Even though the banking sector has lent record amounts to small businesses during the pandemic, these same SMEs are increasingly turning to alternative finance providers. With smaller, more agile, digital-first players providing a range of new services to the small business sector, how can banks rekindle some of the love and loyalty they’ve lost to FinTechs?
by Yishay Trif, CEO, MoneyNetint
One answer is for banks to be ambitious on their customers’ behalf and, rather than just lending them the cash to stand still, help them expand into new markets by removing the cost and complexity that has always dogged cross-border payments.
An unequal revolution
Unlike multinational enterprises with their sophisticated e-commerce sites and worldwide banking relationships, the rest of the world has always been out of reach to the vast majority of SMEs.
While applications like e-wallets, real-time payment systems and credit cards are enabling businesses to sell their products and services anywhere in the world, many SMEs were unable to take advantage because it remained incredibly complicated, expensive and time-consuming to manage the minutiae of cross-border payments. Factors such as fast settlement, transparency, AML and regulatory constraints all push up the cost and complexity of international payments far beyond the resources of most SMEs.
As much as banks might wish to help SMEs spread their wings around the world, it’s uneconomical for them to open new payment channels between two different jurisdictions: they simply can’t justify the time and effort to establish bank-to-bank relationships in every one of the territories in which their customers wish to do business. But while that used to be true, there is now a new model of relationships between banks, one that’s powered by the blockchain revolution and the wave of new institutions harnessing this technology to build a new payments infrastructure for the whole world.
Blockchain: not just for Bitcoin
There’s an assumption that distributed ledger technologies like blockchain are limited to cryptocurrencies, but the most exciting (and relevant) applications actually involve traditional, day-to-day activities such as sharing information and conducting transactions.
Blockchain platforms like RippleNet and others were developed to address the challenges arising within traditional technological infrastructures. With use cases ranging from financial transactions to smart contracts, compliance to anti-money laundering, it’s no surprise that blockchain is transforming the world of legacy finance every bit as much as it is driving the new wave of crypto innovation. To deal with challenges in the traditional cross-border payments world, platforms like Ripple have developed standardised, decentralised infrastructure, with full visibility over fees, delivery and statuses, transaction route optimisation and overall cost reduction. In doing so, they are creating the technological foundation for a new breed of Payment Institutions and Electronic Money Institutions (EMIs) which are establishing a new kind of correspondent relationships with banks around the world, lowering costs, lowering barriers for entry and improving efficiency creating one global standardized scheme.
These financial institutions take complete control of settlement and distribution in multiple markets to create payments networks on which any business can piggyback to start expanding into new markets. And not just businesses, but banks too. Thanks to blockchain platforms like Ripple, instead of paying to use traditional payment rails like Swift, banks today can facilitate secure payments via electronic means that enable their business customers to pay in local currency without losing out on transaction fees or unfavourable rates of exchange.
Changing the narrative
One of the charges levelled at banks — it must be said, often unfairly — is that they are reluctant to update their systems, processes, and platforms. Even when banks are slow to adopt new technology, it’s rarely the will that’s lacking and rather the limitations of legacy infrastructure. But that cuts little ice with SMEs, especially when so many FinTechs are waiting in the wings.
The beauty of EMIs and other payment service providers is that they are doing all this work anyway: they are building a new worldwide financial infrastructure that, like the Internet itself, is open for anyone to use. Instead of being competitors, these businesses are all potential partners for banks, enabling them to open up new markets and revenue streams for SMEs. The best providers manage the entire payment cycle, from receiving payments to paying invoices and salaries, in a secure, inexpensive and user-friendly way.
Partnering with EMIs and payment institutions requires minimal (if any) upfront investment; instead, banks can start providing more affordable, reliable and faster cross-border payments services almost immediately.
Blockchain and other payments technologies can be the foundation for a new era of love and loyalty between banks and their business customers, but it’s important to think beyond the services and functionality they provide. If banks are to seize this opportunity with both hands, they should consider how they use these new capabilities to change the narrative around business banking.
As consumers, our expectation of what a bank should be has changed almost beyond recognition in the last few years; the same must happen for business customers. By choosing the right partners, banks have a unique chance to raise SMEs’ expectations, and to position themselves as their partners for success, not just in the high street at home but in every part of the global village.