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- June 21, 2017
- Karla Friede
- Finance & AP
It used to be that only big companies did business internationally. In the past few years, increasing globalization, reduced trade barriers, the internet, and new business platforms such as eBay and Alibaba have made cross-border trade more accessible and affordable. Now it’s much more common for SMEs to also do business with suppliers internationally.
Along with this new opportunity come new challenges, such as payments. US SMEs buying from international suppliers are finding out it can be hard to pay them the right amount, and on time, using bank wires, which are the traditional solution for cross-border payments. Sending money by wire is a costly manual process that doesn’t scale. Fintechs are stepping in with payment solutions for this emerging market.
A new phenomenon
Paying suppliers internationally isn’t such a big deal for large multinationals. They typically have international offices with localized treasury functions. They set up local bank accounts to hold capital in different countries and pay employees and suppliers in local currencies. They may also have sophisticated currency trading and risk management programs. That makes sense when you’re doing a large volume of trade in a country or region.
It doesn’t make sense for SMEs just expanding supplier relationships globally who are making only a few hundred, or a few thousand payments a year. For most of these businesses, their bank is the first place they go for help making cross-border payments. But banks have not yet responded to this trend with a product that makes sense for these customers.
What banks generally provide is a portal that customers can use to send international wire transfers. Customers can set up their suppliers in there, but every time they want to make a payment, they must hand-enter the amount and the remittance information for each supplier.
Once the payment has been sent, A/P must hand enter that information back into their accounting system. Because the exchange rate isn’t transparent, they may not be able to see the real costs of that payment. Because there isn’t any remittance data that travels along with the payment, suppliers may be confused about how to apply the payment.
No visibility, but plenty of fees
With so much manual work, there are bound to be errors, and these can be harder to get to the bottom of than domestic payment errors. First, you don’t have any visibility into the payment from the time you enter it into the portal until the time it lands. Neither does the bank. The money is going through a chain of corresponding banking partners in different countries. You may not know that the payment failed until you get a call from the supplier asking where the money is. Then you have to figure out where in the process something went wrong. It can be a long process, and many banks will actually charge you if they have to investigate a payment.
That’s on top of whatever the bank is charging for the transaction. That’s usually difficult to figure out, but it’s safe to say that most SMEs are not getting a very good rate because cross-border payments have long been a source of high profitability for banks. Banks charge more on cross-border payments than they do on card processing—somewhere around 300 basis points, which is a high number when you consider that the average international B2B transaction is in the $5,000 to $20,000 range. In my experience, no one really questions the cost because they either don’t understand the foreign exchange rate they’ve been charged, or they don’t believe there are any alternatives.
All told, it’s a painful, expensive process that creates unnecessary friction for burgeoning cross-border trade. There are better Fintech alternatives, and here’s what SMEs should consider when evaluating them:
- Initiation process. It should be simple to initiate cross-border payments right from your accounting system using the same automated workflow as you use for domestic payments, without any manual effort.
- Fee transparency. Many banks tell you that you can send wires internationally for free. But banks pay fees to other banks in this process, and they’re going to make money on the transaction. If it’s not from the transaction fee, it’s going to be from the currency translation rate, which is harder for the customer to get a handle on. If you can't clearly see the currency translation rate before you send the money, that's a good indication that you probably don't have the best rate. Look for a provider that gives you transparency into all fees before you make the transaction.
- Support. Banks have had cross-border payments all to themselves for a very long time, and as a result, it’s very opaque market. Manual payment initiation and data entry into the accounting system, hidden fees and lack of support aren’t such a big deal if you’re only paying a handful of vendors internationally. But once you are making hundreds or even thousands of payments, it becomes a huge pain point.
It’s not just the direct costs. Companies report that cross-border payments account for just 20 percent of payment volume but typically take 80 percent of A/P time. That’s simply not scalable. You can’t just keep throwing people at this as you expand globally.
Eventually, I think there’s potential for blockchain technology to really transform the market for cross-border payments, and that’s one of the reasons you see so many banks investing in it. They don’t want to lose this business, and they’re moving as fast as they can to keep it away from fintechs. But, I think we’re still three to five years out from a robust, complete blockchain solution for cross border payments, and that’s not helpful if you’re trying to grow your business globally right now. Fortunately, the are alternative Fintech solutions out there now that can provide scalable cross-border payments now, freeing SMEs from at least one obstacle to achieving their global ambitions.
Karla Friede is CEO and co-founder of Nvoicepay. She has also held marketing positions at Zevez and GeoTrust, and was co-founder and consultant for the Ascent Group.