International business optimization 101: currency transfers
While the COVID-19 pandemic was mostly catasphrophic for both global economies and individual businesses, there were as ever, some real winners from the crisis making record profits.
Further, in order to adapt to a new world, other businesses found themselves operating internationally for the first time and having to deal with the challenges of operating across time-zones and face the implications of receiving and transferring foreign currency abroad.
A crisis or an opportunity?
So who were these COVID-19 beneficiaries? Well PPE and medicine suppliers did very well and as of course, the Funeral Business was well and truly booming.
Glibness aside, there were also some more unexpected and genuinely interesting changes to the way business was conducted in many different spheres. For example, in central London, some Coffee Shops quickly responded to Lockdowns by re-inventing themselves as Coffee Delivery Services and tradesmen often found themselves inundated with requests to transform long neglected garden sheds into home offices.
It gets even more interesting. Curiously, despite severe travel restrictions that impacted both the movement of goods and people, some businesses actually found themselves opening up to international markets for the first time as e-commerce, and e-services hit an unprecedented boom.
For example, the lockdown enforced closure of ‘non-essential’ factories in the EU meant that companies looked outside the block to source goods for the first time in decades. In terms of service providing companies, firms who previously specialized in organising corporate team bonding events in Sydney, suddenly found that the rise of Zoom culture allowed them to court clients in New York and arrange online corporate “fun days” for teams working from apartments spread across Manhattan.
Whilst opening up to global markets is a very exciting opportunity for any business, it does carry a whole set of challenges. Perhaps the biggest one is the issue of dealing in different currencies. Buying and selling goods across currency zones means that fluctuations in exchange rates can substantially impact the costs which can affect profitability for both buyers and sellers.
Understanding the foreign exchange interbank market
A foreign exchange rate is the price or rate showing how much it costs to buy one currency in exchange for another currency. Foreign Exchange rates typically come in 2 forms, the Interbank Rate which is the rate that banks trade currencies with each other and the Forex Rate which is the cumulative rate resulting from decentralised currency transactions.
Whilst banks will apply the favourable Interbank rate internally, they will usually not pass this onto the customer. For example, JP Morgan in the US may exchange $1 for £0.75 with Lloyds PLC in the UK, but Lloyds will only pass £0.73 onto their UK based customer keeping the £0.02 as their “markup”.
International banking fees
Whilst most businesses understand the issues around exchange rates, fewer appreciate the “hidden costs” of dealing internationally in the form of bank cross border transfer fees. Indeed, most banks will charge a fee (this can be a fixed amount or a percentage) for sending and receiving money internationally so businesses will often find themselves paying two sets of fees on top of the exchange rate every time they make an international transfer.
It gets worse. If the sender and recipient banks do not have a direct relationship they will move the monies via an intermediary bank who will also levy a fee.
It isn’t only the banks who apply “mark-ups’ ‘ on exchange rates and apply transaction fees either. Even tech giants like Paypal and Amazon engage in this practice. In fact, in some cases buying something internationally via Paypal or Amazon can be more expensive than making a bank transfer – basically, the tech giants take advantage of the fact that you have no option other than use their pay platforms and so they extract maximum profit from it. There is especially bad news for UK business’ in store following the announcement of Paypals post Brexit fee increase.
What can be done?
One option which businesses can take advantage of is by using dedicated currency transfer services. Currency transfer services specialise in transferring currency internationally and are usually a lot faster than much cheaper than using the banks or even Paypal. There are a number of currency transfer providers out there and some now specialize in catering for business to business transactions.
Let’s take a look at some of them.
Originally founded in 1962, Moneycorp is a UK based global specialist in currency exchange and international payments. They are now largely owned by the UK banking behemoth RBS and offer a range of servers ranging from business transfers, to multi currency mastercards designed for travellers.
Launched in 2004, Worldfirst don’t have the banking pedigree and heritage of Moneycorp but are a more streamlined fin-tech focused company who specialise in online marketplaces. Worldfirst customers can open multiple currency accounts online, and make fast foreign exchange transactions in 68 currencies.
Transfermate specialise in B2B international money transfers and are backed by both ING and Allied Irish Bank. They pride themselves on high regulatory standards which is why even mega banks like Wells Fargo trust them to handle their currency transfers.
Kantox offers a currency management service which uses AI and real time data to protect account holders from fluctuations in Foreogn Exchange rates. Kantox is particularly useful for international sellers as it allows them to adjust prices in real time in line with changes in exchange rates.
VertoFX have aimed themselves primarily at Freelancers and SMEs making them a firm favourite with Digital Nomads and creatives who operate internationally. They charge ZERO transaction fees and claim to offer x 9 cheaper Foreign Exchange rates than the high street banks.
Airwallex’s mission statement announces that they “Are not a bank (we) are better”. They allow sending and receipt of funds in multiple currencies and crucially, they charge just 0.5% – 1% above the interbank rate when exchanging currencies. Airwallex also offers seamless integration with services such as Paypal and ApplePay making them another good option for e-commerce companies.
How businesses can save money
For businesses regularly dealing in foreign currency transactions, another best practice for overseas trade is ‘hedging’ in order to indemnify themselves against any turbulence in FX markets. Examples of ‘hedging bets’ are taking steps such as keeping a number of foreign currency account balances (USD, EUR and GBP being the most common).
Another option for hedgers is to commit to buy an agreed foreign currency over a set time period and ‘lock in’ the rate by entering into Forward Contracts.
Another sound option is for a business to find their own dedicated dealer – a specialist currency dealer or currency broker who works directly with a business to help them find bespoke foregn exchange solutions. This can take the form of help in finding the best rates or advising the best times to buy and sell currencies. Obviously dedicated dealers will charge a fee but for companies making a lot of foreign currency payments, this will invariably work out cheaper than relying on bank transfers.
By utilising transfer services, hedging or by engaging a dedicated dealer, businesses operating internationally can easily save 1-2% upwards on each transaction. Over the course of a financial year, this really can make a big difference to bottom line profit which is why more businesses than ever are paying closer attention than ever to currency transfer costs.