The economic scale of the SME* market is substantial, contributing £2.0 trillion (52%) a year1 to the UK economy alone and growing. True start-up culture and a passion for entrepreneurship have inspired a boom of new fast-growing tech firms, sole traders and entrants to a variety of markets.
Historically, banks tend to have little appetite servicing SMEs through their existing legacy avenues as they are designed to service larger enterprise clients with deeper pockets. Over the last decade, we have seen the rise of so called Money Service Businesses (MSB) that are servicing a growing demand from SMEs wanting to trade internationally with a more tailored level of service.
Companies such as HiFX, Cambridge Payments, Global Reach, Alpha FX and AFEX have demonstrated that price and service certainly outweigh the loyalty a company holds to their bank as they increased their market share in the FX market.
The international opportunity for financial institutions
The yearly volume of SME and MME transactions demonstrates the wealth of opportunities for new entrants and re-entrants into the FX and international payments market. However, an agnostic and SME focused international payment engine is something that still eludes traditional banks as other products such as lending, deposits and mortgages take priority.
As the market develops, SMEs and consumers are becoming more aware and are now looking for one complete solution, rather than using multiple lenders, brokers and the banks, that enables them to trade seamlessly across borders. SMEs cannot typically use their financial institution of choice as many FIs do not have this capability at their disposal.
Banks are starting to wake up to the fact that they are missing a big market opportunity and some are starting to develop their separate digital solutions.
From an international perspective these solutions are not necessarily focused on satisfying an SME’s every need, instead, they seem to be a quick response to hemorrhaging SME clients to MSBs across multiple services. Challengers such as Atom Bank, Oaknorth, Tide and B-North are great examples of prioritising the needs of SMEs with tailored business banking services.
Is it too late for legacy banks to service SMEs?
Many challenges face FIs as they look to compete in a market that expects simpler user journeys, flawless customer service and strong branding. In a short space of time, new players have become successful by offering cheap pricing and economies of scale. The question remains if this is sustainable in the long term.
Subscription-based models seem to be the new approach to providing core services however, does £1000/month for unlimited interbank transactions seem unviable in the long run if a corporate client's exposure is in the multi-millions?
The question remains: how can a bank looking to overhaul their legacy FX systems and also cater to the SME market and include elements of:
Why are cross-border payments a core component for SMEs?
Globalisation has eroded borders and has allowed businesses to expand internationally. For many SMEs, it has become an essential part of their business that ensures sustainability by trading with international clients and suppliers.
Nowadays, elements of cash management, FX risk management and trade finance services are demanded by SMEs to not only enable the growth of their businesses but to trade internationally more effectively.
SMEs are becoming more conscious of poor pricing and service quality, which has driven the demand for an international payments ecosystem. There is also the consideration of managing multiple counter-parties, statements, platforms and spreadsheets. Focusing to reduce the administrative burden here should be a priority for FIs. By giving SMEs a one-stop shop, they will be able to focus on growing their business instead of dealing with administrative issues associated with international payments.
What options are available to new or old banks to either start or overhaul their SME international FX proposition?
There are three viable solutions; outsource completely (referral arrangement), integrate a fintech partnership or build it yourself. Each one has its benefits and challenges.
2. Fintech Integration
3. Build it yourself
How can Form3 help FI’s provide SMEs with a simple, end to end international payments engine?
Form3 is building the first global API based International Payments engine which enables FIs to develop a platform to provide access to domestic pay in and pay out accounts, FX execution, fixed and window forwards, as well as Unsecured Trade Finance. Everything an SME would need in one place to trade and grow their business internationally.
Through a single API integration, the Form3 international payments engine can streamline and automate many components vital to international trade. Each component can interact with an FI's interface seamlessly in isolation or as a combination of solutions. Through the same single API, FIs can access our range of payment scheme products enabling them to build their payment ecosystem.
Moreover, security and regulatory considerations are intrinsically built into the platform. For example, an FI can confidently declare they comply with ISO 27001 and ISAW 3000.
SMEs have multiple moving parts as part of its financial management. The Form3 platform simplifies the supply chain process, enabling both financial institutions and SMEs to continue working alongside one another and benefit from an international ecosystem that supports cross-border payments and scalable international growth.
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