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Simplifying international payments: A game changer for ITeS and start-ups

Introduction

The global cross-border e-commerce opportunity is projected to reach $800 billion by 2025 and $2 trillion by 20301, and the government believes that MSMEs & SMEs can play a significant role in it. The government has been investing aggressively in initiatives like DGFT's Ecommerce Export Hubs and workshops to help exporters navigate legal & compliance issues associated with cross-border business, as well as schemes like PLI to encourage and enable MSMEs to participate, especially in the export opportunity.

Among the various challenges associated with cross-border payments, a few particularly stand out for small and medium-sized enterprises: longer payment cycles, regulatory complexities and high costs. These issues often lead to unforeseen costs, operational bottlenecks, and disruptions in cash flow. For small business owners, these challenges are not just inefficiencies; they can pose serious risks to survival.

Here are some of the most significant pain points for businesses regarding cross-border payments:

  • Speed: Since most of the banks (excluding large banks) don’t have a global presence, cross-border payments can take up to three days if multiple intermediaries are involved and even longer for some less-developed markets. For smaller money transfers, the number of correspondent banks involved and the size of payments are both issues. Sometimes, a viable FX price (including charges) may not be available for smaller remittances, and it may take extra time to negotiate with multiple parties involved in the remittance. 


  • Reliability & trackability: In the traditional model of international payments, a small business may lose money due to delayed payments. Surprises in terms of service terms & conditions or hidden charges can come up suddenly, putting critical business transactions at risk. Service reliability and transparency are essential for cross-border payments, enabling the recipient to track how far the payment has been processed and when it will arrive. 


  • High costs: Cross-border payments through banks traditionally often prove to be quite expensive due to the inclusion of several other costs like, SWIFT messaging fees, transaction fees, and spread on foreign exchange (FX). With multiple correspondent banks being involved, this cost can balloon to US$25-35 per transaction (or even higher in the case of smaller markets). The choice of FX rate (open, mid-day, closing or average) is also a challenge and can prove to be expensive as currency rates are usually quite volatile, and MSMEs aren’t equipped to make this choice. Left to their bankers, they are generally faced with very limited and often unfavorable rates. For smaller businesses, these high transaction costs can erode profitability.  


  • Lack of interoperability: The banking model typically operates on SWIFT messaging between banks and their correspondent banking partners. This slows down business if one’s banking partner is a small bank or one that doesn’t have large partnerships in the target export market. Additionally, with the world moving to digital banking and even real time settlements, costs and paperwork involved in the traditional remittance mechanism only make it more cumbersome and inefficient. 


  • Compliance & tax implications: MSMEs dealing in exports generally have to be compliant with a complex set of regulations within their industry. Cross-border transactions add another level of tax & compliance-related worries , as any slippages on this account can be quite punitive. Given the complex and often confusing laws, small businesses that do not have dedicated teams to handle these issues can find themselves in trouble later or having to pay a steep price for these services.

Due to these reasons, traditional payment systems like SWIFT transfers, bankers’ cheques, bank transfers, etc., just don’t cut it for small businesses. The costs of multiple international transactions can quickly add up and eat into a company’s profit margins.

The alternative solutions to receive international payments

Small and medium-sized enterprises, such as ITeS providers or other exporters, now can have the opportunity to enhance their cross-border payment processes. Leaning on several modern solutions, goods and services exporters can get the best service and ease over traditional systems like SWIFT, particularly in terms of speed, cost, and security.

Top 3 alternative solutions include:

  1. Blockchain-backed technologies: Reduce the reliance on intermediary banks. Technologies like blockchain leveraging on a decentralized ledger offer faster and more cost-effective cross-border transactions. 
  2. Virtual bank account: Get affordable rates. Exporters can now bid goodbye to the complexities of cross-border payments. For instance, at Xflow, we aim to make this process as simple as collecting domestic payments by offering transparent fees and competitive exchange rates. 
  3. New-age fintech solutions: Access real-time updates and enhanced user experiences. Emerging fintech startups are developing innovative payment platforms with powerful APIs and automated processes to address industry challenges.

How are modern solutions changing the international payments game?

New-age solutions have changed the game with a much leaner approach driven by partnerships to provide comprehensive one-stop solutions such that a startup or small and medium-sized business is the net beneficiary of the cost & time-saving in their business.

Partnering with modern cross-border payments solutions, not only helps improve geographical reach but also lower costs and help improve the overall cashflow.

While banks are still competing based on the perception of safety & cost sensitivity, fintechs like Xflow are taking a more comprehensive, customer-centric approach, offering full-service solutions at a fraction of the cost and time.

For small and medium exporters, opting for a modern and smarter payment method comes with a wide range of benefits, including being cheaper and faster. These include:

1. Wider reach: Last-mile logistical solutions have enabled business with the remotest & smallest offshore markets. However, traditional banking solutions tend to be unreliable and maybe even financially unviable for remote markets. MSMEs then need to be ready with payment solutions that are scalable & accessible across geographies, which in turn helps expand the business reach and acquire new clients.  


2. Local payment experience: More often than not, businesses don’t only compete with fellow exporters but also resident competitors in that market. So, a producer in India needs to offer not only a superior product but also a payment solution that is comparable to the domestic payment experience of their client. 


3. Improved cash flow: Faster turnaround on cash means a shorter cash conversion cycle and lower funding costs, directly impacting profitability. Faster and more efficient payment processing is critical for small businesses as they may not have the financial cushion to absorb lengthy payment cycles. 


4. Cost savings: As per a World Bank report2, the average cost of remitting US$200 was ~6.5% in 20203. For startups & MSMEs, this could be almost half or more of their entire profit margin. By using modern payment solutions, businesses can significantly reduce the high fees traditionally associated with cross-border payments. Reinvesting this margin in the business can help them scale faster and be more competitive for larger orders. 


5. Better risk management: While banks have done a reasonable job in covering risks associated with cross-border transactions, the costs & timelines tend to sully the overall experience and effectiveness. New age payment fintechs are well equipped to manage the risks associated with cross-border payments, such as currency fluctuations, fraud, and compliance issues. For example, Xflow recently attained the gold standard in Information security & compliance by completing the Service Organization Control (SOC) 2 audit and ISO certification, assuring data privacy, security & reliable and consistent system behavior.

Conclusion

Any small business, while participating in the export opportunity, is already faced with multiple vagaries & complexities of that business. Given the fragile nature of their finances, opting for smarter payment solutions with fintechs like Xflow is not an option but a necessity as it not only offers better economics but also brings in efficiency in terms of resource, effort and time management.