Forex for SMEs – Integrated solutions are the answer
Did you know that the forex market is the biggest market in the world? According to the Central Bank’s 2019 triennial survey of foreign exchange and over-the-counter derivatives markets, it exceeds a daily volume of $ 6.6 trillion, which is even higher than that of the stock exchange. But the truth is, most traditional currency providers still focus on larger scale clients. As a result, the vast majority of small and medium-sized businesses struggle to find ways to transfer money from overseas and struggle to accept payments from international customers. Fortunately, the situation of these companies is changing with the appearance of new foreign trade products on the market. What are they and what benefits can they bring?
Why bank foreign exchange services tend not to support SMEs
There are several reasons why traditional financial institutions tend to support small and medium-sized businesses with foreign payments.
Perhaps the main reason is the regulatory bureaucracy that prevents these companies from accessing services such as underwriting or bill financing. In practice, this means that SME owners face a major challenge in raising working capital and keeping their business operational.
Limited Forex Risk Advice
In a survey by HSBC and FT Remark of 200 CFOs and nearly 300 treasurers, 70% of CFOs said their company had suffered a drop in revenue in the previous two years due to a Forex risk preventable and uncovered. This shows that many SME managers have insufficient knowledge of this risk. This problem is so prevalent that SMEs that derive a large part of their income from abroad may find it difficult to remain profitable.
Lack of comprehensive payment solutions adapted to SMEs
While the pandemic has dramatically increased the pace of digitization in banking, there is still a ‘one size fits all’ approach to forex. In summary, traditional banks generally do not have a block payment arrangement for SME customers. What is the result ?
SMEs end up using the same solutions as large corporations and end up paying high international payment transaction fees.
There is often a lack of transparency regarding these fees.
For many entrepreneurs who occasionally pay in foreign currency, it may even be difficult to complete the payment form, as it is different for different currencies and in many cases written using financial jargon.
Once payment has been made, it is often difficult to assess when it will reach the final recipient. It can even take up to 2 weeks. In a fast-paced business environment, it takes a long time.
Are SMEs paying the price for a lack of foreign exchange?
According to Laurent Descout, CEO of NEO Capital Markets, the FinTech revolution has made winners both at the top and the bottom of the market, namely consumers and large companies. The regular shopper can now use their phone or smartwatch to send payment to a large retailer of their choice with just a tap. Both the buyer and the business benefit – they’re technologically configured to make the transaction go smoothly. Everyone’s a winner, right? Well – almost. What about SMEs?
An example: an SME clothing retailer operating in seven countries
To illustrate the point above, let’s take the example of a clothing distribution SME operating in seven countries (and therefore carrying out transactions in seven different currencies). They face long lead times and high commissions as they have to pay a bank to convert the majority of inbound and outbound transactions. In addition, each currency is held in a separate account, which means that it is impossible to view cash flow in real time.
This lack of visibility is a real problem that can lead to unnecessary costs. It can also affect risk management, which requires real-time market information and entry and exit reports. Some small and medium-sized businesses try to solve this problem by installing complex complementary market terminals. Likewise, post-execution management involves the contribution of multiple vendors and vendors, which can significantly slow down communication flows. This is only one side of the coin. If you add different time frames for inbound and outbound payments, it’s difficult to get access to the company’s payment status at any given time.
There is a real need to improve processes in this area and to introduce efficiency gains. Could the solution lie in Forex companies?
The new wave of Forex services for SMEs
Over the past five years or so, Forex companies have been a game-changer for SMEs. A forex company or forex broker is a financial services company that provides traders with access to a platform for buying and selling foreign currencies.
They can help educate SME managers about currency risks and prepare them on how to budget for currency costs in their quarterly and annual cash flow forecasts. They can also set an “amount level” on the currencies they use to make sure there are no surprises.
Companies offering such services include the global risk management and payment platform AFEX and XCAP, which provides SMEs with considerable savings on transferring and receiving foreign currency from abroad.
New BaaS platforms offering foreign exchange services to SMEs
There has also been a new wave of Banking as a Service (BaaS) solutions, which are part of the embedded finance revolution and may be particularly suited to SMEs.
OpenPayd – Using OpenPayd’s API-based technology, businesses can integrate financial services into their products. The platform also enables currency conversion in a wide range of currencies, with real-time trading and API-enabled spot pricing. SMEs can benefit from OpenPayd’s international regulatory coverage through its network of global licenses.
Curve – An innovative payment provider. It is a mobile application where you can put all your bank cards from all over the world, and you can easily move your money between cards. The app is also connected to ApplePay or Google. We particularly appreciated the interoperability of payments.
Stripe and Airwallex – We believed web payment infrastructure providers were the way to go when it comes to banking platforms for SMBs. But we also felt that customers, when using these services, often want advice from a real person when they have a specific question or problem. That is why there is a future in connecting such services with establishments that have a physical brick and mortar store.
Kantox – A company that provides you with the system that presents all your currency exposures, supports you in your international payment decision-making process and covers your position. We live in the reality of payment services, but there are few solutions that help you manage exposure. Should the position be hedged? Should we close it? What is the risk you have exposed yourself to? The system tries to support you in the decision making process.
TreasurUp – This platform integrates web, mobile, ERP connection and people. TreasurUp is designed to interface via its API architecture with just about any accounting or ERP platform in the world.
What are SMEs looking for in foreign exchange?
According to market research from 10Clouds, SME executives generally lacked time, often traveled for business purposes, weren’t always convinced by new FinTech products, and always tended to favor face-to-face interactions. When it came to a Forex solution, they would look for:
Integrated services that offer them holistic payment solutions that cover all of their needs.
A solution that uses the latest AI technology to simplify banking processes for users.
An instantly recognizable platform wherever you are in the world.
A tool with built-in risk management functionality and monitoring of foreign currency fluctuations.
An intelligent combination of human assistance in the bank where it is needed.
A tool that has an overview of the market in real time and a currency fluctuation monitor. “
Learning about currency risk management
One of the biggest questions is how to create a game changing advice tool for clients. This would ideally define the risk profiles and propose the coverage scenarios for each client, allowing them to better manage their payments and investments.
Observe different regulations
There is also the problem of different regulations in different regions, as well as electronic money regulations. The tool must therefore take into account the regulatory requirements of all the countries in which the customer operates. When thinking about hedging solutions, the big question is how do you deal with MIFID regulations? This is especially relevant when thinking about scalable solutions for different markets, as interpretations of the local market are different.
The future of SME exchange is full of possibilities
During our Banking of the Future workshops, we saw that the future of forex solutions for SMEs lies in financing solutions that are integrated, efficient, affordable and highly adapted to the end user. The goal of FinTech providers should be creating easy-to-use, integrated platforms that connect to all providers of banking, accounting systems, invoicing tools, CRM, etc. Such integration is very likely to improve the predictability of cash flows. Ideally, the platforms should also have a built-in risk management tool and hands-on support if needed, potentially through a partnership with physical companies. The potential in this area is enormous. It’s just a matter of harnessing it in the right way.