Dmitry Kuvshinov, Bilderlings executive officer
Over the past few years, many wholesale companies, both European and international, have encountered difficulties in banking services — this problem is particularly acute for those working with the CIS regions. To continue developing normally, businesses seek a safe haven in European and UK financial institutions, but they continue to face difficulties that seem avoidable.
We studied the cases of clients who joined us after leaving the competitors and compiled a kind of checklist: what you need to know at the start before choosing a financial institution that you won’t have to change later.
Regular Bank or Fintech?
To continue operating normally, businesses started to open accounts in so-called “friendly jurisdictions.” However, based on the experience of clients who eventually came to us, there are several downsides:
– Changing the base currency;
– Discussing serious issues only in person.
Let me explain in a detailed way. First question — the currency. Exiting the Eurozone, you face the situation where any transaction is often forcibly converted into the currency of your bank. For instance, a customer pays you in euros for goods, but the money arrives in your account as lira. Then, you need to use this money to buy goods in China, let’s say also in euros — and the lira is converted again into euros. Considering the volatility of the lira (and many other currencies), you end up with double conversion, which can reach up to 10%.
Secondly, there’s the approach to customer communication. Many non-European banks, if they have questions (which are inevitable the case of large businesses), require the client’s personal presence to clarify details. As a result, many entrepreneurs have had to fly, let’s say, to Istanbul several times a month for meetings with the bank. Furthermore, from the moment of a meeting request until the meeting itself transactions on the account are restricted. This leads to significant client expenses and disrupts the supply chain.
Those who find this approach unsuitable seek a safe haven in European/UK financial institutions.
EMI, PI and Others — What’s the Difference?
Let’s check the status (type of license) of a financial institution.
PI, or Payment Institution, are engaged in processing payments but does not allow the storage of your funds. A typical example is Western Union: you cannot store money there, but you can send it. This solves the problem of transferring funds but does not address the issues of storage and overhead costs.
Small EMI, or Small Electronic Money Institution, is a financial institution with low capital that has a limit on the issuance of electronic funds. Which means that clients can store and transfer money, but not more than, let’s say, 2 million euros. This is an excellent option for personal wallet services, but it is unlikely to be suitable for businesses.
Authorized EMI, or Authorized Electronic Money Institution, is a full-fledged alternative to a bank in terms of storing and transferring funds. The main difference from a bank is that the financial institution does not have the right to use client funds, for example, to issue loans to other clients, as banks do.
Jurisdictions: UK, EU or Asia?
Regarding jurisdictions, the most developed for financial institutions today are those of the United Kingdom and Europe. There is a financial ombudsman who protects the interests of clients, and there are numerous procedures and rules that ensure security and transparency of operations. Here, the regulator requires fintech to prioritize client value over its own benefits.
Regarding financial institutions in third countries, particularly in the offshore zones, the risks associated with the reliability of the financial institution are much higher, but the requirements for compliance and AML (Anti-Money Laundering) are significantly lower. In European and UK financial institutions, compliance requirements today generally match the level of banks.
When choosing within the EEA (European Economic Area), the difference lies only in the regulator’s approach to details: some are more strict with certain businesses, some participate in the CRS (Common Reporting Standard) for tax data exchange, some do not, and so on, but these are the nuances.
For example, the UK financial regulator pays close attention to consumer duty procedures, which set higher and clearer standards of consumer protection across financial services and require firms to prioritize their customers’ needs. However, this does not mean that other European fintech regulators do not care about clients: all are striving towards a uniform standard.
Risk Appetites: How to Find Your Perfect Match?
Let’s start with an example. A large Baltic logistics company opened an account with one EMI. The account was easily set up, but it couldn’t operate: the fintech froze €2 million on its account, sending a document stating that since they had questions and suspicions about one of the payments, they were stopping all operations — and no specific questions were immediately asked. The logistics company couldn’t pay truckers’ salaries, office expenses, or settle accounts with contractors — all because they were beyond the risk appetite of the EMI.
