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Despite the reputation that banks and financial institutions have for being reliable stalwarts that provide service through thick and thin, the fact is that many are highly conservative organizations with a low tolerance for risk.
That means that without much notice, a bank could withdraw its services at any time, given any change in its risk appetite. Perhaps that’s one contributing factor in how long-lived banks are. But the truth is that there are several other factors that can affect the continuance of a bank’s services, including local laws concerning financial and data compliance, security of the bank’s assets, how extended it is, and whether or not providing service X in geography Y is proving profitable.
In banks’ defense, they’re pretty good at what they do in general. Despite the economic headwinds that have troubled many economies in the last three or four years, “the global payments industry demonstrated its resilience again in 2021, more than recouping the revenue erosion experienced in 2020, which was the sector’s first decline since the 2008–09 financial crisis,” according to the 2022 McKinsey Global Payments Report [pdf].
Economic conditions might be relatively slow to change, but statutory and digital conditions can change much more quickly. Building a viable and sustainable digital business with an institution that is more reactive to risk than most, therefore, is a tall order.
Choices, and none too good
If a business specializing in e-gaming or cryptocurrencies, NFT trading, or games of chance creates a transnational product that relies on international payments, it could pin its hopes on its bank continuing to operate in the geographies and markets it’s trading in.
Another option might be to continue with the ad hoc currency exchange system that, in all likelihood, the company started out with. But here, high-cost payment processing fees, card network, and interchange fees scale up, too, in line with the business’s growth. Plus, there are the usual headaches with settlement times, tracking down payments mysteriously held up by third parties, having to use multiple payment gateways, and so on.
Alternatively, the digital-first company could invest a serious chunk of cash and time in its own payment infrastructure. By setting up a local banking presence ‘on the ground’ where its customers are, it removes itself from the vagaries of its bank’s appetite for risk.
Doing so probably seems to be the most sensible option, at least on paper. It’s a long-term strategy that saves resources, reduces complexity, and ensures the longevity of trading in a specific market. Eventually. But few businesses that specialize in, for instance, cryptocurrency trading have the expertise to ensure financial compliance in multiple territories. Investing in the required knowledge is costly and slow, and at a stroke, it commits the company to have to keep trading in a particular area of the globe to realize its ROI.
There’s clearly a need to solve this issue. In the PYMNTS 2022 International B2B Payments [pdf] report, we see that between 2020 and 2021, nearly 40% of SMEs increased their turnover via international trades, but only 23% felt satisfied with their cross-border payment solutions.
Despite what the mainstream press (and the search engine results pages) might say, neo-banks are not often the answer. Many neo-banks capitalize on their low overheads by cherry-picking services from the financial market space. They are as unlikely to commit to what they consider to be risky areas as the older financial institutions.
The new wave
Instead, there is a new generation of specialist fintech providers that built themselves specifically for the international exchange of currencies. These multinational platforms quietly establish local banking presence in different territories. If their partners in a country look like they might change their terms, the specialist fintech will seamlessly switch to an alternative. To their clients, the service is effectively opaque and uninterrupted.
There are several advantages to end users, especially those who, by the nature of their business, can have a hard time convincing traditional banks to stand by them.
The first is the ability to try overseas markets to see if they fit – without high exchange fees and compliance issues. The second is a high degree of insulation from traditional banks’ changing approach to risk. And the third is an assurance on rates and the price of each monetary exchange as it moves from country to country.
It’s on this basis that digital businesses can build their business decisions. Companies like Freemarket remove the uncertainty that working with older financial institutions brings, replacing it with stability and security. It’s a difference based on a technology-first approach that utilizes APIs and a cloud-native offering. The digital world plays by different rules, and so a new breed of players is emerging.
To discover more about trading internationally with a financial framework that is as digitally native as you are, reach out to Freemarket.
25 May 2023
24 May 2023
24 May 2023