The opportunity is there for fintechs and payments businesses already supporting online merchants to deliver genuine added value, as Anders la Cour, co-founder and CEO of Banking Circle, explains

A world without borders for marketplace merchants

The world of online trading is maturing, but it is still feeling the pain points of a rapidly growing and evolving marketplace where new merchants face multiple barriers to operate because established financial institutions have a fear of the unknown. 

In 2020, Banking Circle carried out a Europe-wide survey involving more than 1,500 SME online merchants, and found that they access a wide range of services from their current banking partners. Around half use short-term loans, overdrafts, finance agreements for specific purposes, and settlement accounts for cross-border payments. One in three use foreign exchange (FX) services. But crucially, only 15% of the SMEs surveyed have not experienced problems when trying to arrange cross border payments through their banking partners. 

While there is a wide range of issues at play, the most influential difficulties are relatively consistent across the regions. Just over a third of all firms found high fees an issue—the most problematic area for all regions except the Nordics, which struggled more with slow bank responses. And poor FX rates provided challenges for around one in three of all online merchants, although they were less of an issue in the UK compared with the other regions.

Interestingly—and particularly considering the acceleration of digital services in response to Covid-19—a poor digital experience hampered a quarter of respondents. Poor customer service affected a similar proportion.

Easing the payments path

Online marketplaces are an increasingly popular avenue for smaller businesses and startups to rapidly grow their customer base. Marketplaces give merchants instant access to global markets. However, some marketplaces settle merchants in the currency of their home country regardless of whether the merchant’s home accounts can accept the currency used at collection, with the result that they can face additional FX costs. Therefore, when a customer in another country places an order, profits and cashflow take a hit as the funds make their way from buyer to seller. Cross-border payments are slow and expensive through traditional banks, as they use the correspondent banking network, with each bank in the chain charging a landing fee.

Payments businesses have stepped in to bridge this gap and provide a faster, more cost-effective transactions solution, but changes introduced under PSD2 have brought an end to online marketplaces being exempt from payments regulations. For marketplaces to remain exempt, the flow of funds must bypass the marketplace.

Addressing this issue, Banking Circle Marketplaces provides sellers with local IBANs in the country in which they want to sell: typically in GBP, EUR and USD. The solution enables payment service providers to accept payments from marketplace buyers in the name of the marketplace seller and settle the funds back to the seller’s house account in the currency of their choice. This allows them to take control of the FX conversions.

The opportunity is clearly there for fintechs and payments businesses already supporting the online merchant space. They can deliver genuine added value by providing their merchant customers with banking services, including access to funding. And in the current climate that support is going to be more valuable than ever. Indeed, for payments providers that demonstrate a real understanding of SME needs, there could be a significant long-term gain.

The full whitepaper,  ‘Mind the Gap: How payments providers can fill a banking gap for online merchants’,  is available to download for  free here