My last (actually the first, as it turns out so far) blog entry raised an email comment from a friend that I was ignoring the emerging unorthodox Fintech field. The truth is this is a very new field to me. So, I have decided to set aside some time and investigate how the new Fintech services can meet the needs of fellow entrepreneurs in general.
This is mainly written from a Canadian, Vancouver-based venture perspective, but a lot of the points should be relevant to startups (and small businesses) anywhere.
Let’s get one thing straight – Fintech doesn’t replace traditional banking, not yet at least. Most startups are still going to need a bank account to send and receive payments, since most vendors, employees and the Revenue Canada aren’t going to switch to P2P payments overnight.
Until now the most common way for a new company has been to go to the traditional brick-and-mortar merchant system provider, Credit Card Payment Options has a comparison of them and lists a few that appear to the best on the Canadian market. Since these represent ongoing, recurring costs (often both variable in the form of the transaction value percentage, and fixed as the maintenance fees), and there may be punitive cancellation fees etc, the choice of the merchant platform is an important consideration.
This is the area where the new Fintech is already stepping in, – accepting payments from customers, particularly from overseas. As a result, to remain competitive, the traditional financial institutions will simply have to incorporate some elements of the new nascent technologies. This cost-cutting emphasis is particularly vital for operations-focused, retail-like operations, with transaction values mostly around $50-$100 or much less. When your profit margins are in the ~10% region, the 2-5% bank transaction fees do seem like a lot, and switching to alternative methods could shave off a 1% or so, and in theory, in the long run could eliminate transaction costs altogether.
PayPal is ubiquitous and widely accepted, but in some cases its transaction cost still seems expensive, compared to alternatives. For instance, if you’re selling to Russia and Eastern Europe, you may well take a look at WebMoney, a very popular electronic payment system in the former Soviet bloc.
I am still researching WebMoney and other Russian systems in more detail currently, and it seems to one of the few ways to get the payments out of the country at a relatively reasonable rate. The fees could be as low as 0.8% internal transaction fee + 0.6% withdrawal + whatever your bank charges you, but there might added cost due to the current USD 600 maximum withdrawal amount (at $15 wire transfer fee that some banks charge it translates into an added 2.5% which makes it far less attractive).
If you plan to have a lot of Chinese customers, then there are AliPay and WeChat Pay – you do what’s convenient to the customer (AliPay is also used to some extent in Russia, since many Russians shop on AliExpress). There will almost certainly be large dominant player for any sizeable market that is worth looking into.
The elephant in the room, of course, is Bitcoin and the various other cryptocurrencies, and how they could be used to aid at keeping transaction costs low, despite the fact that they are still viewed with some suspicion. Turns out, Small Business BC looked into this question as early as 2014, and concluded basically it’s up to the startup enterprises own risk tolerance to incorporate Bitcoin payments. It’s also interesting to note that the Bitcoin to CAD exchange rate more than doubled since then, from CAD 666 to CAD 1,685 as I am typing this.
BitPay is one of the leading US Bitcoin operators offering payment solutions for businesses and adding a payment tool seems relatively straightforward – settlements can be done into CAD or USD accounts in Canada at 1% flat rate. It is available in Canada, however there are certain limitations. At the moment, settlements in CAD take 2 days and the minimum settlement amount is CAD1,000. The great thing about BitPay is that its scale allows it partnerships with large, established players, – cashing through ATM cards shouldn’t be an issue. So, this one something we’re definitely looking at for the moment.
As a Canadian venture, I have also looked around for local vendors and found Quadriga CX, a Vancouver-based Bitcoin and Ether exchange. It’s a cryptocurrency exchange and not a payment system per se, but what makes potentially interesting to a retail startup Quadriga does have an inbuilt merchant system that accepts CAD, USD and bitcoin. Transaction fees are 1% (plus whatever your bank charges you).
I had some suspicions about Quadriga: when I tried to visit their office, the Gastown location showing on the GoogleMap didn’t exist. The mailing address at Commercial Drive seemed to be a P.O. box., and the phone number was only a “textme” one, but after getting a quick email response and looking up what looks like genuine reviews, I feel more confident about Quadriga. My questions were about monthly fees (none) and minimum balances (none).
Bitcoin is not the only cryptocurrency – there are over 500 active cryptos at the moment and sifting through them, filtering out potential flops and outright scams is a challenge in its own. Given, however, that even the most well-known and widespread of them still doesn’t enjoy widespread acceptance, many of them won’t last very long.
