The rise in alternative small business lending players was first viewed as a competitive force against traditional financial institutions (FIs), although some legacy banks eventually embraced the new market entrants with partnerships and acquisitions to bolster their own small business lending activity.
Data integration technology and the embrace of the open banking business model, though, has opened up new opportunities for alternative lenders themselves to collaborate with fellow FinTechs and round out their solution sets in an effort to become a greater competitive force against legacy FIs.
One of the hottest markets for this area of financial services is the U.K., where a regulatory climate, geopolitical uncertainty, and a robust FinTech community all combine for a busy, competitive small to medium-size business (SMB) finserv market.
U.K.-based Just Cash Flow PLC is among that community, an alternative SMB lender providing a range of financing products, including a revolving credit facility and term loans. While the company is positioned square against other alternative and traditional SMB lenders, a recent partnership sees the firm expanding the scope of its industry footprint beyond SMB loans.
This week, the firm announced a collaboration with Ebury to integrate foreign exchange (FX) and cross-border payment services into its product suite. At first glance, SMB lending and cross-border FX services may not appear to go hand-in-hand. But according to Just Cash Flow Banking Director Mike Smith, fulfilling SMBs’ financing and FX needs can have similar approaches.
“Sourcing the right products based on a clear understanding of needs isn’t always straightforward for SMBs,” he told PYMNTS. “It can be hard to find someone who knows their business and can tailor products from a comprehensive range to meet their requirements.”
He added that Just Cash Flow’s experience in establishing deep-rooted relationships with SMB clients in its lending services positions the firm well to also understand their FX challenges and needs.
The High Street Bank Alternative
Despite the U.K.’s efforts to promote bank switching and foster FinTech alternatives, Smith said SMBs still turn to High Street Banks as their default provider for many services, FX and international payments included.
That reliance on the status quo can mean a high level of misinformation, lacking information, high fees and other consequences, though, with many large FIs unable to support a more personalized experience with their SMB clients.
And just as many SMB owners will stick with their High Street Bank without searching for alternatives. Smith said these entrepreneurs similarly tend to accept the costs associated with traditional banks’ FX services without seeking more affordable options.
“Some businesses just accept forward currency exchange risk without knowing that it could be covered at low cost,” he said. “There is a wide spectrum of experience and knowledge of FX products and services amongst SMBs.”
While hedging and currency forwards may not be SMB owners’ area of expertise, one of the largest risks that SMBs face in their global operations is cross-border payments fraud. Malware and phishing scams, supplier and invoice fraud, and sheer negligence have caused B2B payments fraud to surge. Recent reports from The Guardian found that more than £1 million ($1.3 million) every day is lost to financial scams in the U.K., with the government now in limbo about how to define banks’ compensation requirements for their customers.
The Right Service Combination
Once an SMB is willing to consider working with an alternative financial service provider on its FX needs, there is still confusion that remains about the right foreign exchange products an SMB should deploy — and it may still inadvertently be relying on the same legacy global payment tools traditional FIs deploy.
“Many SMBs don’t realize the importance of routing payments in an efficient way,” explained Smith. “Payments can get stuck in the bureaucracy of the traditional correspondent banking system operated by High Street Banks, creating a hidden cost through slower cash flow for SMBs.”
He added that despite SMBs accelerating digitization as they broaden their trading pool across borders, payments continue to operate “in an analogue manner” over traditional rails and networks.
Connecting SMBs to a range of FX and global payment services can help these companies better position themselves for success. Smith pointed to the integration of Ebury’s mass-payments functionality, invoice scheduling that supports multiple currencies, and virtual IBAN (international bank account numbers) that allow SMBs to hold a variety of currencies as important tools that can address smaller firms’ unique needs.
And while High Street Banks may still hold the lead in filling SMBs’ FX and cross-border payment demands, Smith added that the U.K.’s regulatory climate continues to promote the emergence of alternatives for SMBs in need of more affordable, better suited tools. He pointed to PSD2 and accessibility of eMoney licenses as two initiatives that have fostered progress in available FX services for the SMB market.
“As with other payments areas, regulation is hampering some players and enabling others,” he said, adding that such regulations have fostered “growth in quality providers of FX solutions.”