Levelling Up Your Business in 2023: Growth, Resilience & Stability

Challenges to Growth, Resilience & Stability as an SME in 2023

International expansion is a vital key to growth for SMEs. 

With the ability to reach an international audience, an SME can more easily grow its customer base and increase the flow of revenue coming into the business. 

However, for SMEs deemed high-risk, it can be a real struggle to establish reliable banking relationships across jurisdictions globally. 

These high-risk SMEs — such as online gaming operators, forex trading, MSBs, PSPs, crypto companies and financial institutions such as challenger or neo banks — must consider all the requirements associated with cross-border payments and how to solve them, while also dealing with reluctance from banking providers to partner with them.  

Despite this, SMEs continue to expand internationally, requiring new solutions for sending and receiving cross-border payments tailored for their risk profile. 

According to PYMNTS 2022 International B2B Payments report, 38% of SMEs reported an increase in cross-border payments between 2020 to 2021. The report goes on to reveal that just 23% of SMEs feel satisfied with their cross-border payment solutions, highlighting four key challenges for SMEs regarding cross-border payments summarised below:

1. Organisational Challenges: SMEs need more efficient and easy-to-use cross-border payment systems to simplify payment management. Without a globally connected payment system, SMEs can end up over-extending resources and drawing talent away from other key areas of business.
2. Scalability: Scaling as an SME requires you to have a strong payment system that can win the trust and loyalty of customers. If a payment system is slow, inconsistent, and performing poorly, an SME may not be able to meet its payment obligations adequately. 
3. Compliance: Compliance is always complicated in payments and only becomes increasingly complex when dealing with cross-border payments. Expanding abroad means adding another layer of complexity to compliance, as SMEs must deal with the regulations of new regions.
4. Liquidity: If a cross-border payment system is not optimised for efficiency, SMEs can end up with an unstable flow of revenue as they wait for payments to be processed and reconciled. As a result, these SMEs can end up with limited access to working capital, which can ultimately hinder the ability of an SME to continue expanding abroad. 

For SMEs to overcome these cross-border payment challenges, the solution lies in adopting an innovative cross-border payment system that can provide resilience and stability during times of growth. 

Keeping these challenges in mind, let’s dive into the five key steps for levelling up your SME in 2023: 

1. Improving your Payment Processing Systems

To begin your journey to an improved cross-border payment system, the first crucial priority is to improve existing payment processing systems. 

Poor processing systems that lack efficiency can be a major problem for SMEs. 

When SMEs begin sending and receiving cross-border payments, this payment processing inefficiency can be greatly exacerbated due to the high cost of payment processing fees. 

For domestic payments, SMEs must deal with standard domestic processing fees like payment processor fees, card network fees, and interchange fees. As more cross-border payments are added to the mix, SMEs must also contend with international processing, settlement times and foreign exchange fees as well. 

However, change is on the horizon for SMEs in terms of accessing affordable international payments.

According to a McKinsey & Company report on cross-border payments: 

“The SME segment stands to benefit the most from cross-border payments’ convergence and simplification—given that larger corporates have long had access to most of these capabilities.”

2. Understanding Your Regulatory Landscape

Enabling cross-border payments requires SMEs to grapple with various international regulations.

The key to understanding the regulatory landscape your business is likely to encounter is to consider not just domestic and international regulations but also how those regulations overlap and affect each other. 

For example, in some cases, Brexit made cross-border payments to the European Economic Area (EEA) more difficult for SMEs based out of the UK. Coupled with new regulations that are cracking down on payment laws and compliance, this makes the regulatory landscape much more complex for some UK businesses.

Let’s briefly take a look at the state of regulation in the UK and Europe today: 

• MiCA: Markets in crypto assets (or MiCA for short) is a proposed regulatory standard that would help to standardise rules for crypto assets at the EU level. Though this regulation — if passed — would initially put greater pressure on SMEs that currently leverage unregulated crypto assets, it could ultimately impact how cross-border payments are carried out, as crypto assets allow SMEs to bypass some of the more costly payment processing fees. Although SMEs in the UK may not be subject to this regulation due to Brexit, MiCA is still an important piece of the puzzle for optimising international payments. 
• PSD3: The third iteration of the Payment Services Directive (shortened to PSD3) is a regulatory standard spearheaded by the EU Commission that is currently in development. PSD3 is likely to expand upon improvements made by PSD2, such as building an international open payments ecosystem. For SMEs in the EEA, PSD3 will likely be a vital regulatory change for improving operational and payment flexibility. Additionally, these SMEs will also have to reimagine their compliance models to meet the new set of payment standards. 
• UK Consumer Duty: In the UK, the Financial Conduct Authority is cracking the whip when it comes to consumer protections. The Consumer Duty regulation is designed to set “higher and clearer standards of consumer protection across financial services.” Despite the newness of this regulation, the deadline for the implementation of these standards for new and existing products or services is set for the end of July 2023. As such, SMEs in the UK must act quickly to ensure their payment system and infrastructure is up to par with the new regulation. 
  
  

3. Ensuring Your Banking and NBFI Network is In-Check

After assessing the efficiency of your payment processing system and getting up to speed on the latest regulations in the countries where your business operates, the next crucial step is to assess your correspondent banking and NBFI network. 

Correspondent banks are the financial institutions that facilitate cross-border payments, acting as an intermediary for your domestic bank to process international transactions. These banks can handle a variety of payment activities, including fund transfers and currency exchanges. 

Though correspondent banks can be useful for getting started in new regions, they can also present additional challenges for SMEs without a robust correspondent banking network. 

