SMEs represent about 90% of all businesses and provide more than half of the
world’s employment. They play a crucial role in developing countries, creating
seven out of every 10 jobs on average. Although the de-risking trend in emerging
markets has hampered international finance, new payments technologies such
as blockchain and crypto are increasingly providing SMEs with opportunities to
source talent and supplies abroad and expand into foreign markets.
SME cross-border payments are a significant portion of the B2B payments
market, and SME demand for cross-border payment services is growing. The rate
with which SMEs are conducting cross-border business is accelerating, growing
from 34% in 2019 to 43% in 2020, and that growth is expected to continue with
increased market demand from today’s digital, connected economies. Financial
institutions stand to gain a lot from tapping into the SME B2B cross-border
payments market.
Given these trends, it’s not surprising that acquisition of SMEs as customers is a
key driver of new revenue for financial services companies. According to McKinsey
& Company, SMEs constituted 76% of all new merchant-related revenue growth
in the US between 2017 and 2019. Furthermore, new merchants were the largest
contributor to growth in the merchant-related payments sector during that same
timeframe, with SMEs contributing 98% of that growth.
The opportunity in SME B2B cross-border payments is especially strong in
emerging markets. The growth in cross-border trade in these markets is expected
to double that of the global average between 2018 and 2022 — an increase from
five to 11 percent within that four-year span.
The cross-border payments market is experiencing an exciting transformation.
Expected to reach $156 trillion by 2022, SME contribution to this trillion-dollar
landscape will presumably grow over time, especially in emerging markets.
Making cross-border payments is costly due to high transaction fees incurred
when sending money internationally. Transaction speeds can be extremely slow,
often taking multiple days for a transaction to be resolved. Cross-border trade
often requires payments to be made in full before orders are shipped, so this delay
can result in SMEs—especially those in emerging markets—losing customers to
larger companies that can resolve payments faster. And there is little transparency
or visibility into the status of cross-border payments and expected resolution time,
keeping both senders and receivers guessing.
Yet, SMEs are increasingly reliant on cross-border payments for growth,
both to access new customers and to tap suppliers and outsourced employees.
Historically it has been extremely difficult for SMEs to obtain financing and
liquidity management services, with collateral requirements for financing that are
often prohibitive. The International Finance Corporation (IFC) estimates that 40%
of formal micro, small, and medium-sized enterprises in emerging markets have an
annual unmet financing need of $5.2 trillion (IFC 2017).
Further, traditional global payments systems involve a lot of intermediaries—not
only does this slow down payments, it also introduces more margin for error.
Any lag-time between paying these suppliers and employees really impacts
SMEs’ ability to maintain their business, and grow and scale. To compete, SMEs
need to be able to focus on their business, not on whether their supplier
receives a payment.
Imagine a small clothing manufacturer in Thailand that needs to import raw
materials and fabric. The timing of payments is crucial: without a lot of working
capital, the business depends on fast-moving payments to keep the goods
flowing. But cross-border payments are slow, taking up to several days, with
large fees and limited visibility into payment status and delivery. This impacts the
business owner’s ability to build trust with suppliers, outsourced talent and banks
that might extend them credit. High fees associated with cross-border payments
have an even greater impact on their bottom line, hurting SMEs’ ability to
conduct business.
SMEs need new payments solutions. They need to be able to send and receive
non-cash payments to keep up with consumer demand and the ever-evolving
estimated unmet financing need of micro, small, and medium-sized enterprises in emerging markets.
According to McKinsey & Company, cash payments declined by
16 percent globally in 2020 and the number of non-cash transactions grew by six
percent—undoubtedly a sign of future digital payment trends to come.
Why Are SME Needs Not Being Met?
The needs of individuals and businesses sending cross-border payments have
dramatically evolved. These customers have traditionally been served by retail
banks, which are not meeting their cross-border payment needs. SMEs are now
demanding real-time, low-cost and fully trackable payments on a global scale, and
in new forms. In fact, over 70 percent of small businesses state that accepting new
forms of digital payments is fundamental to growth in 2022, including in the form
of digital currencies such as Bitcoin.
But today’s inefficient system of moving money around the world means high
costs for banks and payment providers. Their working capital is locked up in nostro
and vostro accounts, pre-funding local currencies on each side of a transaction,
and transactions carry exorbitant fees and foreign exchange (FX) costs. New technologies
and processes—especially those that offer better prices and improved
technology—that can reduce overhead costs and lag-time are key to tapping the
growing cross-border SME B2B payments market. When surveyed, McKinsey notes
that price (39 percent) and technology (34 percent) are the main reasons SMEs
would choose a new service provider.
If you are a SME that requires smart payment solutions at the fraction of the cost then you need to speak to Fondy.
