There is ongoing discussion around the lack of digital innovation by banks in the SME lending space. This resonates with Hedgebook as it also relates to banks and how they manage foreign exchange hedging for small-to-medium-enterprise.
Just as low interest rates have contributed to the rapid increase in commercial lending, the volatility in global foreign exchange rates has had a similar impact on companies hedging volumes. While larger corporate customers can readily afford pricing platforms and are well-served by their banks, the gap to those in the small-to-medium end of the market is growing bigger. Banks improving the management of FX hedging for SMEs is a problem crying out for a digital solution. Yet, while currency brokers have focused on the SME space for some time, banks are only just playing catch up now.
Just as in the lending space, banks are struggling to roll out digital hedging solutions and take advantage of this growing opportunity. The issue is three fold:
- A general lack of focus on the SME market,
- Complex data issues from siloed internal databases and
- Legacy in-house systems.
Legacy systems are often at the heart of the issue. Not only are they expensive to maintain, but they create problems that make it difficult for banks to respond quickly to business needs even if they really want to.
Fintech partnerships are the answer
As with the lending scenario there is currently an opportunity for banks to better leverage fintech solutions, like Hedgebook, to tackle these challenges. There is a very real opportunity for co-developing and enhancing their offering by building products and services to plugin to fintech offerings. The outcome will be a better understanding of SMEs foreign exchange risks, leading to improved hedging decisions and ultimately increased activity that can help boost revenues.
In practice, banks can leverage Fintechs in a number of ways, including to accelerate innovation, push through a culture shift or to co-create.
1. Accelerating innovation
Fintechs can innovate much faster than banks can. Cloud-enabled digital platforms, industry standard data models, open APIs and product expertise allow fintechs to respond to the market quicker. Banks should consider partnering with one or more providers to take advantage of their speed of innovation. This will help banks to focus on their customers which is their strong suit, rather than worrying about technology. Brokers are already doing this so why aren’t banks?
2. Create a cultural shift
Banks should not only focus on leveraging an existing tech platform, but also consider using the partnership as a catalyst to shift company culture. Fintechs can help banks to be more agile, nimble, “fail fast”, and challenge their current ways of working to break functional silos – moving from a platform IT to product mindset.
3. A purveyor of industry insights
Fintechs bring learnings from their peers across various dimensions including technology, operational processes, and business models. If banks are open to being challenged and ready to learn from the fintech sector’s collective experience, their solutions will be rich, and the digital learning journey, accelerated.
4. Partnership and co-creation with FX hedging
Most banks see the fintech proposition as an accelerator to deliver their foreign exchange platform faster. The real benefit is to tap into opportunities to co-create new solutions based on the most pressing business and customer needs. Most fintechs, like Hedgebook, follow an agile approach to development, continuously developing their platforms and working closely with clients to meet their requirements. It is why they are rapidly growing their customer base in many cases, at a banks’ expense.
It’s critical for banks to emulate this strategy by identifying the opportunities to co-develop business models and tech platforms with Fintechs to differentiate and compete in the FX hedging for SMEs market.
Barriers to Banks FX hedging for SMEs
Developing Fintech partnerships requires a significant amount of time and effort on the part of financial institutions — both to identify the right fintech companies with whom to partner, and to ensure the resulting partnership is structured so both parties can achieve their desired objectives.
Given the market opportunity in foreign exchange hedging for SMEs, it is worth the effort required. Banks failing to invest today will miss the opportunity to respond to this incredible market surge. However, to capitalise on this opportunity choosing the right fintech and delivery partner will be critical for realising return on investment.
Learn more about how Banks can work more closely with customers to achieve better FX hedging management outcomes in another blog on this topic: Every FX Client Deserves More