The traditional banking model is failing a new breed of 'global SMEs', whose business model is reliant upon real-time retail payments. Enter the distributed ledger system...

The 'global SME' is going to drive the payments revolution. This is for two reasons – first, SMEs have been poorly served by banks and so there is an appetite for change; second, the new global SMEs are being run by a young generation of tech-savvy entrepreneurs who expect payment to happen anywhere at any time without delay.

Indeed, the global SME was something of an oxymoron until recently – the majority of SMEs did business inside a 50-kilometre radius of their base and certainly within national borders. 

But the internet has opened up the buying process to the extent that sending small parcels across the globe now underpins many commercial ventures. Domestically, distribution has reached a point whereby an item ordered in the morning can arrive by the afternoon – which is all well and good provided the payment is as fast or quicker. Often it is lagging behind.

SMEs with limited financial resources depend on real-time payments to make this model work, which is why they are becoming increasingly demanding. Since governments are always banging the drum that SMEs are the key to future growth, they too are pushing faster payments. 

Some 18 countries around the world already have real-time retail payments systems, with another 29 looking at creating them. But what we don’t have is faster payments systems that talk to each other across borders. For the global SME that is a big drawback and banks and regulators need to focus on this. 

A Swift white paper on The Global Adoption of Retail Payments Systems (RT-RPS) says: “As the cost for the industry is a key barrier for adoption, interoperability and efficiency gains are critical success factors for both financial institutions and regulators for rolling out an RT-RPS system.

“One thing is certain – it will be important for the industry to work together and to come up with ways to make this work. Legacy and new models will need to co-exist both at a domestic and cross-border level, and for banks, interoperability will be essential.”

Banks have been smart enough to realise that if they don’t respond to the demands of customers and small businesses, financial technology companies will. Most large players have set up innovative projects to stay ahead of the game. 

The most radical threat is from the distributed ledger system pioneered by Bitcoin – something we have reported on extensively at The Banker.

The recent news that Ripple Labs – which has also built a distributed ledger system similar to Bitcoin’s, but currency agnostic – has been asked to join the Federal Reserve’s Faster Payment Task Force Steering Committee shows the way the wind is blowing. To put it simply – all options are on the table and SMEs and others will gravitate to the ones that deliver. 

Brian Caplen is the editor of The Banker.

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