For example, let’s compare two banking network scenarios to examine this challenge and how SMEs can work to overcome it:

Scenario 1: An SME Manages Its Correspondent Banking Network Independently

In this first scenario, imagine an SME that has chosen to handle all cross-border payment processing through onsite or in-house solutions. By opting for this more independent cross-border payment strategy, the SME in question must bear the responsibility of building out a correspondent banking network and ensure risk diversification, e.g. more banks integrated equals less risk. 

Depending on how a correspondent bank rates the SME’s risk level, establishing this network can be incredibly difficult for the SME without third-party support. 

Moreover, the SME must handle all of the relationship maintenance required to stay in good standing with its correspondent banks. This can result in the SME’s business team drawing attention away from innovation to focus on maintaining these bank relationships.
 

Scenario 2: An SME Leverages a Fintech Payments Solutions provider to Establish a Banking Network

To achieve a more robust correspondent banking network with greater ease, an SME can leverage a partnership with a third-party tech company, such as a banking-as-a-service provider or fintech with specialty in providing payments and FX solutions via access to a global bank and NBFI network. 

Fintechs can be immensely helpful to SMEs striving to expand globally due to the existing connections to correspondent banks and NBFIs that these types of service providers typically offer. 

Rather than having to build and maintain a banking and NBFI network independently, an SME can instead rely on their payments fintech or banking-as-a-service partner to provide the necessary connections to correspondent banks and NBFIs in the SME’s target regions. 

This not only saves SMEs time and manual effort but also makes it significantly more likely that high-risk SMEs can establish a reliable and resilient banking network, both domestically and internationally. 

4. Determining How Your Payment Tech Stack Measures Up

As you work diligently to improve your payment system and level up your business, it becomes increasingly important to determine the quality of your payment tech stack. 

Yet, many SMEs seem to lack a thorough understanding of what makes a payment stack effective. 

In a survey of 250 payment decision-makers at UK-based SMEs, 96% of these decision-makers could not accurately place the parts of a payment value chain in the correct order — despite 72% of these same decision-makers claiming to be confident in their payments knowledge. 

This begs the question of how SMEs can adequately and accurately assess their current payment stacks.

Circling back to the scenarios discussed earlier, SMEs that leverage fintech partnerships are likely to have a much easier time when assessing the value of an existing payment stack. This is thanks largely to the consultation services offered by them that help SMEs to identify both the strengths and weaknesses of their current payment technology. 

5. Evaluating Your Service to Customers

When enabling cross-border payments, it is essential to place customers at the centre of the conversation. 

No matter how robust your corresponding banking and NBFI network is or how high-quality of a payment stack you possess, if your customer experiences are not up to par, your business will never win loyalty in new regions. 

In a January 2023 research report, the increasing penetration of smartphones and the growing popularity of digital payments are named as two key customer demands that businesses are struggling to meet. The report further highlights that alternative solutions to cross-border payments outside of traditional bank solutions offer key benefits, stating that:

“Alternative solution providers that provide faster, cheaper, and more transparent cross-border payment solutions can gain a competitive advantage over banks.”

Many are looking to technology providers to not only support business-to-business payments but also support mass payouts to their consumer customer base. At the end of the day, if you aren’t considering the needs of your target customers in new regions, your business will struggle to establish a payment process that is profitable and doesn’t eat away at your revenue. 

Is Banking-as-a-Service or Payment Fintechs the Key to Business Resilience in 2023?

Throughout this article, we have touched on the role of banking-as-a-service providers and fintechs specialising in payments and FX in enabling SMEs to carry out cross-border payments — but which is better at achieving resilient and stable business growth in 2023 and the years beyond? The answer is both depending on your needs and budget.

Partnering with Banking-as-a-service providers or payment fintechs offer many cross-border advantages to SMEs domiciled in the UK and Europe with global needs or SMEs in other geos looking for access to UK and Europe trading corridors, including: 

• Payment Flexibility: With the help of a banking-as-a-service provider or payments fintech partner, SMEs can achieve greater payment flexibility thanks to gaining access to more advanced payment technology that’s easy to integrate via API connectivity. 
• Banking Network Expansion: As mentioned earlier, banking-as-a-service can provide SMEs with an already established network of correspondent banks, simplifying the process of global expansion for the SMEs — even those rated as high-risk. However, fintechs specialising in payments and FX can provide more robust access to both global banks and NBFIs which ensures better risk diversification.
• Optimised Efficiency: Both banking-as-a-service providers and payment Fintechs offer SMEs the technical know-how necessary to optimise a payment processing system to be as efficient as possible, no matter whether payments are being sent or received domestically or internationally. 
  
  

Final Thoughts: Achieve Business Growth & Flexibility with Freemarket

The year 2023 is sure to be a monumental time for the financial industry.

Ongoing economic uncertainties, industry fallouts and geopolitical conflicts are putting new strains on businesses trying to expand globally — especially SMEs with lower levels of working capital than large corporations. 

As such, achieving business growth this year comes down to the strength of your payments strategy.

At Freemarket our technology and payment solutions are designed specifically to help SMEs struggling to meet the risk appetite of banks globally that supports establishing a solid footing in their target regions. With the support of Freemarket’s diverse global banking and NBFI network, your business can gain access to a robust business-to-business payment ecosystem with advanced cross-border capabilities. 

From cross-border payments and reconciliations in over 200 countries, to lightning-fast currency exchanges across 100+ different currencies, Freemarket has the tools your business needs to thrive in 2023 and beyond. 

Contact the Freemarket team to start levelling up your business today.