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The Chinese city of Shenzhen has a claim to be the most interesting in the world when it comes to modern global trade.
In 1980, it was already a bustling market town of 300,000 residents in southern China, with Hong Kong laying 30 kilometers away across the Sham Chun River. Then, when Chinese authorities decided to open up to western trade, they designated Shenzhen as a special economic zone, allowing western businesses to set-up shop.
The policy transformed the city, and indeed, the world.
Shenzhen saw the first McDonalds in China open there in 1990. Ford established local manufacturing sites. Global retailers like Gillette began importing their products into China via Shenzhen, establishing their presence in this soon-to-be mega market.
We can imagine the high-level meetings these companies had with Chinese banks, setting up the ability to pay local suppliers, collect in the local currency, before moving back the funds to their home country. Each step would require an army of administration support staff and translators, making sure that the Chinese equivalent of dotting every ‘i’ and crossing every ‘t’ was done correctly.
Today, it is very different. A small retailer in the US can decide to sell their product into China and, in shorter time than you might imagine, be collecting in Yuan and converting it back to USD.
How is this possible?
The rise of e-commerce platforms and the beginning of a global financial infrastructure
True global trade requires a truly global financial infrastructure. For years, this meant bank-to-bank transactions. For that small retailer in the US, the complexity of the global banking network made setting up in a foreign territory incredibly difficult (never mind all the other challenges like marketing their product).
Only the biggest brands with the deepest pockets could do it successfully.
Then came the internet and the rise of e-commerce. Platforms like eBay, Amazon, and Alibaba were all established in the 1990s and the promise of global trade for any company began to be realized. However, their collection abilities still relied on those complex banking networks, and therefore the flow of funds was very centralized.
Amazon, for example, would collect funds on behalf of their retailers in a country into centralized local accounts, and then transfer them back to their merchants periodically to the local currencies.
This arrangement had several challenges associated with it. Exchange rate fluctuations could lead to high risk for the platform and merchants, transactions costs were high, pricing would sometimes not be accurate for a customer paying into a different currency, and localization in terms of compliance and payment methods (Alipay in China for example) was a real challenge.
So, E-Commerce platforms needed to revamp the financial infrastructure underpinning their operations and allow their merchants to trade on a global scale with as little friction as possible.
Paying is difficult, collecting is hard, storing is even harder
Collecting funds from a country is a lot harder than paying into the same country. The simple reason for this is that paying into a country requires a bank account number to send the funds to, while collecting funds in the same country requires you to open a bank account there.
Opening a bank account in a foreign country can be a difficult and time-consuming task, full of paperwork and long delays.
E-Commerce platforms would allow their merchants to collect locally into foreign bank accounts if they could set them up, but it was not a realistic proposition for most sellers. This was especially true if they wanted to sell into multiple countries. So, the old infrastructure of the e-commerce platform collecting on behalf of their merchants, storing it in centralized accounts, and then distributing it out remained.
And then fintechs entered the picture.
Fintechs took a different route then the banks. Instead of relying on bank-to-bank arrangements to move money from one country to another, they went out and secured banking licenses for both countries, allowing them to pay and receive a lot easier than traditional correspondent banks.
For those fintechs putting compliance and regulation at the heart of their business and acquiring regulatory licenses like an E-Money license, they could go a step further and offer the ability to store funds locally, sometimes indefinitely.
3 ways e-commerce platforms are improving their global collection capabilities
E-commerce platforms quickly saw the value in this structure and began partnering with fintechs to bring these capabilities to their own operations. Through API integrations and white-labeled solutions, merchants could sell into more countries, more easily, than every before.
1. Opening local accounts or ‘virtual wallets’
The fintech infrastructure, once integrated with the e-commerce platform, means merchants can open virtual accounts (often called ‘virtual wallets’) and collect and store funds in local currencies, and then convert them to their chosen currencies when it suited them.
In the e-commerce back-end, merchants can select the country/currency they want an account in, open it in minutes, plug those details back into their seller profile, and begin collecting and storing locally. The only limitation here is that the country/currency has to be covered by the infrastructure the partnering fintech has built.
2. Exchange rate stability and real-time conversions
Another area where fintechs can bring value to the table is exchange rates.
Firstly, with the infrastructure fintechs have built, they are moving funds directly through their own proprietary network, meaning fees and costs are lower than traditional banks. Secondly, their ability to build in live exchange rates means costs of products are always accurate, and all parties know what they need to pay to match the price. Indeed, it is now simply built into the platform, so for the consumer the process is seamless.
Real-time settlements allow merchants to access funds instantly and give them greater control over their cash flow.
This exchange rate stability transfers to the e-commerce platform itself. When they are collecting, storing and moving funds across borders, they now have a central platform (and not a lot of disconnected bank accounts) to do it with. This gives much greater control to their financial and treasury departments.
3. Regulatory compliance and anti-fraud tools
Another aspect that is not noticed by the consumer, or even the merchant, is the meeting of local compliance laws regarding collecting and moving funds. Fintechs take much of the burden of this off the e-commerce platform, providing all the necessary tools to comply with local regulations and tax rules.
This also extends to processes like anti-money laundering (AML) checks, where the fintech verifies the customer identity and monitors suspicious transactions.
A new financial infrastructure for e-commerce platforms
Much like in the late 1980s and 1990s, we’re very much on the cusp of something new when it comes to global trade. e-commerce platforms will be central to that change, allowing their merchants to trade on an international scale with just the click of a few buttons.
If you stand on one side of the river in Shenzhen, you will now see a city of over 12 million residents on the other side – a visual demonstration of how global trade has transformed the area.
While the most interesting area for modern global trade might be the city of Shenzhen, the next most interesting place might be servers on a cloud, busily facilitating digital trades for billions of people across the world.
To learn how TransferMate can enhance how e-commerce platforms, collect, store, and pay internationally, contact the team.
