Global commerce has been transformed by the internet. International commerce has opened up new opportunities for merchants and small businesses. However, payment issues have been a problem due to the speed of change and financial services are having a hard time keeping up.
Businesses are being held back because of legacy infrastructure
It is frustrating for many SMEs that they can now operate across borders, but legacy banking infrastructure often labels smaller businesses as ‘high-risk’. Transactions can be difficult, expensive, slow and risky because of this.
For example, a business receiving an international payment will probably use SWIFT and won’t receive the money for between one and five days, on average. The process is opaque and there are fees.
Credit card fraud poses risks to merchants. A recent report from 2021 Chargeback Field found that criminal fraud rose by 21% between 2018 and 2021.
While there are options for larger businesses and P2P transactions, SMEs remain largely ignored. Many small businesses operate with very limited margins which is limiting their ability to compete. There are solutions thanks to fintech firms that are agile and innovative, new platforms, as well as the adoption of cryptocurrency.
High-risk SMEs, cross-border transactions and cross-border deals are increasing
Companies are generally labelled ‘high risk’ for a couple of reasons. The first is that the industry type is one of the more broad and arbitrary. This includes online pharmacies, VoIP providers and subscription services for things like magazines.
High-risk industries are numerous. Online gaming, for instance, is a large industry that was worth US$37.65 Billion in 2019. It will likely be worth US$122.05 Billion by 2025. Cryptocurrencies, as well as related businesses, are equally considered risky. Yet Bitcoin alone has a value of $1.03 trillion.ThNovember, 2021).
A second reason why SMEs are considered high risk is that they have low transactions and sales. Also, smaller companies operating outside of wealthier countries or blocks – such as the US, Canada, Japan, Australia, and the EU – are grouped into this ‘risky’ category. This can be extremely restrictive considering that SMEs represent 90% of all businesses in the world.
Smaller merchants can now access global markets because the internet continues to grow. However, legacy banks have fallen behind in the way they label risk and punish SMEs that transact cross-border. Fintech has solutions and banks will have to catch up.
The main problem with traditional banking system is solved by cryptocurrencies
Ironically, given its frequent labelling as ‘high risk’, it seems that cryptocurrency might be a solution. Fintech firms like XanPool and its platform XanPay have created infrastructures to bypass traditional banking networks.
XanPool’s founder and CEO, Jeffery Liu, explains how his company’s cross-border payment solution came about. “As an entrepreneur, I am also on the lookout for problems people are having, and I then set out to try and provide a solution,”He says.
“XanPool was founded in 2019 because there was a problem onboarding and offboarding from fiat currencies to crypto. It was difficult to sell and buy crypto using local currency. You had to navigate the old banking system with all of its delays, fees and risk. The situation was absurd, given that Bitcoin was created to bypass existing systems. So, we designed a way around that.”
XanPool is essentially a market-making software that lets buyers and sellers – liquidity providers – trade crypto using various digital wallets or bank accounts. “We have cryptocurrency and a network of local currency liquidity providers that allows users to bypass traditional banking systems. This means they can also avoid the extra fees and exchange rate problems and, as transactions are instant, there aren’t days of delays and risks of chargebacks and fraud,” Liu says.
Liu saw another problem once XanPool started to work. By leveraging XanPool’s existing cryptocurrency and liquidity pool, cross-border payments could also bypass traditional international banking infrastructure.
The status of SME owners was not good, but it is now.
“We knew SMEs had been largely ignored by the banking system, with regards to making international payments. It was particularly true for countries and industries that have established financial institutions that are considered risky. This includes most online businesses and nearly all of the Asia Pacific region countries,” Liu says.
Given that there are an estimated 213 million SMEs globally and almost 132 million of them are in the Asia Pacific region, there are a lot of enterprises being deemed ‘high risk’ and excluded from easy cross-border transactions.
“To solve this problem, we created XanPay,” Liu explains. “It’s a payment platform that every high-risk business from SMEs to eSports can use. Because it can be integrated with other payment services, it’s easy to use and implement. Furthermore, because it is built on XanPool’s infrastructure, these enterprises benefit from instant international payments with no risk of chargebacks or credit fraud. Having transactions that are 40 per cent cheaper and are instant decreases the risk that got them penalized in the first place.”
XanPay, a fintech solution like XanPay has the advantage that it can start from scratch. While banks are having difficulty adapting their systems to make them more efficient and effective, newer companies have the ability to start fresh and integrate advanced technologies like cryptocurrency and eWallets.
As more SMEs in developing countries move online, the number of businesses labeled ‘risky’ will continue to rise. This was an important issue even a few years back. Now, thankfully, there are several fintech solutions – and if the banks don’t catch up, they will be left behind.