Cost Of X-Border Payments Now A Deciding Factor For SMEs

B2B payments firm Saxo Payments wants firms to consider ditching their traditional financial service providers when doing international business.

In an article penned by Saxo Payments Cofounder and Chief Executive Officer Anders la Cour, published last week, the executive argued that the excessive fees and friction associated with cross-border B2B payments have given way to alternatives.

“With some banks charging transaction fees in excess of £30 [about $36.50] per payment processed, these costs can quickly add up, especially for businesses that trade globally on a regular basis,” the executive wrote.

The issue of bank fees for cross-border payments has been raised before. Last year, cross-border payments firm Covercy released research that concluded SMEs are hit especially hard by their U.K. banks when it comes to international payments. According to its analysis, Covercy found that SMEs that conduct just 20 cross-border transactions valued at $13,000 a month pay an average of more than $2,700 a month in fees.

The research also found that 69 percent of U.K. SMEs pay “completely unnecessary” cross-border payment fees — “unnecessary,” perhaps, because FinTech players are now surfacing to compete against the banks and provide more affordable alternatives to international B2B payments.

In addition to Covercy, another company, Xendpay, is tackling this issue. Xendpay announced last November that it is rolling out a new service, Xendpay Business, that allows SMEs to make international payments on a pay-what-you-want fee model.

“We are the first company to have scrapped compulsory fees in response to the industrywide lack of transparency and endemic rip-off prices,” the firm’s CEO and cofounder, Paresh Davdra, said in a statement at the time.

Those are harsh words for the traditional FIs charging those cross-border payment fees, but other FinTech players seem to agree.

According to Saxo Payments’ la Cour, however, there is another hurdle that small and medium-sized businesses face in their international payments endeavors: They aren’t even aware that these alternative services exist. La Cour cited Saxo’s recent whitepaper “Cross Border B2B Payments – Today’s Landscape; Tomorrow’s Opportunity,” which found that 27 percent of businesses surveyed by Saxo had no idea alternative solutions in cross-border payments existed.

That’s despite the firm’s findings that nearly half of SMEs report being dissatisfied with the rates their banks charge for cross-border payments. Eighty percent said they would consider switching service providers if that cost were reduced.

“Businesses that invest the time in reassessing their priorities when it comes to payments are, in my view, very likely to get a better service at a lower cost than they are currently being offered by incumbent suppliers,” la Cour concluded. “The question is: How many will be prepared to shake up the status quo and unbundle existing services to be delivered by one or more specialist providers?”

But as FinTech firms like Saxo Payments, Covercy and Xendpay explore how to convince SMEs to leave behind their banks and switch to an industry newcomer, banks themselves are working on their own tactics to prevent that very scenario.

One of the most high-profile examples of this is traditional banks’ massive investments in blockchain technology. The Clearing House recently published an article by McKinsey & Co. that highlighted how much the cross-border payments industry could be disrupted by blockchain. According to McKinsey, in 2015, the payments industry — banks and FinTech players alike — earned a combined $200 billion in revenue thanks to the international payments solutions they offered. Nearly 80 percent of that, the firm noted, was the result of B2B payments.

Costs are so high, McKinsey explained, because fees accumulate at each step of the international payment process. Transactions bounce from one bank to another, and each bank wants to benefit financially from helping a payment get to where it needs to go. That is just one of the reasons why industry stakeholders have begun to invest in distributed ledger technology to explore how the technology can not only make cross-border payments faster and more transparent but cheaper for everyone involved.

Blockchain remains far from a ubiquitous solution across both traditional banks and FinTech innovators, but as these players fight for their share of the cross-border B2B payments markets, the cost of providing these services is likely to play a significant role in which players gain and lose that share.