order to finance their business operations.
These needs can be complex and highly nuanced across specific verticals, and a wide variety of fintechs have developed to meet specific needs. However, banks have the opportunity to better exploit this market by identifying areas where they can add value to their SME customers.
SME payment opportunities for banks
Given the diversity of cross-border payments needs among SMEs, there is considerable scope for banks to create tailor-made solutions for this market that cost-effectively meet its specific needs.
In this context, there will likely be a growing need to develop more vertical-specific offerings, for which trends in digitalization and deliverability will require significant technological support. Current examples here include connectivity with accounting software or support for mobile options in markets where these devices dominate digital access, but some verticals could see solutions increasingly tailored to these goals to the future.
For banks, going directly to certain niches may not be the ideal solution, but the continued adoption of integrated financing for SMEs will likely be key in this area. Small and medium-sized businesses increasingly want and expect everything to be in one place, which means there are significant opportunities for platform-based gaming for this market – and for banks that feed them.
The B2B payments sector is likely to experience significant and continued evolution over the coming years, and this will be felt acutely in services aimed at SMEs. For banks, the time has come to focus more on this often neglected market and to develop serious products that effectively take into account the needs of SMEs.