CategoriesAnalytics Cloud Digital Banking IBSi Blogs IBSi Flagship Offerings Open Banking

Digital Disruption: How FinTechs Are Outpacing Traditional Banks in Trade Finance

Trade finance has always been pivotal for global trade, shoring up global supply chains and addressing liquidity concerns. However, there has been a significant shift in its landscape in recent years. While traditional banks once dominated trade finance, FinTechs are rapidly ascending due to several prevailing industry trends.

FinTechs: Pioneers of a Digital-First Era

As in many other industries, the COVID-19 pandemic expedited the digital transformation of the trade finance sector. Data from Statista highlights that the trade finance deficit recently rose to $2 trillion, up from $1.5 trillion before the pandemic.

As the world’s trade infrastructure felt the strain, it became clear that established systems and conventional bank services were lagging behind, enabling the growth of the trade finance gap. Many traditional banks struggled to adapt quickly enough, causing disruptions and delays in trade financing processes.

Enter FinTechs – with digital, cloud-centric solutions that boosted the accessibility of trade finance, which particularly benefited SMEs in emerging markets. In contrast to banks, burdened by paperwork and red tape, FinTechs harnessed innovations like open banking, digital data capture, and cloud-based storage.

By Oliver Carson, CEO and Co-Founder of Universal Partners

Oliver Carson, CEO and Co-Founder of Universal Partners

This gave way to a much more refined, agile process – introducing a modern approach that has effectively addressed the inefficiencies of traditional trade finance, heralding a new era for the industry.

Tailored Financial Solutions for SMEs

For decades, traditional banking practices, with their rigid criteria and legacy systems, have often disadvantaged SMEs. The innate nature of SMEs, characterised by limited credit histories and sporadic cash flows, has frequently resulted in declined trade finance applications.

However, FinTechs recognised an overlooked opportunity. Rather than viewing SMEs through the same lens as traditional banks, FinTechs delved deeper into understanding their unique needs, challenges, and potential.

FinTechs saw SMEs’ requirements and developed tailored financial solutions, such as non-recourse financing. This not only placed the responsibility of payment recovery squarely on the financiers but gave SMEs the crucial working capital they needed without the usual risks.

The success of this approach is evident in the numbers, with FinTechs able to offer a faster, more cost-effective digital service. According to Bain & Co’s projections, by serving these previously underserved SME sectors, FinTechs could earn an extra $2 billion annually in trade finance fees and potentially drive trade volumes up to a staggering $1 trillion by 2026.

A Battle of Agility and Reputation

Traditional banks, once dominant, are now facing challenges in the trade finance domain. Regulatory measures like the Basel III framework, designed to ensure financial stability, have inadvertently decreased the operational flexibility of banks, making it harder for them to adapt swiftly to changing market dynamics.

Compounding this is the banks’ cautionary approach toward SMEs, and this conservative stance has not only limited the growth potential of these enterprises but has also dented the banks’ image as holistic financial service providers.

In contrast, FinTechs have shown remarkable agility in adapting to the current market needs. Their strategies, inherently more favourable towards SMEs, have filled the void left by traditional banks. By leveraging the latest technological advancements, FinTechs have introduced enhanced security measures and streamlined operations, providing a more user-centric experience.

While banks recognise the evolving landscape and are making concerted efforts to innovate with platforms like ‘we.trade’ and ‘Trade Finance Gate’, there’s a palpable sense the institutions are trying to regain lost momentum. The challenge is not just about introducing new tools or platforms but fundamentally reshaping their approach to be more inclusive and adaptive, much like the FinTechs they now compete with.

In summary, FinTechs, with their proactive models and emphasis on customer needs, are continuously making their mark in the trade finance landscape. For traditional banks, the onus is now twofold: not only to innovate but to re-establish the trust of SMEs who now see FinTechs as more dependable allies. As the financial world moves ahead, agility, innovation, and customer-centricity will be at the heart of success, and at present, FinTechs are leading the charge and will find themselves the trusted partners of the global giants of the future.

CategoriesBanking as a Service (BaaS) Exclusive Finance IBSi Flagship Offerings venture capital

10 Reasons why your FinTech Needs the Transformative Power of Labs & Incubators

During the recent FinTech Happy Hour, hosted by Cedar-IBSi FinTech Lab and Cedar Capital, founders, investors, and CXO executives from FinTech, BankTech, and BFSI institutions, came together to exchange ideas, network, and collaborate on Everything FinTech!

One topic that echoed in the room was the importance of labs and incubators in India and the role they can play for FinTech companies.

In the rapidly changing FinTech landscape, the demand for guidance, mentorship, and strategic connections is essential. The Cedar-IBSi FinTech Lab is one such powerful catalyst driving these ideas towards unrivalled success since 2018 when it was set up in Dubai’s Internet City. The Lab not only cultivates invaluable mentorship but also forges highly lucrative connections within the FinTech industry.

Talking about the potential of labs and incubators, Geeta Chauhan, Co-founder, and CEO, HiWi noted, “Incubation and lab programs are particularly useful for startups with no experience or who are starting from scratch. FinTech(s) can take advantage of mentorship programs, a set of contacts and funding that ensure they get the right foot in the door.”

