The global banking system and its processes were established before the internet. As a result, the networks and methods for conducting business are outdated and slow to react to change brought about by the digital world. While progress is being made with online banking systems and payment platforms, a lot of the advances have come from more agile and innovative fintech companies.
For example, the way banks defined ‘high risk’ companies used to be narrow and applied to a few niche industries. However, since the internet, the number of companies deemed high risk has been rising. This is primarily due to the notion that making money online and in multiple currencies is being flagged as suspicious and open to fraud.
As shown by problems faced recently by Binance, buying, selling, or trading cryptocurrency is one sector seen as risky, despite governments increasingly exploring the idea of ‘Govcoins’. Other high-risk categories include eSport and gaming, creating online content, selling art, and eCommerce platforms.
These aren’t small industries. For example, the Creator Economy is estimated to be worth around US$104.2 billion. The size of the eSports market in 2021 is US$1.08 billion and is predicted to increase to $1.6 billion by 2024.
Another heavily penalized group is SMEs that operate internationally – especially those from developing nations, such as the EU list of ‘high-risk third countries’. Across the nations in the Organisation for Economic Co-operation and Development (OECD), SMEs account for around 99% of all businesses. Yet, many are denied banking options or face exorbitant fees and delays.
As the world embraces the advantages of technology, more enterprises will be classed as high-risk simply because banks find it difficult to accurately categorize new approaches to business. Given that crypto platforms are one of those deemed problematic, it is ironic that a payment solution for these industries happens to be cryptocurrency.
Blockchain technology simplifies risky and cross-border transactions
Fintech companies tend to be at the forefront of financial innovation as they can approach problems from entirely new angles. One such company that has found a solution for ‘high-risk’ ventures is XanPool and its platform XanPay.
XanPool’s founder and CEO, Jeffery Liu, explains, “We founded XanPool in 2019 to solve the problem of onboarding and offboarding from fiat currency to crypto. If you want to buy crypto, it can be a painful experience as the money has to be routed through the legacy banking system with all its fees, delays, and lack of transparency. So, we wanted to design a way to avoid all that.
“This led to XanPool, which is essentially market-making software that lets buyers and sellers, liquidity providers, buy and sell cryptocurrencies using digital wallets or bank accounts. This allowed people to bypass legacy platforms like the banks, Visa, or SWIFT, and consequently avoid issues like the 3% merchant fee, unfavorable FX rates, the wait of three days or more for transactions, fund custody, chargeback risks, and all the other issues found with older infrastructure.”
With XanPool’s cryptocurrency and network of local currency liquidity providers, transactions were instant, cheaper, and carried no risk of chargebacks or credit card fraud. What’s more, Liu knew the structure could be applied to other issues. “We realized that we could use XanPool liquidity and peer-to-peer network to solve problems people were having with traditional payment platforms.
“For example, there are numerous solutions for P2P and large-scale transactions,” Liu says. “But if SMBs fall below transaction targets set by the international banking system, they are forced to use legacy infrastructures. For a business with tight margins, the extra fees and delays can be crippling.
“By using the XanPool network and cryptocurrency to route international payments, money can arrive with the merchant instantly, even from other countries. This also means there is no risk of credit card fraud and, unlike on a bank statement, all charges are clear and understandable,” Liu says.
Transferring money using cryptocurrency decreases risk
With cryptocurrency, many of the dangers that lead to businesses being labelled as high risk are removed or decreased. “There are several reasons why an enterprise might seem risky to a bank. These can include operating across borders, especially if multiple currencies are involved. Or they could be companies in countries with high chargeback risks. Or a business might simply be new or not big enough,” Liu says.
The problem is that in the modern online world, smaller businesses from various industries, such as gaming, content creation, or a merchant selling specialized goods, are now working internationally. SMBs can easily function at a global level thanks to technology - but the infrastructure wasn’t there to support it.
Liu adds, “With XanPay, we were able to solve these issues thanks to our structure. For example, there are no chargeback risks or transparency issues, as it is instant. Additionally, merchants using our platform have seen payment processing costs decrease by over 40 per cent. So not only are we providing a platform for those deemed high risk and previously had problems with payment solutions, but we are also decreasing what caused them to be classified as risky in the first place.”
Industries such as cryptocurrency exchanges, online gaming, creative arts and content, and merchants selling cross borders are rapidly growing in number and global reach. If banks and traditional transaction platforms continue with current classification methods, the numbers of high-risk companies are going to skyrocket. The banking system is likely to adapt in the end, but as is so often the case, fintech will already have solved the problem.