Every company has its own profile and so-called risk appetite: some are ready to work only with small payments, while others are geared towards servicing large transactions and know how to work with big businesses. The problem is that while opening an account, the client does not specify their needs, and with a large influx of clients, the EMI opens accounts without considering whether they will actually be able to service the company in reality.
To avoid this scenario, we have three pieces of advice.
- First, it’s important to understand that you’re not alone in this problem. There are other merchants, logistics companies and shipping businesses that have already encountered these issues and share their experiences in blogs, forums, and Telegram channels. Look for information from those who share their experiences!
- Second, there’s a reason why there are so many legal firms that assist with structuring and conducting transactions, including recommendations for financial institutions. You can turn to specialists in the fintech market, consulting agencies, who, based on years of experience, can suggest a financial institution suitable for you to avoid account blocking.
- And third, before opening an account, clarify directly with the EMI manager whether your company’s profile matches their expected level of risk.
Must Have for EMI
Next, you need to look at the services offered by the financial institution. There’s a certain “gentleman’s set.”
Global payments. If your business is not limited to the Eurozone, clarify the possibility of international payments. Often, this either doesn’t exist or exists with the caveats.
Direct SEPA. Most financial institutions in the EEA will offer you SEPA payments. But there’s a difference: whether the company is connected to them directly or through intermediaries.
Direct connection means having the status of a Direct SEPA member and connecting to the SEPA system through the central bank of any European country. In this case, your payment is automatically sent through the central bank via the SEPA system to the recipient bank.
However, many are not Direct SEPA members, and the payment chain looks like this: you send a payment, your financial institution sends it to its payment agent, who is connected to SEPA through the central bank of an EU country. Along this path, compliance questions often arise with each of the agents, which ultimately dramatically affects the speed of payment execution.
SEPA Instant. Surprisingly, many companies, even banks, are still not connected to the SEPA Instant transfer system. You can wait for a payment sent on Friday evening until Monday. The world has long been operating at different speeds, and for businesses, every hour can sometimes be critically important. For example, a ship that is docked in a European port and urgently needs to pay for some services cannot wait three days for the money to arrive. When it comes to small amounts, within the limit of 100,000 euros, this should happen almost instantly.
Debit Cards. If you have a full-fledged business, you likely have overhead costs, business trips, meetings, etc. To this day, not every financial institution offers physical/virtual cards and modern payment methods like ApplePay/Google Pay.
The rest is not as crucial, but it’s still nice when a company has:
- A mobile app to quickly check urgent matters;
- A personal manager — a specific live person who oversees your interests in the financial institution (admittedly, when it comes to your business and finances, it’s more pleasant to talk to a person rather than a chatbot).
What Else Should Be Clarified?
Tariffs. Due to a series of intermediaries and conversions, the cost of a payment can increase significantly, sometimes reaching up to 10% of the amount. Before opening an account, check the cost of maintenance and each type of payment.
One example is the tariffing of complex transactions. For example, the delivery of consolidated cargo, when your trucks are transporting supplies from different companies. This requires an in-depth check, meaning more resources will be used, and yes, such a transaction may cost more.
A good example is when it’s clearly stated in advance that such a transaction will cost 0.5% of the payment amount, no less than a certain amount.
A bad example is when they say, “Due diligence costs 250 euros per hour,” and then it depends on the lawyers’ workload. This is not right: the client should know the cost before making the payment, and not be surprised with something like “either 2,000 or 7,000 euros.”
Transaction Processing Time. The speed of a transaction depends on the channels through which the financial institution sends the payment. The more intermediaries there are, the more checks there will be — which means the payment process is longer and more complicated.
Our clients tell us that in other banks, even a recurring payment (one that is repeated multiple times under the same contract, where it’s already well-known what and where you’re transporting) can take almost a week. For modern business, this is unacceptable, and the question of payment processing speed should be clarified before opening an account.
Public Information about the Company. There are cases when the beneficiaries of an organization are involved in criminal proceedings as defendants and other unpleasant circumstances.
However, it’s important to have a clear mind and understand: satisfied clients don’t rush to the internet to write laudatory odes; they just continue their work. The internet is for negativity. If you see a continuous stream of joyful comments, it’s probably worth thinking about.
