How Corporate Payments Disruptors Compete, And Coexist, With Banks

Foreign currency payments firm Midpoint got a bit closer to its small business accounting partner, Xero, this month when it revealed that not only had they extended their collaborative ties but that Midpoint would also be adding a “Pay Now” button to invoices sent through Xero.

This means Xero’s SME users can pay their international invoices via Midpoint’s FX services, which uses a peer-to-peer matching model, allowing payers to obtain the midpoint of the interbank market rate for foreign exchange costs at that moment in time.

It’s a business model that bypasses the traditional bid-ask spread method, which prices this exchange as the difference between an immediate bid and an immediate offer.

Technical banking jargon aside, Midpoint CEO David Wong and Operations Director Bradley Lemkus said the company’s services are aimed squarely against traditional banks. Yet, with the new “Pay Now” button, Midpoint explained, payments are conducted via direct bank transfer, making for an interesting dynamic of competition and collaboration.

“It is worth bearing in mind that, despite the abundance of FinTech payments companies, 80 percent of our FinTech competition are High Street banks,” Wong said.

The executives spoke with PYMNTS about this relationship and how it exemplifies the world’s evolving payments and financial services landscape on a much larger scale.

Direct Competition

Midpoint’s new service with Xero allows businesses to settle their foreign invoices directly from the bill itself.

While payers must bear the extra costs of foreign exchange fluctuations, which can occur between the time a client is billed and when an invoice is actually paid, Wong explained that the P2P model of foreign exchange payment services is still a cheaper option than traditional financial institutions.

“Banks and brokers might quote ‘zero commission’ or ‘wire fee,’ but they tend to hide their profit margins in the poor FX rate,” he said.

Indeed, there is at least some evidence that traditional banks aren’t being as transparent as they could with their foreign exchange services, especially for SMEs. A scathing research report published earlier this year revealed that banks in the U.K. are spiking their FX fees for small business customers, largely via hidden fees.

Researchers found that SMEs have no clear way to compare which bank will provide the cheapest option when in need of international payment services.

Midpoint is preparing to offer a way for Xero clients to use the “Pay Now” feature with a commercial card, in addition to its current offering, which uses direct bank transfer. But Wong explained that this, too, can come with some unfriendly costs.

“Offering the ability to pay with commercial cards is in our pipeline, but it is worth noting that credit cards will incur charges and these charges are dictated by the card issuer, as well as the card scheme or network,” Wong said.

These extra fees mean B2B suppliers and vendors are likely to pass on the cost of accepting commercial cards to their clients. Ultimately, Lemkus noted, “it’s really difficult to get away from the spread or margin the service providers will charge you” when it comes to foreign exchange services.

Collaboration

These fees are exactly what Midpoint works to tackle. But with its latest feature working only with the cooperation of banks (it is a direct bank transfer, after all), Midpoint discussed how, even though its top competition are the banks, collaboration is the way of the future.

Already, cooperation between innovators and banks is breaking up the longstanding foundations of the financial services market.

Top names like Google and Amazon are entering the payments game. “But I don’t think you’ll see Google or Amazon acquiring a banking license,” Wong said, noting that their services are built on top of existing, bank-owned infrastructure.

The driver behind this, the CEO said, is technology.

The “Pay Now” button is a perfect example: While it seams like a no-brainer, slowly, the ability for businesses to pay their invoices online right when they get billed is an increasingly common option. Fellow FinServ firms PayStand and ONE UP recently launched a similar solution.

“It is only until recently, the past couple of years, that technology, as an enabler, has made it possible for us to offer such a solution to the mass market,” explained Wong.

As the payments technology develops and corporations demand more sophisticated payment services from their financial service providers, banks will need to work with — not against — the disruptors and innovators that put this technology to use.

“There is definitely going to be more collaboration [between banks and innovators],” said Wong. “We’ve already seen that.”

In corporate FinServ, this collaboration allows for an embrace of digital processes.

“If you look at any statistic, more and more, transactions are not handled electronically, so it’s just a matter of time, I think, that business payments follow suit,” noted Wong. “It’s just a natural progression.”

A large portion of this trend can only be made possible by innovators and traditional financial institutions coexisting — whether it’s a digital “Pay Now” button on an invoice that facilitates electronic direct deposits or it’s mobile B2B payments operating on underlying bank infrastructure.

It’s difficult to predict what the FinServ ecosystem will look like in the future, but one thing is for sure: The ecosystem is changing, and that’s driving development in the way corporate payments are done.

“Maybe in 20 or 30 years, the biggest bank in the world will not be a traditional bank that you even know the name of right now,” mused Lemkus. “There are banks emerging who are really electronic banks, rather than traditional retail banks.”

“I think that’s really going to change the dynamics and the whole financial services and banking sector quite dramatically over the next couple of decades.”