As businesses increasingly engage in global transactions, modern cross-border payment solutions allow them to enhance speed and efficiency, generate cost savings, improve cash flow, and expand their reach. Local banks can play a crucial role in addressing these needs by providing faster, more reliable payments with blockchain.
However, these benefits have not reached every corner of the economy. For too many small and medium-sized enterprises (SMEs), international payments are still too expensive, too complicated, or simply unavailable.
According to a whitepaper from Ripple, half of all SMEs are now engaged in international business, and many are in urgent need of real-time, low-cost, and border-agnostic payment solutions.
This creates a compelling revenue opportunity for regional and community banks. Small businesses want to work with smaller banks—two thirds of them, according to a recent survey of community financial institutions, indicated they preferred to use small and regional banks.
Indeed, SMEs are willing to shop around for a bank that meets their needs. In 2023, 13% of SMEs reported switching their primary bank in the past two years—more than double the 5% who made the switch in 2022.
Roadblocks for International Payments
Although small businesses are transacting across borders more than ever, their experiences with global payments can still be costly and frustrating. Some of the key pain points include:
High costs and hidden fees. Banks typically charge around 2% to 3% of the total funds for a cross-border transaction. In addition, foreign exchange conversion rates further increase transaction costs, with some providers even charging a fee just to calculate the conversion rate.
Long wait times for funds to settle. Even when everything goes well, global payments still take an average of three to five business days to settle. The added time required for global payments slows down the transaction process and disrupts exchange rates. Globally, 14% of all cross-border payments are never completed, with an average cost of $12 per failed transaction.
Poor transparency. Traditional payment methods lack the infrastructure needed to provide real-time payment information. As a result, many overseas transactions occur without clear insights into their speed, status, or cost. Businesses are forced to work around their bank’s schedule rather than their own.
Burdensome operational overhead. Managing capital flows across various accounts in every country of a company’s operation can be complex, involving different currencies, regulatory environments, and financial institutions. Few small businesses have the resources or human capital to manage this on their own.
Serving the Market
The traditional way of conducting cross-border transactions is through the correspondent banking system.
SMEs’ payment needs are often serviced by a narrow subset of these large correspondent institutions, even though transactions with them can be financially and operationally burdensome. For instance, banks often require customers to maintain pre-funded accounts in local currencies on both sides of the transaction to ensure adequate liquidity. Additionally, more complex intermediary payment chains—especially across challenging corridors—can lead to higher fees.
A Visa survey of U.S. small businesses found that correspondent banking fees and foreign exchange fluctuations made cross-border payments less transparent. Some 42% of U.S.-based SMEs cited a lack of clarity as a concern. Because SMEs don’t generate the revenue that larger enterprises do, they often endure relatively poor service from their bank, and worse pricing.
Partly due to these obstacles, correspondent banking relationships are more vulnerable than ever. Despite the growing global nature of business, the number of correspondent banking relationships has declined by nearly 30% over the past decade.
Seeking Solutions
Still, payments solutions are evolving rapidly. Today, there are payment processors that specialize in efficient, transparent cross-border payments for SMEs. The faster these transactions settle, the less concern there is around exchange rates, allowing businesses to leverage more reliable and timely transactions.
Companies offering innovative financial services to SMEs stand to increase revenue and cement their competitive position. The B2B payments market is expected to reach $174.3 trillion by 2030, and local banks have a significant opportunity to capitalize on this growth.
The emergence of enterprise-ready solutions provides financial institutions with immediately accessible on-ramps to support SMEs. By simplifying the correspondent banking system, services like Ripple Payments can increase settlement speed and reduce costs for both providers and SMEs. This allows local banks to solve SME-specific problems, acquire new customers, and generate additional revenue streams. By diversifying their payments stack with Ripple, regional and community banks can offer affordable, superior cross-border payment capabilities to SMEs that even outweigh services offered through larger institutions.