Here’s how labs and incubators are revolutionizing FinTech in India.10 Reasons why your FinTech Needs the Transformative Power of Labs & Incubators

  1. Mentorship and Guidance: Labs and incubators provide access to experienced mentors and industry experts who can offer valuable guidance and insights. This mentorship can help FinTech startups make informed decisions and navigate the complexities of the financial industry.
  2. Validation and Credibility: Being a part of an established incubator or accelerator program can add credibility to a FinTech startup. It validates the business idea and can make it easier to gain trust from potential partners, customers, and investors.
  3. Networking Opportunities: Accelerator programs like the Lab offer an extensive network of contacts in the FinTech and financial services sectors. Startups can connect with potential customers, partners, and investors, which is essential for growth and success in the FinTech industry.
  4. Product Development Support: Many FinTech startups need technical assistance and support for product development. Incubators, such as the Cedar-IBSi FinTech Lab can offer access to development teams, resources, and infrastructure to help in building and refining products.
  5. Market Research and Validation: Incubation programs often provide access to market research data and opportunities for market validation, enabling FinTech startups to fine-tune their offerings to meet customer needs.
  6. Fundraising Opportunities: Incubators and accelerators can introduce FinTech startups to potential investors, refine their pitch and business model, making them more attractive to investors. Many incubators and accelerators provide direct funding to early-stage startups in the form of grants, equity investments, or loans.
  7. Cost Savings: Shared office space, resources, and infrastructure can significantly reduce the operational costs for startups, allowing them to focus their financial resources on product development and growth.
  8. Skill Enhancement: These programs often offer training sessions and workshops that help FinTech entrepreneurs, and their teams enhance their skills in various areas, including marketing, sales, and leadership.
  9. Risk Mitigation: By providing a supportive ecosystem, labs and incubators can help FinTech startups identify and mitigate risks early in their development, improving their chances of long-term success.
  10. Market Entry Assistance: For FinTech startups, entering the Indian market can be challenging due to the diverse customer base and regulatory environment. Incubators can provide market entry strategies and assistance.

The Cedar-IBSi FinTech Lab is a dynamic entity propelling FinTech companies towards their target market. It has a proven track record in assisting 35+ FinTechs since 2018, offering market access and collaboration; product and market intelligence via the Cedar-IBSi Platform; visibility via exclusive in-house, global events, leadership interviews, coverage via the IBSi Podcasts and in the IBSi FinTech Journal; Acceleration and access to interesting co-investment opportunities via Cedar Capital.

For FinTechs in the Middle East & India, the Cedar-IBSi FinTech Lab is not just a place for mentorship: it’s a hub. A hub that fosters a culture of creativity, facilitating FinTech startups to think outside the box and develop groundbreaking solutions.

Labs & incubators are thus the perfect partners in your FinTech journey to realize the true power of transformation, innovation, growth, and limitless possibilities.

CategoriesAnalytics Banking as a Service (BaaS) IBSi Blogs IBSi Flagship Offerings

What’s the difference between BaaS and embedded banking? Quite a lot

The problem with a loosely defined term is that its meaning can become stretched. Anyone who has described a stadium-filling act such as Ed Sheeran as “indie” because he plays a guitar is guilty of this.

Banking-as-a-Service (BaaS) is just such a loosely defined term.

Some providers have stretched the term to encompass services such as Open Banking, card platforms, and APIs. This confusion is further exacerbated when aggressive marketing campaigns overlap BaaS with another fast-growing term: embedded banking. Using one term to describe all of these disparate services makes about as much sense as using the same word to describe a multi-platinum-selling artist and the band playing to three people in the local pub.

By John Salter, Chief Customer Officer at ClearBank

John Salter, Chief Customer Officer at ClearBank

 

Confusion over these terms is already widespread. According to Aite, a third of fintech providers do not believe there is any difference between embedded banking and BaaS.

There are, however, important differences between BaaS and embedded banking. Businesses need to understand the differences between these two concepts if they are to understand their own responsibilities, especially around governance and compliance, and what it could mean for scaling up or adding new features in the future.

Breaking it down: What’s the difference?

Despite its name, BaaS does not necessarily mean working directly with the holder of a banking license or that the services provided require a license. Instead, providers offer banking-related services and infrastructure, sometimes on behalf of a licensed bank, to firms including fintech startups, e-commerce platforms, and even other financial institutions.

BaaS is a “push” model. A banking product is created and offered “as a service” to a potential user. BaaS is the distribution of banking products to financial institutions and non-financial institutions. For example, non-bank players like Uber or Lyft work with a BaaS provider that is responsible for payments, cards, accounts, and loans. However, who is responsible for compliance and governance can vary between providers and use cases.

On the other hand, embedded banking is on the “pull” side. This simply means that financial services and products are embedded into financial or non-financial platforms, such as e-commerce and mobile banking applications. Embedded banking is the provision of a banking service directly from the holder of a banking license and embedded directly into the user experience. A typical example would be the Buy Now Pay Later (BNPL) functionality online shops have included at the point of purchase for customers to access installment payment options.

