Tackling Businesses’ Cross-Border Payments Challenge

Addressing the Challenges of Cross-Border Payments for SMEs

Faced with slow processes and inflated fees, improving cross-border payments is crucial for many SMEs. Laurent Descout, co-founder and CEO at Neo, looks at how simple yet fundamental changes to approaches can help drive cost-savings and greater efficiencies. 

When the Committee on Payments and Market Infrastructures (CPMI) published its work programme for 2021–22, it highlighted shaping the future of payments as one of its key priorities. This includes cross-border payments – a market that the Bank of England predicts to be worth more than $250 trillion by 2027.

The reality is there are significant improvements to be made, particularly for SMEs, which continue to be constrained by slow processes and high fees. With major gains to be made, it remains their single greatest priority.

The extent of the challenges becomes clear when comparing their experience to that of large multinationals. Here, there are dedicated in-house treasury teams responsible for all their financial exchanges and managing end-to-end cross border payment requirements. In contrast, SMEs historically have not had access to this level of support and the upshot is they are left struggling with opening and managing multiple bank accounts and contending with inflated costs. Research from Covercy, outlined in Mob76Outlook, reported that SMEs conducting just 20 cross-border transactions valued at $13,000 a month, pay an average of more than $2,700 a month in fees.

In the quest to overcome traditional constraints, there are five tried and tested ways SMEs can affect the greatest change and improve their cross-border payments:

1. Research the market and cut costs

Cross-border payments are a major source of revenue for banks. According to a McKinsey report, income from handling cross-border payments made up a staggering 39% of banks’ revenues in 2020. That’s because they don’t just charge the exchange rate and the FX margin, they also inflate the overall price. To exacerbate the issue, the more banks involved in the process, the more payments SMEs have to make to each one in the chain.

Brexit has then added to the problem as European banks no longer consider euro payments to the UK as bound by SEPA rules. Instead, they are now charged under international cross-border tariffs, further driving up the costs of each payment.

With businesses having to place tight controls on cash management, they simply can’t afford to continue paying rates at this level. The answer is to reduce their reliance on banks for cross-border payments – but what are the other options available in the market today?

Fintechs are one alternative and are now incorporating all the same features into their payment solutions. Many offer more aggressive and transparent cross-border payment pricing – while also adding value – enabling SMEs to better manage and reduce their costs.

To help address Brexit’s impact on payments and allow cheaper transactions through SEPA, these fintechs are also facilitating SMEs setting up EU-based accounts. This means they can avoid having to move existing accounts back into the EU and face the complex, draw-out process of creating an EU business account directly.

1. Get set up faster 

Setting up international bank accounts can take weeks. It’s a drawn-out process that has become unnecessarily complex for businesses with limited resources – and with cross-border payments, it’s often necessary to have a different bank account for each country or currency, which then operate in silos.

These constraints often hamper businesses’ agility and ability to grow – and it’s an often-overlooked area, with many SMEs believing there are no alternatives. The good news is that it doesn’t have to be this way. There are a multitude of companies that can expedite the setup process, with some reducing the time to less than 48 hours. It’s also possible now to avoid disparate accounts and gain a single holistic view of the entire payment and cashflow activity.

1. Increase the speed of payments

When it comes to the payments themselves, it is common for cross-border transactions to take days or even weeks to process. Cleary this adds to the complexity of managing cashflow – but the digitalisation of payments is rapidly changing this reality. The emergence of virtual wallets is one approach that is allowing SMEs to make same day payments. These, in turn, enable businesses to organise their funds and store multiple currencies, ready for making rapid payments or a currency exchange.

1. Increase transparency

Varying, unpredictable fees and slow processes inherent in the traditional banking process means it is difficult – and often impossible – for SMEs to forecast just how much a payment will cost and how long it will take. This lack of transparency also extends to accessing a complete view of exchange rates, payments history and market data, crucial for intelligent decision-making and reporting. When managing cross-border payments via traditional banks, much of this is woefully lacking.

Many fintechs can now offer up-front pricing and fee transparency, along with the ability to track a payment. One emerging alternative is for SMEs to set up their own international account with a multi-currency IBAN in their organisation’s name. As a result, SMEs can manage corporate cash flows and view trading history, market data and statics, all in one place.

1. Think of the wider picture and find the right partners 

Managing multiple partners can be difficult, so it makes sense to pick a firm which is interoperable with your existing processes and offers all your treasury services in one space. Added to this, cross-border payments are an integral part of treasury operations, so interoperability and connectivity with the rest of the treasury stack is vital but often difficult to achieve – and the issue is not just confined to SMEs.

According to Citi’s latest treasury diagnostics report, 64% of corporate treasurers say their treasury management system is either not integrated or only partially integrated with their enterprise resource planning. This can result in an over reliance on manual processes to support cash flow forecasting. SMEs can steal a lead on this by integrating all these critical elements to gain a holistic view of operations and avoid looking at individual areas in silos.

What all these approaches have in common is they are helping SMEs emulate many of the advancements made within consumer payments. In recent years, challenger banks and fintechs have created smarter, more customer-centric experiences to disrupt the traditional retail banking model and benefit the end user.

They’re offering analytics so consumers can see a breakdown of their spending patterns and split funds across multiple pots to save for different instances. They have sleek onboarding processes, user-friendly interfaces and agile infrastructure, making the entire process both efficient and effective.

With similar innovations now available for cross-border payments, SMEs can enjoy many of the same benefits while becoming more cost-efficient and deploying a foundation that enables future growth.