The U.K. referendum was a massive wakeup call to markets everywhere: The world economy truly is an interconnected web, and what happens at Point A will no longer be isolated from making an impact at Point B.
Small and medium-sized businesses are some of the most dramatic examples of this point. Not only must they deal with the threats that larger businesses face following Brexit — having to relocate employees or even entire headquarters, a more complex regulatory environment and FX volatility and exposure mitigation — but they are also tasked with handling these challenges with limited resources, all with the threat that banks may be forced to pull back small business financing.
Western Union Business Solutions got an early jump on bringing FX solutions to small and medium-sized businesses via its EDGE platform, first rolled out in April and expanded to new markets last week. But even before the referendum, researchers had shown how many SMEs were in over their heads when it comes to foreign exchange hedging.
East & Partners, for example, found earlier this year that only between 20 and 25 percent of SMEs in the U.K. and France are making FX risk mitigation a priority.
“In a truly globalized marketplace, it’s important that small businesses have global connectivity across major international commerce hubs,” a spokesperson for Western Union Business Solutions told PYMNTS.
Brexit may have opened the eyes of small business owners as to just how exposed they are to market fluctuations — even if they’re miles away.
“Given the recent shocks to the market, following on from the referendum, we’ve seen that markets can move as much as 10 percent in a matter of days,” the spokesperson said. “The impact this can have on SMEs’ bottom line is huge.”
The spokesperson added that small and medium-sized businesses must get educated on the ability of hedging strategies to protect themselves against some of this risk. Not only has Brexit lifted the curtain on SMEs’ FX exposures, but it’s also revealed that these smaller companies need to start thinking like their bigger peers.
“Protection against FX risks through FinTech is no longer the preserve of large multinationals, and these platforms are accessible and scalable for SMEs right now,” the spokesperson stated, adding that recent WU Business Solutions analysis found that only about a fifth of SMEs had hedged in anticipation of the Brexit vote, compared to 80 percent of large corporations.
“This shows a much higher emphasis on risks from corporates,” the spokesperson noted. “However, any company that trades international, regardless of size, has a relative exposure to markets which must be considered.”
For U.K. small businesses, this is particularly true and not just because they’re at the epicenter of the Brexit aftershocks. On Monday (June 18), the U.K. Federation of Small Businesses (FSB) said SMEs in the nation have the potential to double their exports.
At present, the FSB said, just 21 percent of U.K. SMEs participate in exports (it is, perhaps, no coincidence that this is a similar figure to the portion of U.K. SMEs engaging in hedging activity). The European Union, the body said, is a top target for these exports.
But doubling export activity won’t come without hurdles.
“In addition to more traditional barriers, such as language and foreign exchange, businesses are having to deal with a rapidly changing export landscape and the advantages and challenges brought about by eCommerce,” said FSB National Policy Director Martin McTague in a statement.
It may be difficult, but WU Business Solutions says it’s necessary.
“Any business which imports, exports or trades with different regions will have been impacted by the continued volatility in the currency markets,” the spokesperson said, adding that, just after the referendum, WU Business Solutions saw an uptick in the number of SME clients seeking out its advisory services to map out a plan to protect against FX exposure.
“This demonstrates a real, tangible shift in attitude and highlights the fact that SMEs are prioritizing risk in the light of Brexit,” the spokesperson added.
Of course, hedging against FX risk is far from the only priority held by SMEs as they grow internationally. WU Business Solutions pointed to an increased need for faster payments, too, as they expand across borders, another reason the company said it rolled out its EDGE solution.
“In a truly globalized marketplace, companies aren’t willing to wait days for payments and invoices,” the company said. “Firms now expect business to happen in real time.”
With so much payments and FinTech technology at the tips of small business owners’ fingertips, the spokesperson noted, not only are faster payments and accelerated finance solutions in demand, they’re often necessary to manage cash flow.
“Typically,” the spokesperson continued, “speed is one of the largest drivers behind clients moving away from their existing banking providers, which reinforces this as they are no longer willing to wait two to three days for payments to be processed.”
There has been some dispute over whether faster payments really are a priority for SMEs, with some analysts voicing concerns over an increased threat of fraud (with shorter payment times come shorter times to isolate a cyberattack) and others pointing to businesses’ embrace of the lag between sending a payment or invoice and actually receiving it, often used to extend working capital.
Regardless of how FinTech companies participate in the faster, globalized payments trend or of how SMEs embrace what FinTechs have to offer, what’s certain is that the global market isn’t what it used to be, and small businesses won’t be able to remain isolated. Brexit has shaken any sleeping SMEs awake from that dream, according to the WU Business Solutions spokesperson.
“Brexit has been a real awakening for SMEs across all markets,” WU Business Solutions said, “and has reinforced just how liable their bottom line is to shifting market conditions.”