FX Pain Leading SMEs to Explore Fintech Alternatives

Posted on 6th October 2023

SMEs have historically been short-changed by traditional banks when it comes to FX. Laurent Descout, Founder and CEO of Neo, takes a look at the FX challenges SMEs face and how they’re tackling them.

2022 saw extreme volatility in the foreign exchange (FX) market which led to many unprepared businesses taking a significant hit to their bottom lines.

Even the biggest firms struggled, with IBM citing that FX was one of the reasons why it reported a $3.5 billion decrease in its 2022 revenue in fourth-quarter earnings.

While the market has since calmed, uncertainty remains and SMEs, particularly those with cross-border operations, are taking this threat seriously.

A recent survey of CFOs and treasurers at UK-based SMEs found that 72% felt that over the past 12 months, FX has been a critical matter, while 25% stated it was a relatively important matter.

Despite the importance of FX, many SMEs rely on traditional banks and are struggling as a result. Fortunately, many are exploring new alternatives that are tackling major FX pain points.

The implications of currency fluctuations for SMEs

Currency volatility has been particularly prominent over the last couple of years. Despite calming in recent months, the Kyriba Currency Impact Report revealed that North American and European companies experienced a negative impact of $22.52 billion in Q1 2023 due to FX volatility.

It’s vital that businesses lock in exchange rates ahead of buying and selling goods and services in other currencies. Otherwise, they run the risk of the market moving against them.

For example, a strong dollar makes imports from the US more expensive for UK companies. This is because it costs them more in GBP to buy the same amount of goods, increasing the cost of production for UK companies.

Businesses that have previously overlooked this factor and have not put FX hedging programmes in place could see a negative impact on their bottom lines.

Reliance on traditional banks leading to FX issues

As SMEs grow internationally, they are increasingly faced with significant challenges when it comes to FX risk management.

However, over four-fifths of SMEs (83%) rely on traditional banks for their FX needs and suffer from three major pain points:

Unfair pricing

Nearly half of SMEs (48%) struggle with FX pricing. Large corporates benefit from tighter spreads and better rates, generally getting a better deal due to the higher volume of FX activity they undertake. SMEs are paying over the odds with banks heavily marking up margins and inflating the overall price.

Speed of execution

45% of SMEs cited speed of execution as a major FX pain point. FX markets move quickly, so it’s vital SMEs can buy and sell currencies and effectively hedge their risk as quickly as possible. However, FX execution and hedging have been a widely mismanaged feature of small and medium-sized enterprises for years due to a reliance on banks and a lack of access to the right technology.

Unable to compare prices

Just under a third (30%) of SMEs said that struggling to compare suppliers was a major FX pain point. Many SMEs rely on one or two banking partners, making it difficult for them to compare the market and know they’re getting the best rate.

SMEs also struggle with reporting transactions, poor customer support from experts and a lack of automation.

Legacy technology – the source of SMEs’ FX pain points

When SMEs operate across borders in multiple currencies, they often face challenges with legacy treasury systems. These systems often mean long lead times and high commissions.

This is because SMEs must pay a bank to convert incoming and outgoing transactions into each local currency. Each currency is held in a separate account which operate in silos, meaning the CFO can’t have a full view of the business’s cash flow in real time.

This lack of full financial visibility across their business is a significant problem for CFOs. Over time this can result in unnecessary costs, time absorbed by corporate FX processes and poor risk management.

SMEs are being left behind, and are not only struggling with treasury systems, but they continue to pay over the odds. Traditional banks are letting them down.

The need for a modern TMS that offers a comprehensive and holistic approach incorporating the full package has never been more important.

The future is fintech and filled with possibility

FX execution and hedging have been widely mismanaged processes for years.

This is now changing. With some banks choosing to leave this space and other incumbents failing to adapt to the new technology landscape, it has left a gap in the market for new fintech solutions to take their place which SMEs are beginning to explore. For example, 92% of SMES are having conversations about virtual account solutions.

Multiple bank accounts can now be a thing of the past with digital wallets supporting multiple currencies, meaning SMEs can now set up accounts in the currencies they require and receive and convert these seamlessly.

They can forget the days of expensive FX terminals and get up to date market information when they need it, ensuring they get best execution. Post-trade processes are streamlined too, with SMEs able to create customised blotters and get mark-to-market updates in real time.

SMEs have suffered for a long time, but by embracing the fintech revolution they can get access to technology which is laser-focused on making their lives easier.