Managing Your Cash Flow

Educating the market on the availability of FX savings

6 min read

23 March 2015

Former editor

As businesses grow, the need to look overseas becomes a positive eventuality. One issue this throws up is dealing with foreign currency and the most cost-effective way of doing this.

Alex Hunn, CEO at freemarketFX, believes that businesses are either ignoring the costs associated with, or have become accustomed to paying too much for, currency exchange requirements. It is like being in a bath and having the water heated-up around you, if it happens gradually you don’t realise how hot it is becoming until you get burned.

Similarly, he thinks, people and businesses have become accustomed to FX costs gradually rising and do not realise there is the proverbial cold pool waiting invitingly nearby.

“In a nutshell, there hasn’t been an enormous amount of revolution in the currency exchange industry for decades as your choices were limited to your bank or your broker,” Hunn explained.

Banks, he explained to us, like brokers as they aggregate what would individually be seen as small transactions. What is one conversation for a bank is multiple ones for a broker. The broker adds a margin, but is still better than the bank.

Hunn believes it is in the last five or six years that the web has got to a state where it is feasible for companies to deliver currency in a totally online model and where it is safe and secure enough for people to conduct these kind of transactions online. That is where freemarketFX comes in – a platform, built from scratch, which serves as people-replacing technology. Using a peer-to-peer structure, freemarketFX operates regular currency exchanges where clients make deposits on either side of a transaction. This, the company says, allows it to aggregate as many different clients as possible into each exchange, driving efficiency and guaranteeing a time to delivery.

In the company’s journey to build out both its proposition and trust, it has encountered an interesting awareness, or lack thereof, when it comes to the costs of FX. Of the 100 or so business leaders it questioned, nearly three-quarters thought the fees they were currently being levied were “fair or inexpensive”. The average fee the company encountered was 0.8 per cent, a figure which could seem low on the surface but will add up over time.

“The most remarkable stat for us was that 78 per cent of interviewees thought that these charges were fair. Despite their being a high awareness of innovation, there is as yet a very low adoption of that innovation. We found that 99 per cent are still using a bank or broker. The big factor is that people believe banks and brokers are charging fair fees – they’re unaware of lower options.”

One factor of this aversion to change, Hunn added, is the jaded feeling FDs at growing businesses tend to have due to the barrage of offers from FX providers. The hardest part, he said, is cutting through the pre-conception of the subject matter at hand, and successfully relaying the message of genuine cost savings.

Putting it into simple terms, Hunn presented the case of a hypothetical £10m revenue business making £1m in profit. With 100 per cent of that revenue derived from international activity, FX fees play a big part in how much can ultimately be called profit. Knocking the 0.8 per cent fee down to the 0.2 per cent on offer at freemarketFX makes it 0.6 per cent more efficient and creates a company now pulling in a profit of £1.06m.

So, for a business being sold on a multiple of EBIT, an 8x exit suddenly goes from netting £8m to £8.48m – an improvement of 6 per cent.

“There is a wider education piece around adoption of innovative financial technology,” Hunn said. “You just have to look around the ecosystem to the likes of TransferWise, MarketInvoice and Seedrs. What happens is as people see these services proliferate, and become more common, the trust builds and it can be seen that these companies are providing good, cost effective services.

Trust is a big issue in a new sector and we are fully aware of the requirement to tighten every bolt, dot every ‘I’ and cross every ‘t’. FreemarketFX has partnered with RBS and clients deposit funds to client-segregated accounts prior to being able to instruct a currency exchange. “We understand that although savings are highly attractive, fund security is paramount,” he added

Growth for freemarketFX is around the 100 per cent a month mark, a figure it expects to only grow as finance directors become more aware of the savings on offer.