How neobanks can use cross-border payments to boost revenue

blog· 8min

July 25, 2022

The 2020s are proving to be a boom time for neobanks. Never have consumers had a greater choice of who they do their banking with. Everywhere you turn, new names and services compete for your custom. It is inevitable, though, that this rise in competition will have winners and losers.  The global neobank market at the end of 2020 was estimated to be worth $35 billion and according to Statista the sector will grow at an annual average rate (CAGR) of 47.7% until 2028, reaching a value of $722.6 billion. However cross border payment regulation as well as legacy issues around speed and simplifying cross border payments continues to cause frustrations for the players in this space.

Current challenges for neobanks

However, while market conditions have created many opportunities they also face a number of challenges. In an increasingly crowded marketplace, they need to achieve steady growth in market share and profitability, or risk being lost, their voices drowned out by the cacophony of noise generated by their peers

In order to stand out and attract new customers, Neobanks should look to create distinct features and services that set them apart from their competitors. The best course of action is to identify and address under-served areas within the financial services ecosystem. One such area is cross-currency transactions, where there looks to be a golden opportunity for neobanks to boost their revenue and consolidate their position in the market — especially for neobanks that cater for the SME sector.

Cross-currency opportunities for neobanks

According to projections from the Bank of England the value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, equating to a rise of over $100 trillion in just 10 years.

Simply put, both personal and business customers need to transfer money overseas. Manufacturers want to expand their supply chains across borders. Consider also cross-border asset management and global investment flows, international trade and e-commerce, as well as migrants sending money back to their home country. There are many potential use cases for cross-currency transaction services.

Therefore, there is a big opportunity for neobanks to capitalise on this growing market. Not only can they potentially create a differentiator that sets them apart from the competition with fully managed cross-currency transactional services, but by approaching it in the right way, they can also make these services very profitable.

What challenges still exist for cross currency

However, there are good reasons why few neobanks — or some traditional banks for that matter — have fully developed their international offering. Building out a cross-currency transaction mechanism is a complex, expensive and strenuous endeavour. The process of converting from one currency to another and then delivering it into the appropriate country in a timely, traceable and cost-effective way is actually very complicated and backed by multiple systems, services, products, partners and ecosystems in order to do so.

Liquidity providers, SWIFT, ACH as well as trading systems and execution systems all have to interact seamlessly to perform this process. FX risk management can unnecessarily tie up liquidity better used elsewhere. Additionally, there is a high up-front capital investment required for building SWIFT connectivity. Therefore, there needs to be a compelling and proven business case to undertake such a project. It would require a lot of investment and time to get it all done. While traditional banks with high levels of internal bureaucracy aren’t in a good position to exploit these opportunities, an agile organisation with strong ambition would certainly be able to - but only if it can find suitable partners to develop its service with.

Choosing the right vendor partners

Forming a strong partnership would be a sensible route for an easy access model for any neobank that wants to exploit the opportunity that cross-currency transactions present. Neobanks generally focus on their domestic market so they will need to find a partner that gives them easy access for their customers to pay in multiple countries and currencies globally, all with a simple funding model in their domestic currency which removes the need for management of multiple currencies in their own treasury department. Trying to build this all for themselves would take a significant amount of time, effort and experience that may not be practical.

How to deal with US clearing

Offering a service that gives customers access to the Eurozone and the rest of Europe is one thing, but the US is a whole different kettle of fish. One of the biggest problems for cross-border business is the ability to clear in the US. In short, US clearing is challenging and finding a provider that can help with this pain point is key for entities that want to be able to include the US in their cross-currency coverage. And let’s face it: if you can’t deal with dollars then you’ll be missing out on a lot of business.

Up to this point banking relationships in the US have proven difficult to establish directly for overseas businesses without a presence in country. To add to this, the need for a locally domiciled account or IBAN is a prerequisite in some cases to be able to undertake business in the US and even receive payments. This simply means going across the pond is often out of reach.

The obvious route to the US is working with a partner with established cross-border and currency capabilities in the country. However, with the introduction of new faster payment systems in the US such as FedNow and TCH combined – and also with the ability to democratise access to the clearing houses in the US - there is a huge opportunity for banks overseas to gain access to schemes more efficiently or even directly.

There is definitely a balance that can be struck between domestic clearing and cross-border transactional relationships. Combining rich currency capability with a range of domestic connectivity models in the US, UK and EU really starts to break down these international trade barriers.  

Looking to the future

Those that can establish a market-leading service and grow their customer base — and profit margins — quickly will be well set for the long term. However, they won’t be able to do it on their own. Cross-currency transactions is certainly an appealing area with a lot of potential right now, but navigating the various challenges of creating such a service will require an experienced partner.

Form3’s ambitions are to build a borderless world. Find out how we can support you on your international journey by speaking to one of our payments experts today.

by Andrew Frost Head of Cross Currency - Specialist Sales