Cross-Border Fintech: Clouds On The Horizon
This is week three of our deep dive into our newest investment thesis: Cross-Border Fintech.
In the first post, we teased the thesis. In short, Cross-Border Fintech is a yet unnamed category of startups that use financial technology to reduce the friction companies experience in their cross-border operations.
In the second post, we dove into the macroeconomic backdrop of our thesis. We looked at data to evaluate whether cross-border activities are growing or not. We established that the global order is in flux, but the world is still growing closer together.
In today’s post, we explore the increasing complexity in maintaining cross-border operations.
Default friction
Borders exist, whether for good or bad reasons. They divide the world into countries that share a government and are unified by a common culture, language, currency, laws and regulations, taxes, etc. Crossing a border means facing a different (sub-) set of the above.
Companies that expand across borders need to manage all of these elements. The more borders they cross, the more complex their operations become. This has very concrete and practical implications, like e.g. having to:
- monitor supply chain risks across various countries and languages,
- maintain multi-currency bank accounts and manage FX risks,
- ensure compliance with local rules and regulations,
- calculate VAT according to local methods and ensure transfer pricing is done correctly.
These are just a few exemplary implications.
This type of friction will always be present. It already creates a rich breeding ground for startups to thrive on. But more friction is currently layered into the system.
Protectionism
Countries have always had their own political agendas, so global trade was never perfectly fluid.
China has made it very complicated for Western companies to operate within its borders, even banning certain products like Facebook and Google altogether. The UK and US have been campaigning to ban the use of Huawei components in their own and their allies’ 5G networks. The UK voluntarily left the largest trading bloc in the world, opting instead for tariffs, custom checks and rules of origins for goods.
All of these are examples of trade barriers instigated as part of a political agenda. Add strategic export controls like the US CHIPS Act or China’s export ban on certain minerals, the introduction of tariffs and the threat of retaliation, or massive state subsidies to shield domestic industries from global competition, such as the US Inflation Reduction Act, and you end up with a global economy that is highly distorted by political meddling.
Increasingly, economies around the globe are being politicized. In certain cases, economies are even weaponized to achieve (domestic) political goals. None of this is conducive to global trade or making it easier and more predictable for companies to operate across borders.
Regulation
Regulation is — and will continue to be — one of the key complexities in cross-border operations.
We all know that the European Union loves a good regulation. Many of them are laudable for the values they embody, but some have become a veritable headache for companies within and outside the bloc. Consider the AI Act (AI), MICA (digital assets), or GDPR (personal data). Beyond that, the EU Supply Chain Act (human rights), the Carbon Border Adjustment Mechanism (carbon emissions) or the Corporate Sustainability Reporting Directive ( sustainability reporting) massively increase the complexity of cross-border operations.
The EU is not the only zealous regulator out there though. Starting in January 2025, the US Outbound Investment Regulation takes effect, restricting investments by US entities into sensitive technologies abroad (like AI, quantum, semiconductors) and comes with a heavy burden of extra compliance work. The OECD is in the process of implementing their Base Erosion and Profit Shifting (BEPS) initiative, the most fundamental reform of international tax law since the 1920s. Among other changes, it will alter transfer pricing to prevent profit allocation to lower tax environments. The list goes on.
Physical and armed conflict
The war in the Ukraine and the subsequent fallout between Russia and the West had a massive impact on trade. Western companies abandoned or scaled back their operations in Russia and sought alternative commodities and energy suppliers. Trade routes had to be reconfigured. Sanctions made dealing with Russian entities around the globe difficult.
The conflict in the Middle East is still brewing, and might lead to unforeseen consequences. Yemen, Sudan and Somalia are still ridden with conflict, making the Suez Canal a chokepoint of global trade. Houthi rebels continue to target cargo ships in the Red Sea. The fate of the Panama Canal remains to be seen, now that it has become a proxy battleground for China and the US. Speaking of China, the threat of a move on Taiwan is still latent. All these active and latent conflicts require companies to rethink their operations abroad and react swiftly to any changes.
Climate change
Climate change has a massive impact on cross-border business. Whether through floods, draughts, (snow)storms or fires. Climate change is making previously reliable supply chains much more unpredictable.
In summer, the Rhine river frequently carries so little water that the supply of commodities to German industrial companies like BASF or ThyssenKrupp is critically interrupted. The Panama Canal is currently experiencing a severe drought and has thus reduced its capacity by 50%. On the other extreme, there are more severe floods happening at shorter intervals, causing massive damage to the affected areas and creating ripple effects across global industrial production. Increasingly, these events occur in areas that were historically not prone to them. In the US, weather events frequently cause a quarter of all road cargo delays, costing logistics firms billions annually.
Managing the impact of climate change is hyper-complex, as it is a multifaceted phenomenon with implications across various dimensions. It affects infrastructure, supply chains, input materials, carbon emission management, compliance, and everything in between.
We have now established that:
- the world is (still) becoming more globalized, and
- that border-induced friction is increasing.
To us, this sounds like an interesting dichotomy with a lot of potential for tech startups to capitalize on. In fact, there are plenty of companies doing this already. In our next blog posts we will define Cross-Border Fintech more clearly, and highlight the concrete opportunities we see in this market.
