Everyone knows the reasons for the SME trade finance gap: small firms don’t have the time or the collateral to get their loan applications approved, while banks are nervous about having SME risk on their balance sheet. But what if CFOs could pay for B2B goods the same way they buy their consumer products? Margrith Lütschg-Emmenegger and Marius Savin, co-founders of Octet Europe, share their insights on unlocking card payments for SME trade.


For the CEO or CFO of a small company, procurement can be the cause of many headaches. In bilateral transactions outside of an e-commerce or marketplace platform, there usually is no payment infrastructure, making bank transfers the only option available. And without the time or resources to do thorough KYC and AML checks, companies can never be sure who is on the other side of a transaction, which means they can either take the risk upon themselves, or they have to resort to letters of credit. These are granted through a cumbersome process, with paper documentation being sent back and forth several times between the buyer, the seller, and the buyer’s bank.

E-commerce platforms and marketplaces are increasingly popular for procurement, for good reason: not only do they allow buyers to compare prices on hundreds of different options, but they also facilitate more secure payments, at least in regulated markets. However, this convenience comes with a price: an Octet study found that suppliers hike up their prices by 10% to 20% to sustain the marketing and administration fees charged by marketplaces, as well as to manage cashflow while they wait for these platforms to transfer funds back to them — which can take one to three weeks depending on the contract.

In all cases, the paper trail can be very hard to follow. When a CFO or someone in a company’s finance department is tasked with making a payment, they may not have access to the full history of transactions. They could be dealing with a purchase order initiated three or four months ago and which went through many adjustments, but all the CFO has is an invoice with the amount that needs to be paid, with no visibility over what happened before the invoice was sent. Moreover, any discrepancies in documentation could prevent buyers from clearing the goods from the shipping agent or customs.


Powering B2B procurement for European SMEs

Many in the trade finance space are eagerly awaiting blockchain developments to bring more security and visibility to transactions, with the hope that this will unlock liquidity for SMEs. But shared ledger technology has already been in use for years. Octet Europe is a fintech franchise of Octet Australia, which has been facilitating digitised trade through shared ledgers and card payments for the past 10 years. The Octet Australia platform handles over US$2bn in annual supply chain transactions between more than 100,000 members in over 68 countries. Now, Octet Europe is offering to bring this tried and tested model to European businesses.

Intra-European trade alone is worth €3.5tn, €2tn of which is done by SMEs. Add imports from outside the European Union, and the procurement volumes conducted yearly by European businesses reach €5.5tn, of which almost €3tn is done by SMEs. And yet, small companies are the segment most underserved by traditional financiers. There is a tremendous opportunity to power SME procurement in the region, but we need to rethink the way we serve this segment.

First, we need to help SMEs with their KYC and AML processes: upon registration of a new member, Octet makes a full KYC/AML screening of the company, and when the vetting is done, the member receives user-based rights with a two-factor authentication access. This means that all the companies in our community are KYC-verified, and only the CEO or authorised personnel can access the platform to make transactions.

Octet is not a marketplace, so once they are registered, buyers and suppliers are connected on a one-on-one basis, which gives both parties the comfort that no competitors can have access to the value relationships they have created through hard work. Parties then agree on which documents will be compulsory in the transaction: invoices, shipping documents, delivery notes, inspection certificates, or anything else. All documents are presented electronically on a shared ledger, meaning that the information is available to both parties in real time, and any modifications are tracked and time-stamped. Without presenting all these documents digitally, the seller cannot claim payment.
Being able to transact on a secure platform like Octet Europe, with all KYC/AML checks done for them, and with instant access to the full history of trade documents, removes many of the risks that can sometimes take SMEs out of business completely.


New opportunities for cards in the B2B space

Then, there is the question of payments. In the consumer world, payment habits are completely different from what they were a decade ago. In Europe, cards have replaced cash, and recipients’ bank accounts are credited within a matter of seconds. So why is it that B2B payments are still done through slow and cumbersome bank transfers? Imagine if a CFO could pay for procurement the same way he or she pays for a TV at home – by card, and with various repayment options. For SMEs in particular, this would be a game changer.

Currently, cards in the corporate space are mainly used for travel and entertainment, to pay for hotels, flights and dinners. But recently, card schemes have noticed their potential in procurement spending. In Turkey, cards in the B2B space are already seen as credit tools: card issuers incentivise corporate users to do their procurement through designated portals, and when they do so, the card issuer enables credit, with repayment in several instalments and in up to 12 months.

With Octet Europe, card payments are initiated on the platform, through a 3D Secure merchant facility which authorises the debit of the card, transfers the funding to the client’s account and from there, to the seller. Payments can also be done by bank transfers, whereby the buyer instructs their bank to place the money into the seller’s account on the platform, from where it then goes into their bank account. Employees with access to the Octet platform can only make payments to pre-approved sellers, which brings more control and discipline into the procurement process, adding a layer of comfort for members.

Octet Europe is also in advanced negotiations with credit and debit card issuers to offer trade solutions to SMEs registered on the platform. For financiers – card issuers or other – there are many benefits to using such a platform for business: access to qualitative information on the ways each company spends and reimburses credit, as well as visibility over each transaction’s documentation thanks to the shared ledger. This is expected to increase the limits available to SMEs, by making transactions more secure and transparent for funders.


Increased competitiveness

The cost of transacting online can make SME trade a lot less competitive: companies tend to raise their prices by anywhere between 2.5% – if they use an Open Banking facility – to 20% on an e-commerce or marketplace platform.

By conducting transactions on a dedicated trade platform such as Octet, SMEs can regain competitiveness. First, registration is entirely free, and gives firms instant access to a state-of-the-art supply chain platform. Second, the fee applied to transactions is lower than the costs of sustaining a marketplace or e-commerce presence.

On top of a secure environment to transact, where counterparts are KYC and AML-checked and payments are protected by several layers of authentication, Octet Europe can give companies room for commercial negotiations within the procurement process, adding to the savings for both buyer and seller. This model has been successfully applied in Australia, but it is new to Europe, where it has the potential to revolutionise SME trade finance.