Today, at least when it comes to the consumer side of it, we are all used to payments being instant, reliable and basically free. When sending money to friends and family, we rarely think “what bank do they use” or “will my payments be made”. It’s a nice utopia, where borders no longer matter and money can move easily between different countries, systems, and accounts. Unfortunately, the situation is less rosy for small and medium-sized businesses. Having succumbed to the promise of low fees and instant transactions, many small and medium businesses are choosing the latest financial technology as their main provider. And while transactions are actually executed instantly, you can lose money instantly as well. Refunds prove to be a time consuming ordeal. It would be an oversimplification to blame business owners for choosing a startup to handle their transactions, as banks come with their own set of flaws. Let’s look at the situation find themselves SMEs in more detail.
Banks like risk less than they like to admit
To someone unfamiliar with the current situation, it may not be clear why any company would have to look for an alternative to banks. After all, banks are reputable institutions backed by decades if not centuries of experience. But as Sarah Kociansky so aptly put it in her article on the subject, “Bank accounts are hard to come by these days, expensive, and no longer suitable for the average purpose of small and medium-sized businesses.” I totally agree with her thoughts regarding banks’ slow adoption of the customer-centric practices (and SMEs, of course, that are people-run) that people expect. The fact that her article is from 2018 only proves that some things take time to change. But the cumbersome nature of some banks is only the tip of the iceberg. Especially if your business accepts and sends payments around the world, not just within the borders of one country. In this case, it’s the banks’ risk aversion that bothers you the most, not being old school.
With that said, I wouldn’t really blame the banks in this case. After the deadly September 11 events, countries around the world lobbied for greater regulation, seeking to prevent malicious actors from laundering massive amounts of money and financing terrorist operations. With the current AML/CFT framework, for banks today, every new customer of a company, especially if trading across borders, is a potential liability. The reasons for suspicion are different in each case. A bank can shift a business away, if the owner is not a resident, or if the business is owned by a legal entity registered in a different jurisdiction. If the company is trading in high-risk commodities, the amount of red signals goes up. It is easier to say no to a handful of small clients than to accept the cumulative risks they bring.
Neither banks nor fintech companies really care about individual issues
The ability to grow rapidly means that the financial institution has a large pool of satisfied clients. If 1% or even 10% of them are having problems, there is no motivation to solve all their issues right away. After all, these customers will either wait or leave, only to be replaced by new customers with lower requirements. And while some financial institutions offer great, personalized customer service, rival banks rely on outsourcing call centers and chatbots — a combination known to anyone whose money has been stuck in transit.
What unites both fintech companies, no matter how advanced they portray themselves, and banks is the impersonal relationship they have with customers. Not knowing who to call in an emergency is not the best feeling when running a business.
Banks and financial companies are less global than we expect
When choosing any type of service provider, the company expects them to cover the area for which they are responsible. After all, you rarely rent 5 different cleaning service providers or buy your paper from 3 unrelated suppliers. Unfortunately, the same cannot be said for international payments. For example, you might have an English bank that matches well with the majority of Chinese banks…except for the one your customer uses. What are you doing?
If your payment provider does not provide you with efficient and timely transfers to a country that is critical to your business, you cannot change your service provider. You stay with them for the services they do well. You then sign up with a different bank or fintech company for services that your initial provider is poor at dealing with. This increases the administrative burden that you, as a business owner, bear, and adds unnecessary complexity. The complexity you would prefer someone else to deal with. Except no one wants that.
Instead of the conclusion
There is a whole niche to be filled by companies serving internationally oriented SMEs. What deters many entrepreneurs from entering this field is not only the risks but also the amount of knowledge such a company must accumulate. I haven’t touched on AML in this article, because the topic itself deserves an entire article if not a series. In short, every financial technology working in the payments space needs a strong anti-money laundering backbone. Since it takes time and resources to grow this backbone (and the market never sleeps either!), some smaller organizations need to become an expert in risk management, taking on more risk. There are ways to hedge this risk. Increasing their understanding of their clients’ areas of business (essentially, knowing how different sectors work) is one such area. This is not the easiest route to take (not the quickest way to unicorndom) but it is one well worth exploring. I will return to the topic in more detail soon.