By Hamish Anderson, Founder and CEO, Money Mover
99% of the world’s 125m companies are small and medium-sized enterprises (SMEs). They are responsible for generating 49% of global GDP. In an increasingly global world, for many international expansion is not only the key to growth, but is the key to survival. Research from Oxford Economics across 21 markets reveals that SMEs expect international revenues to grow from 40% to 66% in the next three years, while the number of those doing business in at least six countries will jump 129%.
Help us to help ourselves
The focus on how to support businesses as they grow tends to be on funding, but the reality is that SMEs need support and tools rather than just loans. International expansion in particular is a massive challenge for businesses. The problem is that the majority of SMEs lack the knowledge and skills to capitalise on opportunities and mitigate the risks involved in internationalisation. Arguably the most concerning of these risks is FX transfer – a market currently growing at 7.7% a year. SMEs will need to take and make payments in a variety of different markets but the options are limited. Banks, while secure, are not offering the best rates – either to consumers or SMEs. P2P transfer sites, while offering better rates, don’t offer reasonable transfer times or transparent fees.
The strength of Sterling adds another level of complexity to doing business abroad. If UK businesses are sourcing materials and services from the continent then the cost is likely to have fallen. This provides an opportunity to hedge by buying more now at a lower price. Conversely, when selling abroad, can businesses afford to lose large parts of a sale to bank fees? Especially when they may already have had to reduce prices to compete with non-UK businesses able to take advantage of an expensive Pound.
When it comes to supporting international expansion, traditional financial service providers, and even the new fintech players, aren’t providing the service that SMEs deserve.
A tax on growth: too expensive, too difficult
It’s a hackneyed story to some, but worth revisiting: most SMEs still waste money by using banks to provide international payment services and currency exchange.
SMEs don’t qualify for corporate FX services, which means they tend to get treated like retail and suffer poor service and high costs as a result. The hit to SMEs making international payments comes through substantial exchange rate spreads (up to 3% or more) that they pay each time they exchange one currency for another. This 3% could equate to a substantial amount of money for a small company and might better be used for staff training costs, new systems or even a new employee.
When dealing with fine margins, these fees hamstring international growth, and are only accepted because it is the status quo. Despite a lack of awareness among the SME community, there are alternatives to the big high street banks. These are the P2P players that offer a matching service to reduce the cost of international payments. They work by matching a foreign buyer with a seller, taking the payment into a local bank account owned by the P2P company and then paying the payee from another owned bank account in their local currency. Thus no money ever leaves the country, exchange fees are avoided and the P2P transfer company can use a rate much closer to the market rate.
Sound good? Well it is, but only for consumers. These types of services simply aren’t fit for businesses because of two reasons tied to the fundamentals of P2P.
- Price – Because the price needs to be matched by a counterparty the rate is not guaranteed at time of execution – by the time a match is found the rate may well have moved
- Speed – For the same reason, there is a lack of certainty over the payment settlement date and time – it could take quite a while to find a match
SMEs lack transparency over the rate, speed and the status of their international payments regardless of who they go to. This isn’t a basis for sound financial planning.
Serving the underserved
Most SMEs have accepted this unnecessary 3% tax on their business. And even if they can find better rates, this is offset by service issues that make management difficult.
And we haven’t even got into ease of access and integration. Is it possible for an accountant or part-time FD to log-in to the business account and manage payments? Is there a full audit trail? Can detailed transaction records be exported into other applications and confirmations downloaded?
Too many businesses continue to use banks because of inertia because they don’t know there is a better option. It’s damaging to SMEs and is damaging the UK’s economy. It’s time that changed.