As any business owner or accounts team knows, balancing the books is complicated enough before you introduce the variables that come intertwined with international payments.
Businesses face key decisions when making international payments and reconciling accounts, and one of the first is whether to deal with a bank or non-bank broker when making international transactions.
Whether you’re a small business making your first forays into import and export or a larger firm regularly moving millions of pounds overseas, there are other, more economical, effective and appropriate services available to those prepared to look beyond the banks.
Moving money online
While many consumers are comfortable using online money transfer services such as PayPal for personal transactions and overseas purchases, businesses that make global payments will often turn to the corporate services of a foreign currency specialist.
Risk management
One of the main reasons that businesses use an FX broker is to help manage the inherent risks to payment values caused by exchange rate fluctuations.
Dealing with a bank, businesses are subject to whatever rate is offered at the time they pay their overseas invoice. For example, even if the Pound is at a four-month low against the Euro (bad time to buy Euros), there will be no exceptions made; in short, you’re a rate-taker.
A broker, on the other hand, would often look to understand any flexibility within your invoice terms, or the payment window?, in order to update you on any favourable market movements that could benefit the transaction cost.
When timing is everything
The decision still lies with the business, but they are kept up to date with the latest market intelligence to make informed choices. When the markets are volatile, and timing becomes even more important, there is always the risk that you’ll be out of the office or tied up when the broker contacts you for approval on a transaction.
To combat this, you could use a market order to target a specific exchange rate at which to buy or sell currency, or book a forward contract to book your deal at an agreed price now, for a date in the future. Of course, by committing in advance to buy or sell at a fixed price, you run the risk of acting too soon and letting a better exchange rate pass you by. A broker may offer to work your order with an agreed overnight target but with open flexibility during normal market hours, allowing you to stay reactive to positive market movements.
These structures can give busy entrepreneurs the confidence that an over-running meeting won’t necessarily cost them a favourable exchange rate.
Banking on savings
Transaction costs and exchange rates vary between bank and non-bank entities: the standard exchange rates charged by banks are typically between 3.5 and 4 per cent more expensive than a broker’s. High street banks will also charge a fee of somewhere in the region of 20 per transaction; a lot of FX brokers offer fee-free transactions.
What banks do have on their side is time, as inter-account transactions take place with no money leaving the bank to a third party. As business requirements grow in size, the service level provided by the banks generally improves. There comes a point where a bigger business client may receive from the banks the kind of personalised service that smaller businesses receive from a brokerage but for many, the point where the service levels may equalise is a long way off.
Paul Plewman is a director at Sable International FX.
