Startup digital banks target small business customers

Pedestrians walk past an electronic board showing the currency exchange rates in Istanbul, Turkey. REUTERS/Osman Orsal/Files

LONDON (Reuters) – Revolut and TransferWise are signing up thousands of small businesses a month for foreign exchange payments, touting slicker service and lower fees as they try to take on banks in a sector with flows of $7 trillion a year. 

The British money transfer firms have expanded by targeting the retail market with offers of cheaper and faster ways to send cash internationally.

But the much bigger — and lucrative — market for small and medium-sized businesses remains overwhelmingly with banks. Many small firms accuse them of using slow, outdated technology and charging fees as high as those for retail clients.

“Small businesses don’t get any better prices than consumers,” said Stuart Gregory, head of TransferWise for Business. “You’re not getting speed, convenience, you’re not getting a good price.”

Banks say they are overhauling their systems to offer faster, simplified services and cutting fees. And experts say lenders’ ability to offer a wide range of services — such as overdrafts and loans — means many businesses will still pick traditional financial institutions when making FX payments.

Small firms sent between $6 trillion and $7 trillion of cross-border flows globally in 2017, consultancy McKinsey said last year, compared with $400 billion to $500 billion in individual-to-individual payments.

TransferWise is signing up 10,000 new businesses a month, double the rate of late last year, and growth in TransferWise’s business customer base is outstripping that for retail clients, Gregory said, although many clients are micro firms.

It expects businesses to account within a few years for a quarter of its overall 3 billion pounds ($3.9 billion) monthly flows, up from about a sixth, or 500 million pounds, today. 

TransferWise, which is valued at an estimated $4 billion, has also been selling its platform to financial firms since November. 

Customers include British digital bank Monzo and Dutch bank Bunq. It said it is also talking to Groupe BPCE about integrating its platform into the French lender.

Revolut, another rare example of a British fintech “unicorn” worth over $1 billion, expects monthly transaction volumes by businesses to top $1 billion in May, from $218 million in June last year. 

It has attracted 100,000 businesses — up from 33,000 last June — and is adding 3,000 to 6,000 customers a month. TransferWise declined to give its overall business customer number.

Sukand Ramachandran, partner in BCG’s financial institutions practice, said fintechs had an opportunity — but only where volumes were small. 

They face compliance and regulatory hurdles as they grow, raising costs. They may also become increasingly reliant on banks for the liquidity needed to serve their customers.

“As long as the ticket size is not too big, there is an opportunity. The banks may be happy to give away the smaller transactions,” Ramachandran said. 


Small companies typically pay overseas suppliers, or foreign workers, via their bank, paying transaction fees and a “spread” on the forex rate.

International payment revenues across all customers top $200 billion-plus globally a year, according to McKinsey. Business-to-business revenues total $127 billion, although most likely comes from big lower-margin corporate customers. 

Revenues from consumer-to-consumer payments totalled $26 billion, with a 6% revenue margin, McKinsey said. 

Using the traditional SWIFT network, a bank-owned cooperative launched in the 1970s, payments can take days to reach their destination. 

Marwan Forzley, co-founder of San Francisco-based transfer firm Veem, acknowledged that banks would continue to take the vast majority of volumes, but said the size of the market meant there was room to grow. 

“It’s an industry that has been using the existing platforms for decades with no innovation,” Forzley said, adding that Veem had more than 100,000 users, 2-1/2 times more than in early 2018.

Ross Targett, CEO of Code Kingdoms, a startup that makes software for teaching coding skills, said using TransferWise had saved the firm $95,000 last year.

“We were getting $8,000 invoices, and getting $7,500 back,” he said. “Where’s all this gone? Bad FX rates, admin fees and the percentage (the bank) leverages on top of it.” 

Banks are fighting back. In 2017 SWIFT introduced an initiative to leverage newer technology and accelerate transfer times — many payments reach beneficiaries in under 30 minutes.

“The big banks are trying to improve their customer experiences,” said Sulabh Agarwal, a payments expert at consultancy Accenture. “The challenge for banks is: How much do you cannibalise the existing business?”

BCG’s Ramachandran said the “biggest thing banks need to do is make it easier (to make payments). They don’t necessarily need to be the cheapest.”

Dutch e-scooter operator Dott chose Revolut because of the ease with which it could open a bank account and lower fees. 

But CEO Maxim Romain said that should his business need more sophisticated services as it grows, it was possible “Revolut will be a little bit less relevant for us”.

(Reporting by Tom Wilson and Tommy Wilkes; Editing by Catherine Evans)

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