Did you know that the foreign exchange market is the largest market in the world? According to the
2019 Triennial Central Bank Survey of FX and OTC derivatives markets, it exceeds a daily volume of $6.6 trillion, which is higher even than the stock exchange. But the truth is that most traditional foreign exchange providers are still focused around larger
scale clients. As a result, the vast majority of small and medium businesses struggle to find ways of remitting money from abroad, and they have trouble accepting payments from international clients. Luckily, the situation for these businesses is changing
with new foreign trade products cropping up on the market. What are these and what benefits can they bring?
Why FX services from banks don’t tend to support SMEs
There are several reasons why traditional finance institutions tend to support small and medium businesses with foreign payments.
Regulations
The top reason is perhaps the regulatory red tape that prevents such companies from accessing services such as underwriting or invoice financing. In practice, this means that the owners of SMEs face a major challenge in raising working capital and keeping
their business operational.
Limited Forex risk advice
In a survey of 200 CFOs and nearly 300 treasurers conducted by HSBC and FT Remark, 70% of CFOs said that their company suffered reduced earnings in the prior two
years due to avoidable, unhedged Forex risk. This points towards the fact that many SME execs have insufficient knowledge of such risk. This problem is so widespread, that the SMEs which derive much of their revenues from overseas might struggle with remaining
profitable.
Lack of global payments solutions tailored to SMEs
Although the pandemic has significantly sped up the pace of digitalization in the banking sector, there still tends to be a ‘one size fits all’ approach when it comes to forex. In a nutshell, traditional banks tend not to have a global payments provision
for SME clients. What’s the result?
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SMEs end up using the same solutions as large corporates and end up paying high international payments transaction fees.
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There is often a lack of transparency regarding these fees.
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For many entrepreneurs who occasionally pay in foreign currencies, it might even be challenging to fill out the payment form, since it is different for different currencies and in many cases written using financial jargon.
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Once the payment is made, its often hard to assess when it will reach the final recipient. It might even take as long as 2 weeks. In a fast business environment this is a very long time.
Are SMEs paying the price for a lack of FX provision?
According to Laurent Descout, CEO at NEO Capital Markets, the FinTech revolution has resulted in winners at both the top and bottom end of the market, namely consumers and large…
Read More: Forex for SMEs — Integrated Solutions are the Answer