As any West Berliner over the age of 40 can attest, you don’t need a coastline to feel like you’re living on an island. Yet, while the Iron Curtain is becoming a distant memory even in the minds of those it once divided, European businesses today face a similar barrier that makes it practically impossible to trade or engage beyond their borders.
This isn’t a physical wall: it is the failure of the established banking industry to provide fast, reliable, and affordable international payments.

Cross-border transactions have always been time-consuming and expensive, but in the pre-internet days, this never mattered much to most businesses. Today, however, any business of any size can potentially be a multinational – especially digital businesses, which typically look to the Web (and so, the world) for their customers, rather than just their local High Street. Yet while the internet has made commerce borderless, the banking industry hasn’t kept pace by supporting seamless international payments for all, strangling the global growth ambitions of digital-first businesses.

While most domestic transactions are seamless and straightforward, especially following the Open Banking revolution, all but the biggest enterprises face significant challenges in doing business beyond their borders. They must contend with slow, cumbersome, and costly international payments; indeed, for many digital businesses, the fees and charges can outweigh the value of the transactions they are trying to complete. Traditional banking systems are meanwhile plagued by delays, high fees, and unreliable processes. Transactions can take days or even weeks, and the associated costs can be prohibitive for SMEs that do not have the financial capacity to absorb such expenses.

This is bad news for everyone. The exclusion of agile, innovative businesses from international commerce undermines overall market competitiveness, reinforcing the dominance of large corporations and limiting consumer options. So why, given that technology has transformed so many other aspects of international business, have international payments failed to evolve?

Barriers to Efficient International Payments

The challenges of cross-border transactions go beyond simple data transfers. Effective international operations require specialised processes, including risk assessments, Know Your Customer (KYC), and Know Your Business (KYB) protocols. Banks must also navigate complex legal landscapes in various jurisdictions and establish relationships with correspondent banks and national regulators.

Traditional banks possess the capabilities to address these needs but often choose not to invest in the necessary infrastructure.
From a purely financial perspective, supporting the unique requirements of digital businesses, particularly those with international ambitions, may not seem profitable. Establishing the requisite systems, hiring experienced and expert personnel, and forming global partnerships demand substantial resources at a time when banks are already struggling to replace legacy systems. It may not be a priority for them now, but the emergence of fintechs specialising in cross-border payments is a warning shot across their bows.

Legacy-free challengers

While traditional banks may be hesitant to adapt, fintech is stepping into the breach. This new breed of financial service provider offers fast, reliable, and affordable international payments tailored to the needs of digital businesses. Free from the constraints of legacy systems, harnessing the latest technologies and – most importantly of all – investing in the required relationships and skills, these fintechs are designed to meet the demands of today’s global digital economy.
Traditional banks might view these fintech solutions as serving niche markets, but this perspective could change as digital businesses continue to grow. The COVID-19 pandemic, for instance, prompted companies of all sizes to re-evaluate their supply chains and explore new international markets, highlighting the need for efficient cross-border payment systems.

Banks can continue to promote their (domestic) open banking achievements, but without providing truly global services, their claims will increasingly fall flat. If the growing community of digital businesses question why their financial partners cannot support their international needs, adjusting their ad campaigns and marketing messages will be among the least of their worries.

The question facing the traditional banking industry is how long they can afford to maintain their parochial, inward-looking focus. When ambitious digital businesses feel like they’re living on an island, it’s only natural that they will start looking for a bridge to the rest of the world.

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Among all the banking service and over-charging stories you hear about, there is an even bigger concern. Will you ever see your money again? 

Conventional banks not only seem to have challenges serving digital businesses well, while charging them top dollar, but continuing bank failures show that they are also putting their deposits at risk.

Come to think of it, why do we even need the things we call “banks” today? This is a call to get back to the basics – banks with a cost-effective transactional business model that removes the need to put clients’ funds at risk by chasing high returns, and keeps those funds in the safest place possible – central banks – should the worst happen.

