Not-so-open banking fails businesses that dare to dream beyond their borders

Even the smallest digital business is now a potential multinational. Whether it’s a vintage clothes retailer trading on Depop or a digital creative selling through a self-built website, customers can come from anywhere in the world. That was always the promise of the online revolution – to supercharge globalisation by removing the barriers to cross-border trade. So why, given that these benefits have been a reality for decades, has the banking industry failed to follow suit and support digital businesses with easy, affordable, and fast international payments?

For all the talk about open banking, financial services remains a walled garden. If all your customers are domestic, fine. But if a small or medium-sized enterprise has even the most modest global ambitions – if they want to trade with customers and suppliers in Mexico as easily as with those in Milton Keynes, for example – the traditional banking industry leaves them high and dry. For all but the biggest billion-dollar companies, cross-border payments remain slow, cumbersome, and so expensive that fees and charges can end up costing more than the value of the sale.

The biggest failure of open banking is its continued inability to deliver truly democratic international banking services. This does incalculable damage to SMEs, preventing businesses from achieving their growth ambitions by strangling their ability to trade outside their home country. But it’s also bad news for the whole business community, as well as their customers. Freezing smaller businesses out of international trade damages competitiveness; it tilts the playing field even further towards Big Business, entrenching their monopolies and restricting consumer choice.

Connecting banks digitally through open APIs was supposed to represent a step change in consumer and business financial services by ensuring the fast and secure transfer of information between parties. Some of the promised benefits, such as easy account transferring and faster transactions, have indeed come to pass. Yet the benefits are almost exclusively domestic. Digital business has moved on in the many years since open banking was first mooted. Why hasn’t the banking industry? 

The answer is that cross-border, multi-currency transactions are about much more than data. They demand dedicated processes and systems such as international risk assessment, Know Your Customer and Know Your Business. Above all, banks need specialist legal expertise and know-how in every foreign territory they serve, as well as the necessary relationships with everyone from correspondent banks to national regulators.

None of this is beyond traditional banks’ capabilities, so why don’t they offer it? The answer’s simple: they don’t think it’s worth it. On a purely balance-sheet level, they’re right: the large majority of “tradbanks” are simply not set up to support the specific needs of the digital business ecosystem, especially when it comes to offering overseas payments in all the major (and many minor) markets around the world. Developing the required systems and processes, employing the right people, and forging the necessary relationships – this all demands a significant investment in time, effort and capital.  

It may not seem to make financial sense for traditional banks to reorganise their operations to serve today’s relatively modest market of smaller, digital enterprises with global ambitions. These businesses need not worry too much, since they can now choose from a range of emerging fintechs that can serve their needs for fast, reliable and affordable international payments across a range of currencies. In part, that’s because these new financial services providers are not encumbered by legacy systems; more importantly, they’ve been set up specifically to serve the needs of international digital businesses.

Traditional banks can say they’re sanguine about these specialist providers, and that there’s more than enough room in the market for fintechs serving ‘niche’ markets. That will only remain true, however, if digital, cross-border businesses remain a relatively small segment of the wider business ecosystem. And that’s a very big ‘if’. To take just one among a myriad of factors, the supply chain chaos of the pandemic forced businesses of every size to re-examine their supply chains, and seek out new sources of both sales and suppliers.

Banks can continue to trumpet their open banking credentials, but if they don’t provide truly international services, these claims will ring hollow to the growing community of digital businesses that see opportunity beyond their own borders. The industry should therefore prepare for one particularly awkward question from their SME customers in the years to come: “We’re international. Why aren’t you?”