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The challenge of de-risking is nothing new in the world of financial services. Increasingly, we are seeing this evidence itself in cross-border payments as corporates struggle to establish resilient, consistent and reliable international payment systems.
Why is this?
For starters, international payments are complex. They are characterized by a myriad of hurdles that stem from the complex web of correspondent banks that are required to execute these payments. When this structural complexity is paired with the rapidly diminishing risk appetite of many of the larger banks, corporates and small businesses are finding themselves with reduced access to what is essentially, the lifeblood of their cash flow.
In this article, we discuss the changing risk appetite of banks and how growing to mid-sized corporate businesses can achieve pain-free international payments despite such challenges. Plus, we cover key advantages FinTechs bring to the table that help corporates rethink their tech strategies.
Keep reading to learn how you can boost flexibility and reduce costs, all while enhancing banking resiliency.
The Challenge of De-Risking & Its Effects on Cross-Border Growth
Traditional banks tend to risk-assess existing and prospective clients through strict “rules-based” decision-making models as well as the need to “generalise” about client types. As a result, corporate clients aggregated as “small” in the economy or deemed risky due to segment or geography are finding it increasingly difficult to access the banking services necessary to support their international growth.
This is specifically evident in the following areas:
Evidence would suggest that the de-risking trend is accelerating with an increasing number of small corporates finding their potential provider options significantly reduced. This, of course, begs the question of why banks make it so difficult for certain corporate clients to conduct business with them.
To gain a better understanding of this, let’s examine a small corporate customer. Requiring relatively plain vanilla services, these clients are not going to generate sufficient revenue for larger banks. Costs of regulation, compliance, legacy technology, customer servicing etc mean these clients banks are unlikely to generate a positive return. This is especially true when small clients are seeking cross-border payment services since, though the client’s business may be small, the costs of these services are not. For instance, enabling cross-border payments requires heightened spending for sophisticated onboarding, KYC and monitoring processes.
Cash management banks may look at clients with limited banking needs and ultimately decide that it isn’t cost-effective to service that client type.
The challenge becomes even greater when considering clients from less-understood geographies or from segments of the new economy (financial technology companies, payment service providers, crypto-oriented businesses, etc.)
The Role of FinTechs in Enabling Better Tech Strategies for Corporates
With today’s economic headwinds in play — such as higher interest rates, wage inflation, geopolitical tensions, etc. — corporate businesses have become increasingly cost-conscious. The demand for low-cost, technologically advanced and flexible client-centric solutions is increasing.
While traditional banks may not be easily convinced to work with small to medium-sized corporations, the advent of FinTechs has enabled corporate clients to re-think their provider strategies, particularly around international payment provision.
FinTechs offer product solutions and agility required for for cross-border payments, such as API connectivity, service aggregation, multi-currency account support, and the means to facilitate flows across borders at lower, transparent pricing.
As a result, FinTechs help to drive corporate business by increasing operational speed while also lowering costs, boosting accessibility, and enhancing transparency. With this level of support, corporate businesses can better manage risks according to the sub-sector of business and geographical regions they operate in.
Key advantages FinTechs offer to corporates include:
Additionally, FinTechs typically offer lower-cost models than the more traditional suppliers, with more up-to-date solutions for tech stacks and payments without the hurdle of legacy infrastructures often found in larger financial institutions.
Plus, in the wake of the aforementioned economic challenges, corporate clients are going to prioritise cost savings more than ever. Whether it’s a large, medium, or small-sized corporate,
all of these businesses are moving toward reducing the number of cash management
providers and increasing banking resiliency.
“Bank de-risking presents a significant opportunity for Fintechs to grow their share of the
cross-border payments business”
– Michael Whitehead, Chief Banking and Product Officer.
Leveraging FinTech to Navigate Complexities of De-Risking & Changing Regulation
Initially, the banking sector’s response to the emergence of FinTechs was to view them as direct competition. Now, more and more institutions are realising the growing potential of FinTech partnerships. Allowing FinTechs to work alongside traditional providers can result in unique capabilities.
As traditional providers for both corporates and non-banks are retreating into safer strategies, more opportunities are opening up for FinTechs. One of the largest advantages that FinTechs bring to the table is increased speed, helping to support key activities such as:
Final Thoughts: Why Choose Freemarket for Cross-Border Payments
In a time of reduced banking provision and uncertain economic outlook, it is crucial to have a FinTech partner that can support cross-border payments, as well as helping to streamline internal processes and eliminate unnecessary complexity.
At Freemarket, we strive to provide our clients with highly flexible services that are technically tailored to meet each of those client’s specific needs. With a network of bank and payment aggregators, we offer our clients global accessibility leveraging cloud-based architecture. Flexibility of offering is essential for our clients – flexibility of solution, flexibility in service model and flexibility of pricing.
Many of our clients are looking for a non-standard way of approaching pricing, such as:
For corporate clients looking to maximise the advantages of new technology, from security to resiliency, Freemarket has the experience, support, and resources necessary to achieve this. We can effectively connect technology, banking services, digital infrastructures, and payment networks through a single API-enabled connection point.
To learn more about Freemarket’s solutions, talk to us.
