However, in recent years, fintech upstarts have burst onto the scene intent on solving some of the most vexing problems for small and medium-sized enterprises (SMEs) seeking to send and receive payments internationally, such as slow processing times, a lack of transparency and high fees. The global average cost of sending US$200 is about 6.5%, according to the World Bank.
SMEs have historically faced more challenges in cross-border payments than large multinationals because they lack dedicated in-house treasury teams. Without comprehensive support for cross-border payments, SMEs often are stuck opening and managing multiple bank accounts and dealing with inflated costs. Recent research by Israel-based Covercy found that SMEs conducting just 20 cross-border transactions valued at US$13,000 a month pay an average of more than US$2,700 in monthly fees.
The opportunity for fintechs
Fintechs have been gaining market share in B2B cross-border payments quickly thanks to a favorable macroeconomic environment – at least until this year – and the pandemic-driven transition to digital payments, where they enjoy inherent advantages over incumbent financial institutions relying on cumbersome legacy information technology infrastructure. Citing the pandemic’s transformative effect on payments in the region, the consultancy McKinsey & Co. in 2020 forecast that Asia’s payments sector (both retail and B2B) would reach US$1 trillion in annual revenue by 2022 or 2023.
Meanwhile, the overall B2B cross-border payments market is immense and growing steadily. Ernst & Young reckons that B2B payments account for US$150 trillion of the US$156 trillion global cross-border payments market and is increasing at a 5% annual clip.
While fintechs may compete with big banks in this area, sometimes they work together. In general, large banks still dominate the big corporate payments market, while fintechs usually cater to SMEs.
Fintechs typically employ two different strategies in their effort to capture cross-border B2B payments market share: Build new cross-border payment rails that that do not rely on traditional correspondent banking networks or provide a technology stack to clients that allows them to connect more seamlessly to legacy bank rails.
Build it and they will come
In the Asia-Pacific region, a number of fintechs have built their own payment rails. One of the most prominent is UK-based Wise, whose Asia-Pacific business grew 40% annually in 2021 and contributed £101.3 million ($180 million) in revenue, according to the company’s annual report. Overall, Wise processes US$72 billion a year in payments of which 20 to 25% are business payments, according to the publication Payments Dive.
Wise has been making steady headway in the Australian market, where banks are known for their high cross-border payments fees. Australia’s large banks charge about A$30 for a single international transfer and also profit handsomely from foreign exchange fees. The World Bank has found the cost of sending money out of Australia is higher than the G20 average.
In October, Wise became the first non-bank to get an exchange settlement account at the Reserve Bank of Australia (RBA). Having this account will allow Wise to connect directly to the real-time payments system NPP, likely lowering costs for customers and allowing the company to compete on a more even keel with Australian banks. In an October report, Australia Financial Review noted that when the Bank of England allowed Wise to connect directly to the UK fast payment system the company was able to reduce costs by 10 times. It is quite possible Wise can achieve a similar fee reduction in Australia.
Connecting to legacy rails
Some of the most successful fintechs in Asia’s B2B cross-border payments market focus on facilitating improved access to the traditional correspondent banking network instead of trying to build entirely new payment rails. They differentiate themselves from banks with more intuitive interfaces that offer greater features and functionality.
One of these firms is Payoneer, which only works with non-retail customers. The company processed more than US$44 billion in payment volume in 2020, according to a filing with the U.S. Securities and Exchange Commission (SEC). More than 80% of that is cross-border.
Payoneer has thrived in Asia Pacific where SMEs are widely underserved in the cross-border payments segment. In the third quarter of 2022, the company reported 39% year-on-year revenue growth in its portfolio of emerging markets, which includes Southeast Asia and South Asia.
For its part, Israel’s Rapyd uses bank money transfer methods, but says that its but proprietary API developers allow it to customize user experiences. Rapyd’s API gives clients access to payments as well as other services such as fund collection, disbursements, compliance and card issuing.
Mixing and matching
B2B payments is set to continue growing steadily through the middle of this decade in Asia Pacific on the back of strong economic fundamentals, persistent demand from SMEs and rapid digitalization. The consultancy Frost & Sullivan predicts Asia Pacific B2B payments revenue will double to US$1.4 trillion by 2025, at a compound annual growth rate of 10.5%. A significant portion of these opportunities will be in the cross-border segment.
To optimize opportunities in this fast-growing market, fintechs are likely to increasingly look to for partnership opportunities, in some cases with banks but also with each other. For instance, in May Taiwan-based blockchain services firm OwlTing announced a partnership with Singapore-based B2B payments service provider Nium that will cover cross-border payment services, automatic reconciliation and online currency swaps. OwlTing competes aggressively with banks on price, charging less than US$10 for same-day settlement, while the average cross-border remittance fee ranges from US$25 to US$30 per transaction.
“As a leading blockchain company, we're actively looking for global partners to make B2B payments faster and cheaper. We are very pleased to cooperate with Nium to grow from domestic financial services to multi-currency, cross-border payments services,” OwlTing CEO Darren Wang said in a statement.
This commentary was written in collaboration with Banking Circle and originally appeared on Banking Circle.