While the UK government is encouraging businesses to boost cross-border trade to help grow the economy, many firms are, understandably, lacking confidence given the volatility of the currency exchange markets, the eurozone in particular. However, there are practical steps businesses can take to minimise the risks and apply a good level of control over international transactions.
First it is important to separate the two processes: foreign exchange (FX) and international payments. FX is the process of converting one country’s currency into another country’s currency in order to complete a transaction. International payments is the process by which the transaction takes place.
The ideal scenario is to find a payments partner who will manage both FX and payments as cost-effectively and efficiently as possible. Finding a provider who can do both processes seamlessly at the right cost can have a significant impact on bottom-line profitability.
FX: Understanding the Market
An understanding of the way FX works is critical to the way businesses trade internationally. The FX market moves extremely quickly with rates changing every two to three seconds according to the information fed into the market, such as gross domestic product (GDP) figures, country interest rates, house prices and inflation to name a few.
Generally speaking, poor figures weaken the value of the currency in question, while positive country figures strengthen the specific currency. The key point is that over a day the difference in value for rates of exchange can be considerable, highlighting why it is vital for businesses to work with a payments partner with a clear understanding of market information.
This may be through a current banking partner, a specialist broker or a specialist bank. Whichever route a business may follow, the main requirement is a demonstrable understanding of the market and the impact this can have on the relevant currency pair. With this market insight, businesses can make informed decisions on when to transact rather than completing a blind trade, which is an extremely risky process that can result in significant losses simply by trading at the wrong time of day. Having some control over when to make transactions certainly goes a long way to achieving stable trading conditions.
Examining each option in a bit more detail it becomes easier to assess the pros and cons of using individual commercial FX providers. The options are as follows:
High street banks
First, looking at branches of high street banks, which typically use a ‘day sheet’ with rates adjusted to protect the bank from losses. Rates offered can have margins added ranging from 0.5-4% and charges will be incurred for currency account management. This contrasts with specialist banks and brokers that will usually allow the customer to access rates that move in line with the market with less margin attached to the rate.
On the more positive side, a key benefit for sticking with the current banking partner is that all UK banks are Financial Services Authority (FSA) regulated and must adhere to balanced capitalisation following tightened FSA regulations. This protects them and, in turn, their customers.
Looking at specialist brokers, these firms will have market information to offer and will therefore allow the customer to access rates that move in line with the market with less margin attached to the rate. However, specialist brokers in the main will not be able to offer true currency accounts because they may not hold the appropriate licences to hold funds for an extended time period.
The larger brokers will offer ‘holding accounts’ at their banking partners, with time limits attached. This may cause issues with flexibility and international clients wishing to pay unknown third parties.
Finally, in contrast to the above options, specialist banks will offer competitive pricing from live market rates as this is their only area of focus. FSA regulated, they offer the protection of high street banks but with a much greater level of expertise, flexibility and cost efficiency. This is because they are usually unencumbered with the scale of operations of high street banks and have often built their business focusing on specific services rather than offering a wide range of banking products. Some will have online facilities to help businesses manage their funds and dedicated account management to handle queries and transactions rather than a centralised call centre. This ensures businesses have greater access to information and better control.
Choosing the best partner is dependent on each individual business’s requirements. By analysing the pros and cons, and consulting with payment providers to see who best fits your needs, businesses are able to determine which facilities they require most, as well as the financial implications of these services before committing to a partnership. Needless to say choices should be made based on what is best for your business. Weighing up all the options available can be time consuming but the initial investment of time will reap rewards.
There are several factors businesses need to consider before deciding on transaction processes and appointing an international payments partner.
What are the costs?
Consider what charges you could be facing. For example, high street banks send electronic funds transfers (EFTs) which can add to the time and cost of payments. When an international payment is made, it passes through a number of banks en route. In a lot of cases they may wish to charge for the handling of the payment. All costs should be made clear up front at the time of signing the contact or agreeing to the terms and conditions (T&Cs).
To limit the volatility of fluctuating exchange rates, businesses should be looking at finding suppliers with fixed payment costs. Some providers, rather than charging for EFTs will offer a fixed price solution providing businesses with a monthly invoice for a flat fee.
Consider options such as forward contracts. A forward contract is a transaction that allows importers to lock in an exchange rate for delivery of funds generally up to one year maximum in advance, thus removing future risks from currency fluctuations. Forward contracts are ideal for businesses wishing to protect profit margins. They typically require a deposit which is then deducted from the sum payable on the maturity date or contract expiring date. The deposit in most cases offers protection against defaults. However some don’t, which means businesses may be required to provide even more money to offset the initial deposit.
Look for Visibility and Communication, Pre-emptive Error Checks and Service
Visibility and communication is also important. Check your provider can confirm how quickly your funds will clear but also offer you immediate notification of those funds. In some countries, particularly in the US, customers may choose to pay for services and products with drafts or cheques. Typically most high street banks do not show incoming funds which are made by cheque until the funds have been completely cleared. Depending on the draft type, this process may take weeks to clear and show in the relevant account.
Error rates are a serious issue in international payments. Help prevent lost payments and extra charges by ensuring the provider conducts pre-emptive error checks as a matter of course. Businesses should also look for an FX provider that requests beneficiary data prior to you using their systems. Finally, check references can be added to payments so that they can be traced easily. If the payment provider does not check the detail of a payment entered, you run the risk of payments being delayed in the correspondent bank network.
Customer service should not be overlooked but is rarely questioned until a payment goes missing. Customer support is a crucial element of the process, businesses should request a dedicated contact rather than settling for a call centre.
There are a number of issues to consider when conducting overseas trade. Businesses need to protect their profit margins whilst maximising their opportunities to trade internationally. Some initial time investment in researching the options and costs for their business will pay dividends in the future.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.