In this era of digital commerce and payments, it can be easy to forget that many small and medium-sized business often fall through the cracks. That holds especially true when it comes to letters of credit – an old, perhaps even outdated device that is involved in some $3 trillion in annual global trade. Those letters of credit, of course, are meant to provide assurances for such transactions, but SMBs have difficulty getting them – they mainly go to large firms.
But as cross-border payments gain power in this interconnected world, options are increasing for those SMBs that want to play bigger roles when it comes to imports and exports.
That sets the context for a new PYMNTS interview with Scott Reynolds, CEO and founder of TangoTrade. The company just launched a program that is designed to basically function as digital letters of credit, but without the often difficult participation requirement of big banks.
As he told Karen Webster, the company’s brand-new Payment Assurance program will launch with Tempus, a foreign exchange (FX) and international payment solutions company with 50,000 small businesses on its platform. It will help enable SMBs to engage in more trade without the risk of being left holding the bag when doing business with buyers outside of their domestic market.
As Reynolds described it, the program is the first of its kind to target SMBs seeking global payment security. He put the launch of Payments Assurance into the same general context that has recently seen the rise of alternative financing and payment providers, all aided by the growing strength of FinTech. The general idea is to reduce friction for SMBs seeking a bigger role in the global flow of exports and imports.
“Large companies typically turn to banks (for) letters of credit,” he told Webster. “Letters of credit have been around for years and years, and they have not changed for years and years.” As for SMBs, they are basically hoping for the best. “When we talked to small businesses, they said letters of credit work, but that they are a pain.”
But banks don’t award letters of credit to SMBs as is often the case with larger firms, and even if they do, the costs can be prohibitive for those smaller operations. Not only that, but suppliers often require prepayment before delivering products to importers. Indeed, Reynolds shared a story about a costume jewelry maker in China that started requiring prepayments after being stiffed too many times by putative customers.
Sure, there are other platforms out there designed to ease the path to global trade from SMBs: Reynolds pointed to Alibaba as an example. “But that’s limited to transactions on the Alibaba platform, and only for suppliers from the Chinese mainland,” he said.
In a general way, the Payment Assurance platform functions as an escrow device, ensuring that suppliers and buyers get what they have both agreed to. SMBs can access the platform via integrations with freight forwarders and even B2B marketplaces that also leverage the TangoTrade API. An online interface provides management for the entire supplier-and-buyer international transaction. Payment from the buyer is held by what the company calls a dedicated licensed holding account. TangoTrade then validates the shipment has been made and transfers the payment to the seller, with competitive exchange rates and local payment options provided via the Tempus part of the operation.
For its part, TangoTrade is not taking a financial risk because the funds come from elsewhere, Reynolds said. Rather, the company functions as an intermediary. “Buyers have the option to put the funds in a secure holding account or go through our small business lending provider to (gain access to) a credit line or term loan,” he noted. “We are not taking a risk, but providing options.”
Payment Assurance does not use or rely upon cryptocurrency or blockchain technology – which may come as a surprise to some PYMNTS readers, given how both are hot topics in the world of global commerce and digital transactions. “We can potentially leverage blockchain in the future,” Reynolds said. The future also holds the possibility of offering Payment Assurance via more distribution channels and partners, he said. “We are focused on providing the product wherever importers or exporters act.”
SMBs face a multitude of challenges and frictions when it comes to global trade, but digital technology offers hope of reducing those challenges in the years to come.