B2B Payments

In Global B2B Payments, Both Banks And FinTechs Face Regulatory Headwinds

FinTech innovators are finally paying attention to the B2B sphere, and much of that focus has landed on the cross-border payments space — a notoriously clunky, expensive and opaque burden for many business payers.

Traditional banks are often at the center of that global B2B payments friction. But, as more attention brews, B2B FinTechs have decided that collaborating with those financial institutions (FIs) can be the best way forward. One of the latest to do so is international payments company TransferMate, an Ireland-based firm that announced last month it received more than $35 million in equity investment from Allied Irish Banks.

The deal not only signals investors’ support for companies that want to disrupt cross-border B2B payments, but also highlights the role banks now play in removing friction.

“There are many points of friction when it comes to sending money internationally the traditional way,” said Sinead Fitzmaurice, cofounder and CFO of TransferMate. “The majority of banks simply don’t have the necessary regulatory licenses to operate outside their native countries, which creates a dependency on the intermediary bank system to complete international transfers.”

This system, also known as corresponding banking, brings in additional parties to a single transaction, meaning added time and money for the payer and recipient.

“Intermediary banks not only charge their own sender and receiver fees, but frequently offer less favorable rates while simultaneously slowing up the process significantly,” Fitzmaurice said.

For small- and medium-sized businesses (SMBs), cross-border payments fees can be crippling. A 2016 research report conducted by global payments firm Covercy found SMBs in the U.K. pay thousands of dollars in unnecessary financial exchange (FX) and other bank fees every month. A small business with 20 or so $13,000 international transactions a month, for example, would pay an average of more than $2,700 a month in fees.

That expense compounds friction for business payers when considering the legacy infrastructure on which banks operate, added Fitzmaurice.

“Traditional banks are, more often than not, working with outdated technology platforms, which can also curtail speed and transparency,” she said. “This causes cash flow delays for companies.”

Regulatory Burdens

Over time, companies have become more aware of the shortcomings of their traditional financial service providers when it comes to cross-border payments, the executive said. They’re also becoming more aware of alternative players that address some of those shortcomings.

But the global financial services market is complex, especially when it comes to regulation, which leads to a disparity in awareness of alternative players from market to market, Fitzmaurice explained. Awareness of solutions like TransferMate is strong in Europe, but in the U.S., regulatory challenges have made it difficult for the company to take root.

“The sheer complexity of providing a B2B, end-to-end solution for businesses to overcome the friction points — where alternatives must comply with rigid regulatory requirements and also provide tech-enabled platforms that are more complex than serving P2P customers — has resulted in B2B solutions being slower than P2P solutions in terms of awareness across various markets,” she said, adding that in the U.S., for instance, FinTechs have to not only receive federal approval, but must also be cleared by all 50 states to operate in the country.

Interestingly, analysts have found that banks are facing a similar struggle when it comes to overcoming regulatory burdens, and it has had a direct impact on the correspondent banking system.

Last September, the World Bank Group’s International Finance Corporation (IFC) released a report that surveyed 300 financial institutions across 92 countries. The report concluded that more than one-third of surveyed banks reported a drop in correspondent banking relationships, which “disrupts the financial connections that countries and businesses needs,” said IFC CEO Philippe Le Houérou in a statement at the time.

A major driver of a drop in correspondent banking relationships is the complexity of the regulatory landscape, the IFC said, especially when it comes to FIs’ compliance requirements pertaining to money laundering, risk and capital.

A Collaborative Effort

Traditional banks’ cross-border payments offerings may fall short for corporates, and regulatory pressures are constraining those FIs’ ability to meet businesses’ global payments needs even further. But FinTechs stand to gain from collaborating with FIs, said Fitzmaurice, who added that FIs like Irish commercial bank AIB are becoming more forward-thinking in their approach to financial services innovation.

“The way in which people and businesses bank has changed dramatically, and forward-looking banks are very aware of their customers seeking digitally-enabled methods to transact whether domestically or internationally,” she stated. “Rather than working against and competing with banks, we intend to partner with them.”

The AIB funding will also help TransferMate continue its efforts to secure regulatory clearance in the U.S., the executive added.

Beyond U.S. expansion, the company will be keeping an eye on the up-and-coming innovations that could further disrupt cross-border B2B payments, like blockchain. But, Fitzmaurice said, regulation will certainly remain at the center of focus for banks, FinTechs and innovators of these emerging tools.

“Naturally, blockchain and cryptocurrency solutions are very topical at present on the promise of greater speed and transparency,” she said. “Adoption, however, will require alignment of protocols and regulations, with significant gaps in terms of identity and security being cited when it comes to utilization as a cross-border payment facility for typical [SMBs].”

Collaboration between all players in the ecosystem will be critical moving forward, too, the executive added.

“We believe the B2B global payments market is a large and relatively untapped opportunity, with a significant amount of players focusing on the P2P market, making it difficult for them to pivot into serving B2B customers as servicing can be dramatically different,” Fitzmaurice said. “I think 2018 will see more focus on B2B solutions that aim to provide corporate customers with an ecosystem when it comes to cross-border transactional solutions underpinned by customers seeking simpler, more transparent solutions.”

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