With B2B eCommerce now a booming segment thanks to accelerated digitization in the last year, cross-border trade volume is expected to rise.
Small- to medium-sized business (SMB) buyers and sellers are facing fewer barriers to enter the market thanks to the rise of digital marketplaces and eCommerce-as-a-Service technology solutions.
But global trade is a complicated operation, to say the least. Currency conversions, finding new buyers and sellers in unfamiliar markets, language barriers, unique tax rules and other challenges are bountiful, and unfortunately, SMBs face the same headaches that larger enterprises do when expanding internationally — yet often lack the resources to overcome them.
At the heart of many of these issues is trust — or lack thereof, according to Tazapay CEO and Co-founder Rahul Shinghal. He told PYMNTS that this trust deficit creates especially large pain points in an already complicated B2B payment process.
"Trust is one of the biggest challenges for SMBs while doing international trade," he said, pointing to the often-contradictory payment needs on each end of the transaction. While sellers want to be paid in advance, buyers insist that payment should only occur upon delivery. As a result, "Very often buyers and sellers are not able to complete a trade because they can't agree on the payment terms."
A Maze Of Options
This disagreement is the result of businesses working with unfamiliar partners, in which vendors cannot trust they will be paid on time, and buyers cannot trust that their goods will be delivered as requested. It isn't a challenge unique to SMBs, and there are several avenues available to mitigate the issue.
One is to address trade financing solutions like supply chain finance, which can allow a buyer to delay payment while initiating financing for the supplier. While valuable, some critics argue that such financing only reinforces buyers' habit of extending payment terms while burdening vendors with extra costs. Plus, as Shinghal noted, supply chain financing and other such financing tools are not always available for smaller players.
Letters of credit are another common tool in the global trade arena. The document is issued by a bank to guarantee payment to a vendor, yet once again, said Shinghal, this option often shuts out SMBs and smaller transaction amounts. Other traditional escrow services similarly tend to focus on larger transaction sizes.
Without these financing and escrow services at their disposal, SMBs tend to use informal negotiation tools to establish trust, such as relying on common acquaintances or traveling overseas to visit business partners. Not only is this strategy cumbersome, but in today's market, it's impossible.
"With COVID, as travel is restricted, SMBs engaged in cross-border business are finding it even harder to establish trust with new customers and suppliers," noted Shinghal.
Filling The Trust Gap
In today's digital ecosystem, enterprise modernization has generated more data than ever before about an organization that can be useful to businesses that need to assess the risk of working with a new partner. Yet, especially for SMBs, having access to this data, ensuring that it is reliable, and being able to ingest it and analyze it in a meaningful was is no easy task.
Further, once a business does decide to transact with a partner overseas, there is additional friction in the actual payment itself. Foreign exchange (FX) fees can be high and lack transparency, while the documents needed to release those funds are "inconsistent and cumbersome," said Shinghal. Cross-border transactions also lack traceability, with buyers unable to gain insight into whether funds have landed with a supplier, or how long it will take for money to settle.
"Both parties are on tenterhooks until the money is received," he said.
And, if it isn't received, or if the goods are not delivered as promised, there is often no recourse for either the buyer or seller.
Tazapay aims to address both hurdles of a lack of trust and a complex cross-border payment process through its digital escrow service designed for SMBs and lower transaction values. With integrated dispute resolution capabilities, the technology acts as a middleman to fill in the trust gap between buyer and seller, facilitating the movement of money and ensuring that only occurs once both parties' obligations have been fulfilled.
With B2B eCommerce on the rise, Shinghal said such solutions designed to tackle the friction in cross-border B2B trade for SMBs will continue to grow in demand.
"Cross-border B2B is poised for rapid growth in the next few years," he said, pointing to industries like apparel and commodities that are embracing online marketplaces that will expand buyer-supplier discovery for SMBs. "COVID has accelerated the digitization of cross-border transactions. As this happens, the trust deficit is only expected to increase."
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December 09, 2020 at 08:04PM
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