Do businesses need to understand the difference?

Should anyone care about this? This is a good question as most businesses won’t start with the question of whether they want BaaS or embedded banking. In fact, they’re unlikely to ask this question at all. Instead, they will have specific requirements for banking or banking-like services, and approach the right provider with those needs in mind.

So, who cares? Aren’t we simply over-analysing the technicalities?

It may seem so, but there are important implications for regulation and who is responsible for compliance.

BaaS providers may have a banking licence, or they may hold an EMI licence. Embedded banking providers are, by definition, holders of a banking licence. It’s important when entering into any agreement that the customer-facing business understands the regulatory nature of the agreement—who is responsible for compliance and KYC, how funds are safeguarded, and whether they are protected by a full banking licence. There is already concern from regulators around where consumers’ money is held and how safe it is—is there enough transparency? Knowing the difference is important, especially when the “gold standard” is when funds are held by a bank in an embedded solution.

Businesses aiming to enhance their offerings with financial services have the potential to create differentiated services that set them apart from the competition. But working with the right partner is crucial to success. When evaluating a partner, businesses must consider the range of services on offer, technology implications, compliance, security, and more.

So, a clear understanding of the differences between BaaS and embedded banking will make it easier for any business to decide what is right for them and their customers.

CategoriesAnalytics IBSi Blogs IBSi Flagship Offerings Payments

Redefining the relationship between PSPs and merchants

The current relationship between merchants and Payment Service Providers (PSPs) is ripe for a reset. Merchants are grappling with consumer demand for greater payment flexibility whilst managing costs amid market turbulence and rocketing inflation.
Now acquiring has become a commodity, PSPs are struggling to justify higher margins and feel extreme pressure from players like Adyen, Stripe, and Checkout.com, who are aggressively going after the small-to-medium-sized SME merchant base. A race to the bottom on pricing is no longer working.
But this doesn’t mean there’s no hope for the future. If PSPs can expand the services for merchants to turn a pure acquiring relationship into a full banking one — innovation and growth opportunities are unlocked on both sides.

By Ivo Gueorguiev, Co-founder and Chairman of Paynetics

Ivo Gueorguiev, Co-founder and Chairman of Paynetics

The next level

Being a PSP in the current climate has become increasingly difficult. Pure acquiring services have become a commodity where client loyalty is short-lived, and margins are under pressure. Add increasing regulation, ever-changing card scheme policies and the growing redundancy of hardware Point of Sale (POS) — a pure acquiring relationship can feel like more pain than profit.

PSPs looking for longevity need to rethink their relationship with merchants, as they won’t win by continually under-pricing their competition and endlessly selling POS terminals. PSPs should instead consider how to compete with the big players, either banks or large acquirers, and add value to merchants.

Reducing merchant churn

An answer is moving from a pure acquiring relationship to a complete banking relationship. PSPs can offer bank accounts and corporate cards to bring down the acquiring cost and give immediate settlement to customers. The result? Increased margins and sped up transactions for merchants, enabling PSPs to draw in new customers, improve loyalty and reduce churn.

When a corporate card is issued within the same environment as card acquiring, merchants no longer have to wait three business days to move money from an acquiring account to a bank account. If a merchant can get a corporate card from their PSP, they can pay for their supplies and earn cashback, reducing the supply cost.

Another way PSPs can add value is by offering further lending facilitation through products like merchant cash advances reserved for banks and direct-to-merchant players like Viva Wallet. PSPs can leverage the transaction data to help lenders have a more precise underwriting of merchants, resulting in laser-sharp customisation of the loan profile and improved pricing.

Embedded finance to help PSPs step up

Fortunately, PSPs don’t need to figure out this new banking relationship alone. State-of-the-art instruments are available to providers wanting a deeper merchant relationship and additional revenue streams.

With the right financial services partner, PSPs can now offer fully functional International Bank Account Numbers (IBAN) accounts, open banking connectivity, and provide corporate cards. For instance, a fully functional IBAN account offers the same facilities as a regular bank account. Yet, with lower administrative costs and reduced complexity, making multi-currency, cross-border payments a breeze. Then there are the benefits of facilitating open banking. It enables merchants to embrace automation and leads to greater financial transparency by giving consumers more choice and control.

Another area of innovation is the latest software POS solutions, which only require a phone to accept card payments, leaving behind clunky, expensive hardware. Such features provide distinct advantages to merchants.

Benefits to both parties

Offering a suite of services enables PSPs to step up and compete with commercial banks and direct to merchant players so they do not get pushed out of an increasingly crowded field. In payments, doing one thing very well no longer cuts it — providers must offer more services to the same high standard.

Yet pursuing a complete banking relationship with PSPs is also in a merchant’s best interest. They gain a more user-friendly banking relationship, lower acquiring costs, immediate settlement and access to working capital.

Change is possible thanks to digital financial innovations and is desirable due to the significant economic benefits it could bring. A complete banking relationship benefits PSPs and merchants greatly, helping both maintain an edge in an increasingly competitive market.

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