New technologies are resulting in a rise of small businesses participating in international trade. For the last two decades, the internet has been driving the trend for small and medium-sized businesses (SMBs) to expand both in number and reach. Covid-19 severely impacted many of these enterprises, with 90% reporting a drop in turnover, but it also accelerated the move toward online shopping and expanding markets abroad.
SMBs and SMEs are the backbones of most economies globally. For example, in the EU, 99% of businesses are SMEs and create around 85% of new jobs. Moreover, technologies like the internet, mobile phones, digital wallets, and e-Commerce are causing a boom in the sector and driving an expansion to international markets. But at the same time, smaller businesses are being held back by traditional correspondent banking processes for international payments.
Fintech has provided numerous solutions for peer-to-peer transactions that work globally. Larger B2B transactions can still be done through older networks. Unfortunately for SMBs, their transaction amounts and volumes often mean they are excluded from many solutions available to larger firms.
Until recently, international payments required large financial institutions that were established decades ago. Consequently, the systems tend to be cumbersome, expensive, and overly complex. A solution such as SWIFT, which currently handles half of all high-value cross-border transactions, was founded in 1973. However, even SWIFT is starting to face intense competition from services such as Ripple.
Blockchain and cryptocurrencies are challenging the traditional platforms
Ripple is one of many new fintech services that are leveraging the potential of blockchain and bitcoin. However, most of these solutions are still geared toward larger organizations. As a result, the vast SMB sector was inexplicably left behind, facing slow transaction times, costly fees, and risks such as chargebacks and credit card fraud.
Recently, that has been changing. New fintech companies are starting to offer services that utilize the advantages of cryptocurrencies but are targeted toward SMBs.
A good example is XanPay, a platform created by XanPool. Jeffery Liu, XanPay's founder, and CEO explains the approach and how it came about. "It began with XanPool, which was established to make onboarding and off boarding from fiat currency to crypto easier, faster, and less expensive. Buying cryptocurrency with local fiat currency was complicated and painful, and we wanted to fix that.
"The problems we faced resulted from outdated systems used by legacy financial infrastructures like foreign exchanges, credit card companies, and the SWIFT Network. The main issues included taking a week to make a transaction, lots of associated charges and fees, and numerous risks like chargebacks. It was ironic that cryptocurrencies were established as an alternative to traditional infrastructures, but if you wanted to buy crypto with fiat currency, you had to use those old processes.
"So, we built XanPool. We merged fintech solutions like payment platforms and e-wallets with the more agile and less restricted benefits of using cryptocurrency. The XanPool Network consists of businesses and individuals, as opposed to banks and traditional payment platforms. Buyers and sellers - liquidity providers - use our automated market-making software to automate crypto trading using their own banks or e-wallets," Liu says.
Having established XanPool, Liu and his company saw the opportunity to use its existing cryptocurrency and network of local currency providers to create a new payment platform called XanPay. This service is specifically geared toward enabling SMBs to make cross-border transactions without having to go through legacy infrastructure.
Using cryptocurrency avoids the common problems inherent with legacy infrastructure
Liu says, "The problems faced by SMBs were the same as those encountered when trying to buy crypto with fiat currency. And they all stemmed from outmoded legacy transaction processes. As a result, when SMBs started to embrace the advantages of the internet and eCommerce, they found themselves held back by the systems they were forced to use due to a lack of an alternative.
"Small businesses work on very tight margins, and yet, when trying to expand into other countries, they face numerous expenses and problems due to inefficient processes. For example, there's the standard 3% merchant fee, transaction charges, and exchange rates that are rarely favorable.
"Then, when a transaction is going through, it typically takes three to five days, sometimes much longer, and there is a complete lack of transparency. There is also risk resulting from chargebacks, which can be innocent or fraudulent but are inconvenient and costly.
Using cryptocurrency bypasses legacy finance structures and avoids these issues. "Using crypto means SMBs using our platform can receive payments instantly and pay a lot less per transaction. For example, our only costs are related to the Market Maker, at most 1%, and then a negligible cryptocurrency fee. There's also no lack of transparency or risk of fraud," Liu adds.
The processes still used by most cross-border transactions result from systems established before the internet, eCommerce, and blockchain. The infrastructure has stayed the same for so long because until recently, there was nothing else to replace them. The dream for cross-border currency transactions has always been low cost, low risk, and instantaneous. That is now possible.
There have been improvements with older platforms, but any system built on top of legacy infrastructure will likely face problems. However, fintech companies like XanPool and Ripple, which have built systems based on cryptocurrency technology, are changing the landscape for cross-border transactions and providing a much-needed solution for SMBs to thrive.
