Exploring the potential benefits of adding international payment services to your repertoire.
It’s no secret.
Major consolidation has been an ongoing trend in the community bank and credit union space for decades – and with a rapidly growing field of non-bank competitors, particularly fintech-oriented, the clash for your consumers’ share of wallet isn’t getting easier.
How can today’s community-based financial institutions (FIs) remain competitive in an ever-evolving financial services landscape?
You might consider adding international payment service options to your cash management suite.
Here’s why.
“International payments are interlinked with three of the most important segments within community banks and credit unions – small and midsize businesses, high-net-worth clients, and retail clients,” said StoneX Managing Director: Financial Institutions, Steve Kuhl.
Small and Midsize Businesses
“There are hundreds of thousands of small to midsize businesses around the United States that are involved in import and export, or other overseas activity that requires them to have international payment services,” Kuhl said.
There’s plenty of potential in this segment. Consider this …
According to the U.S. Chamber of Commerce:
- 97% of the 288,000 American companies that export are small and medium-sized businesses.
- The number of small and midsize firms that export has risen approximately threefold over the past two decades.
Plus, according to World Bank, 27% of U.S. GDP (Gross Domestic Product) is derived from international trade (import/export activity).
The U.S. currently has Comprehensive Free Trade Agreements (CFTA) with 20 countries. These trade deals have created opportunities for U.S. farmers, ranchers, manufacturers, and service providers of all sizes.
Knowing this, what happens if your institution isn’t equipped to service your small and midsize businesses’ international payments?
“It almost always leads to broader encroachment once a small or midsize business turns to a larger competitor or a fintech alternative to service international payments,” Kuhl said. “It doesn’t usually just stop with the international payments. They look at other ways of cannibalizing other streams of business.”
Kuhl’s advice to community banks and credit unions: “Protect your commercial clients, your coveted small, midsize businesses that are in your geographic area, in your backyard, that are involved in import, export, or some other overseas connection point.”
High-Net-Worth Clients
Consider the key areas your high-net-worth clients typically utilize:
- Private Banking
- Trust Department
- Wealth Management
- Investment Services
“As you service your high-net-worth clients, more and more of their portfolios and needs are oriented toward either foreign investments or other assets held abroad,” Kuhl said.
According to the U.S. Securities and Exchange Commission, more Americans are making international investments, or domestic investments that give them global exposure, than ever before.
There are various ways investors can access international investments, such as:
- U.S.-registered mutual funds
- U.S.-registered exchange-traded funds (ETFs)
- American depositary receipts
- U.S.-traded foreign stocks
- Trading on foreign markets
“If you’re not offering international payment-related services and you look at servicing high-net-worth clients with their foreign diversification needs, their foreign asset requirements, whether it’s mainstream assets that they elect to purchase abroad, equities, mutual funds, etcetera … they’re going to look to some other financial institution to provide comprehensively that international piece,” Kuhl said.
Retail Clients
Don’t forget your retail clients and their potential need for international remittances.
According to the Independent Community Bankers of America (ICBA), many foreign-born individuals who send money back to their home countries include a significant proportion of the estimated 63 million unbanked and underbanked in the U.S.
“You have individuals who perhaps need to get money to family members abroad at home,” Kuhl said. “Your all-important retail client base, consumer lending, consumer depository gathering, there’s going to be a distinct subset of those clients with international remittance needs.”
Knowing this, why aren’t all community-based financial institutions exploring international opportunities?
“I think the overwhelming initial barrier would be one of awareness, especially at the senior management executive level,” Kuhl said. “If you look at the historical genesis of community banks and credit unions, it was focused on that grassroots understanding, domestic-oriented, deposit taking and lending.
“International wasn’t historically a prominent part of their strategy.”
Simply put, international payment services may feel like a foreign concept (pun intended) to FI executives.
“What you’ll find out in the marketplace is that community bank and credit union executives may not have any strategy, any business plan, even any real concrete budgetary ideas of how much their institution should be making with respect to international payment services,” Kuhl said. “Senior management executives haven’t, until recently, started connecting the dots between international and the broader well-being of the bank or credit union concerning their position in the marketplace.”
Methods of Payment
So, what exactly can banks and credit unions offer?
International wire transfer services and basic payment offerings are a start, but there’s a broader segment of settlement methods.
“I would say the overwhelming payment method that is the default standard would be SWIFT-based,” Kuhl said.
A SWIFT (Society of Worldwide Interbank Financial Telecommunication network) payment is an electronic transaction that allows individuals and businesses to securely transfer money internationally through an intermediary bank.
The network itself is not a banking system, nor does it actually transfer the funds – rather, it sends payment orders between financial institutions using network codes.
“It (SWIFT) provides a form of communicative surety with respect to the messaging, as well as close to real-time settlement for many corridors internationally,” Kuhl said.
Other common methods of payment for export sales include:
- Cash-In-Advance
- Consignment
- Documentary Collections
- Letters of Credit
- Open Account
What steps should an institution take to enhance its international offerings?
“I would say the first step is to create a basic strategic plan,” Kuhl said. “Make sure there’s a formalized pro forma target, a budget target, so that you have a guiding light in terms of, ‘What are we trying to accomplish this year, both in monetary and strategic terms?’”
Kuhl added an essential part of your plan must include educating your staff at all levels.
“Make sure all relevant staff understand the importance of international and how they play into your institution’s competitive position in the marketplace,” Kuhl said. “Also, make sure your frontline staff is adequately trained and educated so they can effectively engage with prospects and promote your offerings.”
ABOUT STEVE KUHL
Steven Kuhl, CFA, is the Managing Director: Financial Institutions at StoneX. Headquartered in New York with over 80 offices worldwide, StoneX is an institutional-grade financial services franchise offering advanced digital platforms, end-to-end clearing and execution services, and global market expertise to clients globally. Kuhl has worked in the financial services industry for 25+ years, covering everything from multinational foreign exchange, trading, corporate treasury consulting, risk management, business development, strategic partnerships, and more.