Bank failures are more common than you imagine

You may think that your bank deposits are safe because they are insured by government-backed  deposit schemes. But the recent spate of bank failures shows that banks are not inherently safe, and that deposit guarantee schemes have their limits. Even when deposits are guaranteed, it can take months to get your money. 

In March 2023, Silicon Valley Bank (SVB), the 16th largest commercial bank in the US and the preferred bank for nearly half of all US venture-backed technology and life science companies, collapsed in the US banking system’s third-largest failure. About 89% of the bank’s $172 billion in deposit liabilities exceeded the maximum insured by the FDIC (Federal Deposit Insurance Corp) and would have been wiped out without exceptional authority from the US Treasury to guarantee all deposits.

In the same month, Signature Bank, a regional bank based in New York with $63 billion in assets, also failed after being hit by a wave of withdrawals and lawsuits related to its involvement in several fraud and money laundering scandals. The FDIC was likewise forced to guarantee all deposits at Signature Bank. But do these latest exceptional measures to protect deposits only serve to encourage yet more reckless behaviour by banks in the future? 

This is far from theoretical. There are many cases around the world where depositors have lost some or all of their money due to bank failures. In fact, more than 550 US banks shut down from 2001 to 2023, according to the (FDIC). And as inflation reemerges as a feature of global economies, the risk of future bank failures is considerable.

Banks are not efficient

You may think that your bank offers you a range of useful services. But do you really need all of them? And do you know how much they cost you?

The reality is that banks’ costs are escalating as regulatory requirements increase. Anti-money laundering (AML), know your customer (KYC) and counter-terrorism financing (CTF) precautions impose costs that have to be passed on to customers. Banks are not known for their operational efficiencies to offset these costs. They have legacy systems, complex structures and high overheads that make them slow and expensive. These additional costs not only strain businesses’ already-tight budgets but also hinder their ability to grow and thrive. 

In search of additional profits to cover these costs, banks offer an increasing range of peripheral add-ons that further increase their costs and make their business models unwieldy. They can also be tempted into business areas where margins and risks are higher, such as derivatives, cryptocurrencies and subprime mortgages. These activities expose them to market fluctuations, credit defaults and regulatory fines.

Even where banks are not taking on higher risks, things can still go very wrong, as SVB demonstrates. SVB was holding a lot of safe, interest-bearing US treasuries. But, as the Federal Reserve increased interest rates, the market price of those treasuries dropped so much that SVB was no longer able to cover all withdrawal requests if it were forced to sell them in the event that all its depositors demanded their money. 

The result is that the traditional banking model is neither safe nor efficient. The base services are priced low but topped up with high “optional” fees for services that digital businesses may not need or want. And, to cover loss-making base services, the model puts depositors’ money at risk, regardless of whether banks adopt high- or low-risk strategies to generate income.

What digital businesses need

So what is the alternative? What digital businesses need is a stripped-back form of banking where the institution is licensed and protected by its home central bank but where its focus is simply transactional: enabling businesses to receive and make payments. Let’s call it a transactional bank.

This is already possible in certain jurisdictions. In Lithuania, where Nexpay is located, the central bank has been progressive in providing central bank infrastructure access to new banks and EMIs (Electronic Money Institutions). Because Lithuania is a member of the Eurozone, the funds held with the central bank are ultimately held by the ECB, which is about as secure as it gets. 

Businesses still need to be selective, of course. A neobank with ECB protection can still be bloated with unnecessary products and costs. But there are now solutions out there offering protection and low-cost payment solutions across Europe and beyond, using innovative technology and streamlined processes. Such operators do not offer any other services that would increase costs or risks. They simply enable their customers to move money safely and efficiently, avoiding exposure to risky activities and invoking the peace of mind that comes from knowing that deposits are backed by the ECB. 

It is high time we considered a new banking model that prioritises safety, cost-effectiveness, and simplicity, enabling digital businesses to thrive without unnecessary frills and risks. This is a call for a stripped-back form of banking where the institution is licensed and protected by a credible central bank, ensuring the ultimate guarantee of deposits. By shedding all the unnecessary bells and whistles that conventional banks have accumulated, transactional banks can deliver a cost-effective, secure service tailored specifically to the digital economy.