Today, at least when it comes to the consumer side of it, we are all used to payments being instant, reliable and basically free. When sending money to friends and family, we rarely think about “what bank are they using” or “will my payment clear”. It is a nice utopia, where borders do not matter anymore and funds can easily move between different countries, systems and accounts. Unfortunately, the situation is less rosy for small and medium-sized businesses. Succumbed by the promise of low fees and instantaneous transactions, many SMBs choose the trendiest fintech as their main provider. And while transactions are indeed executed instantaneously, funds can be lost instantaneously as well. Retrieving the money proves to be a time-consuming ordeal. It would be overly simplistic to blame business owners for choosing a startup to handle their transactions, as banks come with their own set of drawbacks. Let us look at the situation SMBs find themselves in more detail.

Banks like risks less than they would like to admit it

To a person unfamiliar with the current state of affairs, it might be not clear why any business would have to search for an alternative to banks. After all, banks are reputable institutions backed by decades if not centuries of experience. But as Sarah Kocianski put it brilliantly in her article on the subject, these days “bank accounts are hard to come by, expensive, and no longer fit for purpose for the average SMB”. I fully agree with her thoughts regarding the banks’ slow adoption of customer-centric practices people (and SMBs are, of course, run by people) expect. The fact that her article is from 2018 only proves the point that some things take time to change. But the cumbersome nature of some banks is just the tip of the iceberg. Especially if your business is accepting and sending payments around the world, not just within the borders of one country. In that case, it is the banks’ aversion to risk that bothers you most, not them being old-school.

I would not really blame the banks in this case, though. After the deadly acts of September 11, countries around the world pushed for more regulation, seeking to prevent malicious actors from laundering vast amounts of money and financing terrorist operations. With the existing AML/CTF framework, for banks today, every new corporate client, especially one trading across borders, is a potential liability. The reasons for suspicion vary in each case. A bank can turn a business away, if the owner is a non-resident, or if the company is owned by a legal entity registered in a different jurisdiction. If a company is trading high-risk commodities, the amount of red flags goes up. It is easier to say no to a handful of small clients than to accept the cumulative risks that they bring.

Neither banks nor fintechs really care about single cases

The ability to quickly grow means that a financial institution has a significant pool of satisfied customers. If 1% or even 10% of them are having issues, there’s no impetus to immediately solve all of their cases. After all, those customers will either wait or leave, only to be replaced by new customers with fewer demands. And while some financial institutions offer great and personal customer service, challenger banks rely on outsourced call centres and chatbots – a combination known to anyone who had their funds stuck in transit.

What unites both fintechs, no matter how progressive they picture themselves, and banks is the impersonal relationship they have with clients. Not knowing who to call in case of an emergency is not the best feeling when running a business. 

Banks and fintechs are less universal than we expect them to be

When choosing any sort of provider, a business expects that they will cover the field they are responsible for. After all, you rarely hire 5 different cleaning services providers or buy your paper from 3 unrelated suppliers. Unfortunately, the same cannot be said for international payments. For instance, you might have an English bank that corresponds well with the majority Chinese bank… except for the bank your client is using. What do you do?

If your payments provider does not provide you with timely and efficient transfers to a country that is crucial for your business, you do not change your provider. You stay with them for the services they are providing well. You then sign with a different bank or fintech for the services your initial provider is poor at handling. This increases the administrative burden you, as a business owner, have, and adds unnecessary complexity. Complexity you would rather have someone else handle for you. Except no one wants to.

In lieu of a conclusion

There is an entire niche to be filled by companies servicing internationally-minded SMBs. What diverts many entrepreneurs from going into that niche is not just the risk but also the amount of know-how such a company would have to accumulate. I have not touched upon AML in this article, as the topic itself deserves an entire article if not a series.  In short, every fintech working in the field of payments needs a strong AML backbone. Since it takes time and resources to grow that backbone (and the market is not sleeping either!), some smaller institutions need to become aces at managing risk, all the while taking on more risk. There are ways of hedging that risk. Increasing their understanding of their clients’ business areas (basically, knowing how different sectors operate) is one of them. This is not the easiest path to take (and not the quickest road to unicorndom) but a path worth exploring. I will be returning to the topic in more detail shortly.