Article March 20, 2024 Regional banks seizing FX international payment opportunities The transformation of the FX payments landscape offers a unique opportunity for collaboration and growth for small and medium-sized enterprises (SMEs) companies and community and regional banks. Historically, moving funds internationally has been fraught with cost and complexity and lacking in transparency. Now, community and regional banks see a substantial opportunity to reimagine their clients’ cross-border payments business models. Matthew Petrik Head of FX Product As we mark the one-year anniversary of 2023’s regional banking crisis, credit unions, community banks, and regional banks are operating in a more stable rate environment under the more watchful eye of regulators and policymakers. However, uncertainty clearly isn’t going anywhere as we await a less capital constrained environment amid a looming US election. The sunsetting of the Fed’s Bank Term Funding Program (BTFP) means that banks must now either allow those loans to roll off or find another source of refinancing. We see an enormous opportunity for banks to drive growth from their customer bases in the world’s largest and most liquid market, the foreign exchange market, in the wake of these changes. Community and regional banks that are offering services to small and medium-sized enterprises (SME) involved in foreign exchange transactions enjoy a reliable source of recurring non-interest income and cultivate stickier client relationships by providing superior customer experiences and offering more innovative solutions that help them achieve their goals. Early mover banks can capitalize by satisfying their SME needs and expectations The revolution in the global payments ecosystem has been sweeping legacy processes from the financial system, driving demand for more sophisticated solutions from retail consumers and commercial banking relationships alike. A substantial untapped market is SMEs that have a compelling need for cross-border payment solutions. Banks have yet to meet an obvious need to keep pace with globalization and digitalization in this area. International trade represents a full quarter of the US gross domestic product, with $676 billion flowing out to Mexico and Canada, and $896 billion flowing in from our closest neighbors. SMEs represent the vast majority of companies (91% with less than 100 employees, 76% with less than 20 employees) importing and exporting goods. Banks that can capture this business stand to unlock an exceptional revenue driver and better ability to compete with larger institutions. Tech is opening access of FX payments services to SME businesses and their banks US importers and exporters, long saddled with slow and antiquated FX payment systems, have a pressing need for transparent, efficient money flow services. SMEs are seeking digitized alternatives to the complex manual-processing required for FX transactions that take place in brick-and-mortar bank branches and come with high fees and lengthy transaction times. Furthermore, businesses must manage the risks caused by greater exposure to volatility and trapped cash due to regulatory, tax, legal, and operational factors. Instead, if banks can furnish SMEs with centralized payment capability using Derivative Path’s integrated FX International Payments platform, they can streamline their international payment operations and reap numerous benefits: Minimized currency volatility Actionable data insights and reporting Automated access to liquidity / Just-in-time funding / No trapped cash Account rationalization Reduced cost of funding Payment and currency optionality Banks gain competitive advantage by providing FX payments services Deloitte suggested in its 2024 outlook report that banks should prepare to support direct integration of transaction data to offer real-time or near real-time insights on payments transactions and liquidity positions. The banks that help SME companies modernize their FX payments business lines will earn reputations for being sophisticated providers of capital markets solutions among the importers and exporters that trade trillions in international commerce annually. A robust FX payments technology offering attracts corporate clients, drives revenue, and fortifies particularly high value client relationships. Community and regional banks can take greater control of pricing for their customers’ international payments and thus retain a larger share of the fees that these activities generate. We are proud to be helping our bank clients – some of which may never have believed they would be able to launch a viable FX international payments business – create roadmaps to having a fully digitized FX product at the point of sale and in their back offices. Feel free to reach out with any comments or questions. To dive deeper, watch our recent FX webinar.
