SMEs deserve faster, cheaper cross-border payment service

November 05, 2021 10:07
Photo: Wise

Hong Kong is home to over 340,000 Small and Medium-sized Enterprises (SMEs), making up a whopping 98% of businesses in Hong Kong. It’s no exaggeration to say that SMEs are the driving force of Hong Kong’s economic development — many leverage Hong Kong’s strategic position to conduct business with overseas markets. Indeed, more than 70% of SMEs are exporting globally, according to research by Fedex.

However, successfully going global is not an easy task for SMEs who typically have operational and financial resource constraints. Take cross-border payments for instance: it’s an essential service for SMEs embarking on international expansions, and many would naturally see an increased need to send and receive foreign currency transactions when working with vendors and suppliers overseas. Yet, it’s alarming that in the same research by Fedex, more than half of them point to currency exchange issues as the biggest challenge to growth. Why is this the case?

Simple money transfer is not a simple task for SMEs

While domestic payments have grown by leaps and bounds, the story changes the moment another currency is involved. Today, moving money around the world remains extremely slow, difficult, and expensive for the most part. While these problems affect everyone who transacts in another currency, it’s resource-lean players like SMEs that are hit the hardest. Think about it: if payments to overseas suppliers are constantly delayed, not only would it damage business relationships, but SMEs could also face additional late payment penalties in addition to the high fees charged by their banks.

Just like consumers need fast and convenient digital experiences in the modern age, so do SMEs. If we can receive hundreds of words via an email in a split second, what prevents us from moving payments internationally within just a few seconds?

Banks are not well-suited for international needs

The challenges with cross border payments still exist today largely because of the legacy infrastructure that is not designed to move money around the world. The system was built primarily with domestic needs in mind, and sending money abroad requires moving funds through a number of intermediary banks, a highly inefficient system that results in delays, frustration and high fees. Today, the average cost of remittances remains persistently high at 6.38%.

According to a report by EY, global cross-border payment flows are expected to reach US$156 trillion by 2022, with business-to-business (B2B) transactions making up the largest share. There is an urgent need to rethink and redefine this system as people and businesses become increasingly internationally connected.

Hidden fees hinder SMEs growth

When transacting in a different currency, most people and businesses are unknowingly landing themselves with eye-watering fees. This is in part due to a lack of awareness around how foreign currency transactions are priced — the upfront transaction fee and exchange rate. Banks and other providers often do not convert money using the fair, mid-market exchange rate as seen on Google or Reuters. Instead, an often-undisclosed markup to the exchange rate is added, which results in a hidden fee that makes it hard for people to know when they’re being overcharged.

Indeed, according to a study commissioned by Wise and conducted by Capital Economics, Hong Kong businesses alone pay more than HK$26 billion yearly on foreign expenditure fees for trade in goods and services. Shockingly, HK$25 billion of those fees, or 93%, is hidden in exchange rate markups. This is an unacceptable practice, and one that hurts SMEs growth for whom these fees can make a world of difference between survival or sinking.

The road ahead

The good news is that the financial industry is acutely aware of the key problems and are taking steps to improve the experience. Customers’ increased expectations for instant, convenient and seamless services have driven change in the industry, both at a regulatory level, as well as the emergence of innovative fintech companies building low-cost, transparent and simple international money services for consumers and businesses.

We’re also seeing a growing trend of future-forward banks integrating these fintechs’ API solutions into their infrastructure, allowing them to roll out more innovative services and better experiences for their customers without having to build it from scratch.

As ground-breaking as it seems, surely such collaboration between traditional banks and fintech platforms is just the beginning. The reason is simple – it’s a win-win. On one hand, banks can save time, money, and resources while strengthening their competitive edge as they serve their customers’ needs. On the other hand, when fintechs are given opportunities to serve more customers indirectly through the banks, this allows more people, including SMEs, to gain access to cheaper, faster, and more transparent cross-border services.

As the world becomes increasingly digital, moving money at internet speed is no longer a luxury — it is business-critical. Slow, cumbersome, and expensive processes hurt SMEs before they get a chance to start.

SMEs deserve a better option, and it is high time for us to make that happen.

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APAC Expansion Lead, Wise