Filling the revenue gap for Banks in Europe – Is focusing on providing FX services to SMEs the answer?


Last year, at SME Banking Club, we did an Online Banking Study for the CEE region, and found out that an Integrated FX Module is becoming a very good advantage for banks that offers benefits to customers with, for example, export-import operations who work actively with foreign currency transactions. Almost half of analyzed banks in the CEE region have implemented this module, which in addition to RTGS settlements also includes an FX Trader module enabling spot & forward transactions, a broad selection of tradeable currencies, an FX transaction history and the ability to place currency orders with an exchange rate limit.

In this context, Olena Gryniuk talked to Andrew Frost, an International Customer Success Manager at Form3, a company in the UK that implements payments and FX solution with the banks and fintechs.

Olena Gryniuk: How can banks diversify their revenue streams by implementing FX products?

Andrew Frost: A bank needs to look at how best to diversify its product range across its existing client base. Most banks are made up of large corporates, mid-cap businesses, SME’s and retail clients. One area that a bank can generate additional revenues is within foreign currency conversions.

Traditionally a full range of FX products and services are offered by a bank, however, the profits generated through these services depend on scale and volume. Therefore, a full menu of products (spot, forwards, options, market orders) has historically only been made available to large corporates with substantial overseas operations and ongoing FX requirements.

This requires a complex system managed by dealers, advisors, and relationship managers, purely to execute trades and contracts for this elite group of larger corporates.

If we look at the level of FX services provided by banks today, mid-cap businesses receive a watered-down version with fewer products, wider pricing and less interest from the bank to service.

SMEs are perceived to have even lower volumes and the potential resulting profit is even less appealing as a revenue generator for banks. However, SMEs who trade international potentially have FX exposures around €0.5m and €20m per year.

As we move down the list, margins start to increase drastically and often an SME cannot access conversion rates better than 2.5% away from interbank. Therefore, we begin to see a migration of these companies away from their bank to execute their FX transactions and hedging strategy with an external specialist.

These specialist brokers give access to the full range of products and, to a degree, much-improved pricing. However, there can often be issues with consistency over time. In an environment where the bank’s profitability is under pressure from negative interest rates, overlooking the SME segment that provides 56% of Europe’s GDP could be a lost opportunity.

As the market develops, SMEs and consumers are becoming more aware of the alternatives to a bank and are now looking for one complete solution, rather than using multiple lenders, brokers and banks. Simplicity, automation, consistent and transparent pricing as well as digitalisation is of utmost importance.

SMEs cannot typically use their financial institution of choice as many do not have this capability at their disposal. Banks need to pivot and introduce this quickly, cheaply and sustainably.

Fintech collaborations are becoming much more common and banks are quickly realising that adaptation is essential for increasing profitability and revenue. Banks can go to market quicker as all the heavy lifting has been done already.

API technology from Fintechs now allows a bank to essentially plugin specialist modular components to their customer ecosystem, leveraging external specialist services, outsource compliance and still benefitting from the revenue stream and wallet share.

OG: Which FX products are crucial for SMEs if they need to trade internationally?

AF: First of all, Spot Transaction

The ability to convert from one currency to another quickly, easily and cheaply is essential. This process can also be digitised and managed simply through a user interface without the need for manual execution via bank employees.

FX Hedging

The ability to hedge FX risk is becoming more relevant through these turbulent times as volatility of the currency market is completely unpredictable. One of the key differentiators between what a bank would provide through their watered-down corporate channel and an external specialist is access to more sophisticated products.

Forward contracts give businesses the ability to fix exchange rates over a set period, either for a specific date in the future or over a period where you can draw down against ongoing business requirements. Combined with a pricing strategy, over this set period it can protect profit margins and remove an element of buying/selling uncertainty.

SMEs are becoming more aware of the need to use these risk management techniques top protect themselves against violent swings in currency value. An example of this is Brexit and the 20% devaluation of GBP across most currencies. Similarly, in Jan 2015, when Switzerland announced they were going to scrap its currency peg of 1.20 against the euro, the CHF saw a 20% increase in value overnight. Both movements are more than enough to put an SME out of business when cash flow and profits are already tight.

Payments and Collection

As SME’s export through more global channels such as e-commerce & marketplaces, this creates further problems when it comes to collecting money. International collection is expensive, involving additional cross border payment and collection fees. In an ideal world, an SME would be able to collect funds domestically in as many of their trading locations as possible to reduce these ancillary costs.

Form3 International Team (from left to right): Maureen Verbraeken, Andrew Frost, Fabrizio Zanollo

OG: How can banks use transaction APIs to implement a tailored FX solution?

AF: Banks are hungry for additional revenue, however, their legacy systems are not aligned to the needs of agile customers with leaner exposure and simpler needs. To build something from scratch would be very costly and likely to be out of date before it is live.

We, at Form3, are building an all-in-one International Transaction Service to solve this problem in collaboration with FX specialist Ebury. With a single cloud-native JSON API, FIs across Europe are trusting Form3 to connect them to payment schemes (FPS, BACS, SEPA).

Form3 are leveraging this expertise to connect FI’s to Ebury’s FX engine and provide banks with the ability to turn on a fully digitalised FX transaction and international payment service seamlessly.

Through one single integration, the Form3 API gives multiple access to scheme and payment services. From an international transaction perspective, the four following international modules are available, either as a full suite or a combination of solutions:

  1. FX and International Payments
  2. Risk Management
  3. Currency Accounts
  4. Trade Finance

A modern and fully integrated solution that meets the needs of both Banks and SMEs. Get in touch  with us for more details.