Syscoin, another Vancouver-based outfit, is a crypto oriented towards business users, and seems more ambitious than most others, claiming to be not just a currency or a wallet, but a marketplace, like eBay and Amazon, – “only better”. It’s a bold claim, but the startup comes well endorsed (MS Azure), and might actually be able to pull it off. Either, way something worth looking at, for a Canadian startup.
But what if you don’t trust cryptocurrencies as a class or simply don’t like their limited acceptance and potential volatility? There also P2P blockchain payment operators like Abra that operate directly in cash, but in case with Abra, at the moment I don’t like their reliance on “tellers” – essentially freelance agents cashing deposits. I don’t think it’s really safe particularly for larger payments. At the moment, it seems, bank deposit and withdrawals are only available in the US and the Philippines.
In the end, the actual savings will depend on how widespread the payment mechanism is in your target market – as I am looking at Russia and China at the moment, bitcoin is almost unheard of among the mainstream consumer. Cryptocurrencies offer potentially massive savings, but the adoption rate is still low, so a realistic solution will have to incorporate both the traditional and the new Fintech.
Payroll and Payouts
The payroll sector is understandably much more conservative than the common payments one, and is still dominated by the traditional accounting software providers like Sage, QuickBooks, with cloud-based newcomers like Xero, and a few smaller cloud-based payroll specialists. This will likely remain so for a few more years, so at the moment I understand that a new Canadian company with traditional workforce has only two options:
- Hire a payroll accountant and manage this in-house through either the catch-all accounting software or a dedicated payroll solution (e.g. WagePoint);
- Outsource this task entirely to a Canadian payroll provider (e.g. PayWorks or Ceridian For Small Business).
There are however indications that this too could change. Hyperwallet is a US startup that has recently opened a new office in Vancouver, providing payout solutions for companies that need to pay to multiple suppliers, distributors, sellers and freelance workers. As the “gig economy” proliferates, services as this will start to look increasingly like payroll – or perhaps companies like Hyperwallet will start offering payroll-like solutions (if they aren’t already doing so).
Foreign Exchange & International Transfers
There may be situations when a startup needs to transfer or exchange substantial amounts in foreign currency – for instance for paying to an overseas supplier, or to set up a branch office in a new country.
TransferWise. This Estonian startup was at the forefront of the Fintech movement around 2012 when it first challenged the brick-and-mortar international transfers industry (probably sending shivers down the spine at Western Union, MoneyGram and others). It’s P2P, cutting off the middleman – this means that it may take a few hours (or a couple of days) to execute a transfer from one currency to the other, but the result is substantial savings in fees, exchanging at mid-market rates and the platform takes 0.5%. There may be additional bank fees for depositing, but still it’s less than paying 3-5% to the bank just for exchanging (on top of the transfer fee). In 2016 direct CAD transactions became available on Transferwise making the service affordable for Canadians. Until then CAD transfers had to go through SWIFT which was a bit expensive.
If the amounts go beyond the typical P2P levels or there’s an added urgency to the transaction (e.g. you’re not sure that someone will be immediately able to exchange the right amount), one might take a look at an online currency exchange like Mercury FX. I have used it 2015 and saved quite a bit compared to the bank rates – I used them because they had a Hong Kong location. If you’d like to stick to the Canadian vendors, your trusted downtown VCBE now offers online service as well – the rates will tend to be higher than at P2P but still much better than at a bank. There’s really no need to pay extortionate bank forex rates these days.
What else can Fintech solutions be used for?
Something that is less often discussed than e.g. payments and transfers is the potential use of the blockchain technology for creating points or rewards systems. If there’s a method to create secure record certificates or quasicurrency units that have stated or fluctuating value and can be moved electronically at a negligible transaction cost – the very essence of blockchain – they can used as rewards to promote customer loyalty, employee retention, to encourage further spending etc. Such “points” can be assigned for transactions, stored on a personal account accessed with a plastic card or a phone app, and can be redeemed for discounts, rebates, cashback, special promotion items and gifts. Another such potential use could be authenticity certificates to go with products that are likely to be counterfeited, faked or pirated, or where it’s important to emphasise the origin of the product (think FairTrade) or simply as proof or payment or value certificates (think event tickets). There are probably other, more creative uses for this technology.
P. S. If you know any better solutions or have encountered issues with the services described, please let me know in the comments. Advice and comments are generally very welcome here.
P. P. S. I don’t have any financial interest in any of the products and companies mentioned in this entry.