Underbanked Fintechs in a shrinking world



A shrinking world, a growing problem

And­ers la Cour, Chief Executive Officer of Saxo Payments, explores the growing issue of underbanked FinTechs


The world today is a smaller place than ever, in terms of international travel, commerce and business, and it continues to shrink rapidly. The fast development of new technology and online solutions to long-standing impasses are opening up the world so that even the smallest companies and start-ups can trade across borders in a way never before possible.

However, in setting up the international infrastructure of a business – whether a fledgling company with global ambitions or a large firm only now expanding internationally – provision of a strong and cost effective payment solution can often be left neglected at the bottom of the to-do list. If it makes it onto the list in the first place, that is.

The automatic response when payments do make it to the ‘priorities’ list, is to investigate suitable bank accounts. This is, of course, the traditional and long-standing solution for sending and receiving payments.


Only banking has the answer?

Companies looking to trade abroad generally need to open accounts in each of the geographical regions in which they wish to do business. But the appetite of the incumbent banks to offer this service is waning. Regulation, competition and even terrorism are all causing the incumbents to find the basic bank account a less attractive aspect of their offering. As a result, start-ups, including the burgeoning world of FinTechs, and established payments businesses are left searching for a bank that is willing and able to help them reach their international trading potential, by allowing them to open the necessary bank accounts.

It seems that the supposedly ‘simple’ process of opening a bank account is becoming increasingly difficult for start-ups and even established businesses. This presents a real risk, quite remarkable in this day and age, of a growing community of underbanked businesses. Worryingly, this can seriously affect their growth both locally and globally. Regulation requirements also play a part in hindering cross border growth of businesses. And these high barriers to entry can stall many companies and ultimately reduce competitiveness across the board. It’s a ‘lose-lose’ situation.

When banks are able to help businesses with their bank account requirements, companies can find that the bank’s sheer size, and restrictions due to legacy infrastructure, mean the bank is not able to be as flexible and responsive as they might require. This is especially true for younger companies including FinTechs.

By nature, FinTechs are small, nimble and quick to adapt to changing market conditions, and can find incumbent banks restrictive when it comes to trading internationally. Even just the number of intermediaries required for a traditional international bank transfer adds significantly to the cost and time involved with the process.


Stuck in a banking rut

Worryingly, many companies – of all sizes, from start-ups to huge corporations – are putting up with these high costs and slow transfer times when there are alternatives available in the market.

At Saxo Payments we recently carried out an exclusive study into the payment processes of issuers, acquirers, payment service providers (PSPs) and merchants[1], which provided some shocking figures. 63% of businesses are not satisfied with the length of time from payment being sent to payment arriving, yet haven’t switched provider. This is mainly due to a basic lack of spare time to invest in researching alternatives (31.5%), but these businesses also stated that they are hampered by limitations on the internal resources which would be required to make a change (25%).

In addition, less than 40% (38.2%) believe they get a competitive foreign exchange rate when handling cross border transfers but again have not switched provider. The reasons given mirror those above – 32% do not have time to look elsewhere and 28% are put off because the change is so unlikely to be implemented due to the resources required to make the switch.

Finally, opinions on whether business get a good deal in terms of the rates they pay to handle cross border transfers for customers is split relatively evenly – almost half (48%) do not feel satisfied, yet are putting up with the poor service from their current provider.

These businesses are sleepwalking through the payment and transfer process, paying fees which have a serious impact on their profit margins, and putting up with delays which could see them lose potential business or suppliers if they cannot make payments occur more quickly. The payment process is a fundamental element in the running of a business, which should not be neglected, lest the company risks losing out in a big way.


The future of payments

Accelerator programmes, sandboxes and tech labs: just some of the latest buzzwords in payments and FinTech. All of which present some really exciting opportunities. FinTech accelerators are popping up across the world, regulatory sandboxes have also been introduced globally, and the latest news in technology laboratories is the signing up of eight start-ups to the Asia-Pacific FinTech Innovation Lab.[2]

This is all extremely exciting for development and innovation in the banking and payments industry. But these new initiatives must not ignore the basic fundamentals of business operation – including payments.  As FinTech start-ups continue to emerge on an almost daily basis, there is a growing question over whether they will be able to access the basic banking services they need.


To bank or not to bank?

But what is a FinTech to do? They need a bank account in order to send and receive payments, but these are time-consuming and complex to set up even if they do find a bank able to provide a basic account, and the high cost and slow transfer times associated with cross border payments through this account could make trading abroad unfeasible. All of this culminates in huge limits on the company’s growth potential. Should the business keep looking for a cheaper bank account, or accept the limitations the account places on their company? Neither is an attractive option, particularly to an ambition new start-up.

Thankfully, there are now alternative solutions available to businesses of any size. Whilst banks will remain necessary for certain banking services, such as deposits, not all payments and transfers need to be carried out through a traditional bank as they have in the past. It is also possible for a company to use more than one provider, selecting the range of solutions which best meets their specific requirements. And this doesn’t have to make the process or management of payments more complicated, in fact it can make things simpler as well as faster and cheaper.

What businesses should be looking for is a solution that allows companies who are serving merchants in the digital space to open physical and/or virtual IBAN accounts in a wide choice of currencies, in their name and/or their client’s name. And users should be able to send and receive cross border and local payments at a low cost and within seconds rather than days.

Banks will always play an important role in business, but alternative solutions can be employed alongside to complement the traditional banks’ offering and maximise profit potential and international growth. The most important thing is that companies of all sizes take the time to investigate these alternatives, rather than sleepwalking through high fees, slow transfer times and poor FX rates which with they have long been dissatisfied. It is time payments worked FOR payments businesses, not AGAINST them.


[1] www.saxopayments.com/cross-border-b2b-payments-todays-landscape-tomorrows-opportunity

[2] www.finextra.com/pressarticle/65751/eight-startups-enter-the-fintech-innovation-lab-asia-pacific

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