The cross-border B2B market is growing at an incredible pace. According to Boston Consulting Group’s estimates, total offline and online cross-border B2B transactions will account for more than $50 trillion by 2020, eclipsing the cross-border consumer spending 20-fold. This growth has been fueled by online transactions in a more digital and hyper-connected world.
Nowhere has this change been more transformational than in India. Unlike developed markets, India has been under-penetrated, offering huge potential for growth. The 2016 Internet Trends Report by Mary Meeker, a partner with venture capital firm Kleiner Perkins Caulfield and Byers, found that India is the only exception to the slowing growth rate of internet adoption, accelerating to 43% year-over-year growth in 2015. In addition, total online cross-border spending in India grew by more than 78% from 2015, cites BCG. Recently, Payoneer commissioned an independent survey from the global research and content platform, Let’s Talk Payments LLC, to better understand the drivers and obstacles to this growth. Here, we look at some of the findings of this report, and what this means for B2B companies in India.
According to LTP, there are four main drivers of cross-border B2B growth:
- Connectivity: The number of opportunities for a business to find (and be found by) potential customers has exploded.
- E-commerce platforms: The rapid development of e-commerce platforms, particularly B2B and B2C e-commerce marketplaces, is changing the way businesses go to market and find customers. The entire distribution model for a business to get to customers is being radically transformed.
- Infrastructure: The increasingly available global infrastructure is the grease that enables the wheels of cross-border commerce to keep spinning faster and faster.
- Cloud-based software: new cloud-based software is enabling businesses to go more digital, for more of what they do, more quickly, simply and cost-effectively than ever.
Together, our increasingly digital world has created greater exposure for businesses to a new, global market of customers, and have changed the business model for how goods and services are sold and distributed. India is particularly well-poised to benefit from this global shift. For several generations, India has invested in education and it offers an intelligent, highly trained, and technically savvy workforce. Now, platforms like Amazon, Upwork, and Getty Images have created a nearly unlimited array of options for businesses and professionals in India ready to expand internationally with minimal entry costs. Suddenly, a developer in India can work for clients in the United States, Germany, China—all without needing to worry about having a physical presence in any of these countries.
Unfortunately, while the access to the global economy has been democratized with unprecedented speed, the financial systems supporting these transactions have not kept up. The majority of cross-border B2B payments are still carried out through international wires, which are notoriously problematic. The Let’s Talk Payments report cites three major issues with wire transfers:
- For wire transfer payments, no standard exists for sending remittance information that allows efficient reconciliation and posting of electronic payments once they are received.
- Risk of fraud: Online wire transfers are open to the risk that criminals can circumvent online authentication measures.
- Time frame: Sending a wire transfer to a bank abroad can take a lot longer wire transfers to domestic bank. This is problematic if there is an emergency.
One Indian merchant interviewed for the report said that they “made a wire transfer using a bank in America to an account in India using SWIFT codes. It has been two and a half months and it hasn’t gone through. The bank in India has not received any information regarding this and the bank in America is not willing to help.” Another professional had a payment disappear between banks: six weeks later there were still no answers and no money. In an emerging economy, an unexpected delay in receipt of funds can create liquidity issues that can push a new company out of businesses.
In addition to payment delays and fraud risks, unanticipated fees can mean big trouble for Indian businesses. Take, for example, a freelancer on Upwork. According to the report, if she earnes $55 (about 3700 Indian Rupees) for her services and chooses to receive her funds through PayPal, she will ultimately collect just over 2980 INR, a loss of roughly 20%. It is therefore crucial that Indian professionals and businesses critically review their payment options, to find the fastest and most cost-effective option.
Given the limitations of existing financial systems, entrepreneurs must be very conservative when creating business plans, or seek alternative payment platforms. The opportunity for cross-border business in India is staggering, but the true costs—for those who don’t do their research—can also be significant.
Scott Gallit is CEO of Payoneer, a provider of international online payment technology and services.