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One of the clearest memories from my childhood – one of those that I can still see like a photograph – is sitting in the back seat of my parent’s car and holding a bunch of papers I was given after opening my first bank account.
For many businesses worldwide, accessing and using financial services is not straightforward. On top of that, once accessed, those services favour large organisations with teams of financial specialists who take advantage of every loophole and efficiency, making it difficult for scaling businesses to compete from day one.
Now, however, businesses can access an alternative financial ecosystem built by fintechs, allowing them to use low-cost ways to send and receive money globally and grow rapidly while complying with laws and regulations in new marketplaces.
While ‘democratisation of finance’ op-eds have generally focused on consumers, we should also acknowledge and explore how small-to-medium businesses can now level the playing field when it comes to growing and competing globally.
3 ways businesses are leveraging fintech solutions to grow globally
Fintech's can now give SMEs the financial tools to pay and receive internationally as if they had built a sophisticated global network themselves, manage multiple currencies with more efficiency, and combine both to expand into new markets quickly and at low cost.
1. Expanding into new markets
It’s useful to start with the end goal of a growing business – acquiring the ability to trade globally.
With Brexit, we have seen over the last few years how the reintroduction of paperwork and red tape can seriously stifle a business’s ability to grow and compete on a global stage. No matter what size an organisation is, penetrating new markets while complying with all rules and regulations is a mammoth task, but for small to medium businesses, it can halt them in their tracks.
Up until the relevantly recent past, the only option a business had to expand into new territories was to go to their commercial bank, which would then begin the process of opening a new banking footprint in the chosen jurisdiction. This process would involve several other banks, often a mountain of paperwork, and could take weeks, if not months, to complete.
To quote one of our famous Irish poets, this has “changed, changed utterly”.
Fintechs have gone out and built their own regulated infrastructure and banking network across the world, essentially combining that complex network of banks into a single, integrated ecosystem. This means that when a business in Missouri, U.S.A., wants to start trading with a company in Penang, Malaysia, they don’t have to go to their local bank and ‘manually’ connect it with a Malaysian bank; they simply use a fintech that has a footprint in the two territories.
With the work already done for them, the business can instantly start trading globally at a low cost.
2. Paying and receiving into global markets
Let us return to that business using the correspondent banking network to set up in a new territory. Once they have gone through the process, what is the resulting framework that their money flows to and from this new market?
At its core, the network will be complex. This is because the global banking network is built on relationships that have grown over time, using messaging networks like SWIFT to complete a transaction.
The business’s money will go through several banks as it moves across the world, each taking a fee for their work as well as any FX commissions. As a result, it will ‘disappear’ as it enters the network and then appear on the other side, making it impossible to track. What’s more, it is not guaranteed that the amount paid will be the amount received, as third parties can legitimately take a fee for handling the money. This not only results in revenue losses, but difficulties in reconciling payments – both huge concerns for a growing business.
The overall result is that businesses get squeezed when making international payments, and the smaller the organisation, the larger the squeeze will be relative to its revenue.
The global payments infrastructure we discussed regarding setting up in new territories also means businesses can remove that squeeze. By removing the third parties on the chain, businesses can send and receive international payments like they do domestic ones.
A crucial point here is the technology fintechs have built for businesses to make these payments; they are user-led portals designed to be easy to use. Subsequently, for a growing business looking for ways to maximise productivity within a small team, these platforms allow them to transact globally easily.
There is a phrase in movies that “you can see every dollar on the screen”, and that is what fintechs allow businesses to do – keep the dollars where they are needed.
3. Managing and moving money globally
Managing multiple currencies is a tricky enough task for global enterprises, never mind small-to-medium businesses. In 2015, currency swings cost Apple the equivalent of the revenue Google would generate in an entire quarter. If Apple, with all their global finance teams and analysts, can be hit so hard, what chance do small and medium businesses have?
No one can take away the risk of currency swings, but we can give the tools necessary for small or inexperienced finance teams to manage multiple currencies and their international cash flow more effectively.
There are now fintech products that allow businesses to easily hold, pay and receive multiple currencies on a single platform. Again, this is an extension of the international payments infrastructure that has been built up. It allows businesses to open local bank accounts in the covered areas instantly, then store currencies in those accounts before moving currencies between them when the exchange rates are favourable.
It also allows businesses to receive funds in a foreign territory, pay out locally from that bank account to any local suppliers (without having to incur any FX costs), and then ‘bring profits home’ when it suits them.
All this removes the mystique around international currency dealings, which can feel like a daunting task for a growing business.
Democracy has many outcomes
A powerful side-effect we have seen in the marketplace is how these changes are not just impacting businesses; they are impacting banks as well.
Local and regional banks, by partnering with these fintechs, expand their global footprint instantly too. They can then offer this global network to their customers directly, meaning they can grow alongside them. Of course, global banks themselves are partnering with fintechs, co-creating these networks through which money will flow.
It’s a fascinating era for how money moves across borders, but one of our aims should always be giving that business owner the ability to get those crucial pieces of paper that say: now we can really start.
This article originally appeared in Finextra in May, 2023. For more on how TransferMate can support SMEs grow globally, contact the team here.
