Running an international business can be tough. There’s a lot more to consider and comply with in regard to regulations, laws, and security. However, sometimes the most costly part of being in the global marketplace is simply the payment side of things.
The main threats that payments pose to a business are currency conversion fees, currency fluctuation risks, hidden fees, and slow transaction times. However, much of these issues come from complacency, as relying on high street banks and traditional financing is often the most costly, least transparent, and highest effort.
The reason for banks being a poor choice for international payments is because, and this may sound strange, it’s not their forte. Banks are all-rounders. They provide security, credibility, and pragmatism… But this comes at a cost. Often, the exchange rate you actually receive is 3-5% below the real interbank rate, all whilst flat/wire fees are often applied.
If banks specialize in any area, it is mortgages and debt products. One thing they are clearly not interested in is competing against fintechs and brokers in providing sophisticated, cheap currency handling. Or perhaps they are, but the vast overheads and legacy systems make it difficult…
What is a currency broker?
For this reason, optimal international payments require a specialist. A currency broker, unlike a bank, is solely focused on providing cheap foreign currency payments. Almost all of the staff hired at the brokerage is focused on this goal, and it’s often the only product they provide.
A currency brokerage is a regulated business that facilitates money transfers. They have access to some of the best exchange rates, and because of the cost-focused competition between them, the exchange rate margin and fees that they take have been squeezed down to a minimum.
Beyond simply cheap currency, unlike banks, currency brokers offer a dedicated dealer (usually for free) that is an expert in FX, along with sophisticated FX products like hedging, market news, analysis, scheduled payments, and often business payment and treasury solutions.
Which are the leading currency brokers?
There are many currency brokers and which one you choose may depend on your needs and location. To name some of the industry leaders, OFX, Xe, WorldFirst, Moneycorp, and TorFX are among the industry leaders. However, there is an (almost) infinite selection, so make sure to choose wisely and don’t be afraid to use more than one.
There are some other names that are often mentioned, like Western Union and Wise, but these aren’t strictly currency brokers. WU, for example, charges high fees for remittance, which is the delivery of cash, whilst Wise is only surface-level payments (small limits, no dedicated dealer, sophisticated FX services). This is where currency brokers diverge from remittance firms and money transfer companies.
How to optimally utilize a currency broker
Here is a quick guide on how to make the most out of currency brokers.
Choosing the right broker
First and foremost, you can only get as much out of a broker as they offer. And, not all brokers are created with the same goals. Some will focus on higher net worth clients that wish to make large transfers and investments, whilst others focus on business solutions. Some focus on their mobile app, whilst others choose to deal over the phone. Before choosing a broker, take into account the following points below.
Hedging
One of the main themes of the economy in 2022, and will likely continue in 2023, has been volatile currency. Induced for a variety of reasons such as geopolitics, rampant inflation, and rising interest rates, all major currency pairs have had an eventful 2022.
For example, USD GBP began the year at around 0.73 but ended the year at 0.83. For Brits buying USD-dominated supplies or services, this is a huge increase in costs. And, many analysts forecast further appreciations in the dollar, though no one can say for sure.
The major way to mitigate these risks is through hedging. Hedging products include things like Forward and Options contracts. These contracts take the spot rate (current pricing) and lock in this price for a future international payment. A pre-agreed date, transaction amount, and price means that it doesn’t matter how currencies change in the future, you will execute your transaction at a fixed price in X amount of days or weeks.
A good example of how this is applicable is with b2b cross-border payments. These are often fairly periodic, particularly with SaaS subscriptions. Perhaps you’re using a large ERP system for $900 per month. This monthly amount is fluctuating for British and European businesses, making cash flow very hard to forecast. In times of upcoming recession and instability, insolvency risk is high, and thus controlling currency risk is vital.
Today, this subscription costs 826 EUR per month. Instead of waiting around and seeing if this rises to 900+ EUR if USDEUR reaches parity (again), this 826 EUR rate (plus a small fee) can be locked in for the year ahead.
Expertise
It’s also vital to extract the knowledge and expertise from the brokers. Short conversations can provide invaluable advice and information. Whilst they cannot predict the future market, they can offer solutions to your business-specific problems and have creative ways to manage risk. Furthermore, they may help set-up solutions like scheduled or bulk payments to help get preferential rates, along with automating your international business payments.
Alerts and analysis
Many brokers do provide some analysis which can be a good way to keep an eye on the market. For example, anticipation over upcoming volatility could be useful to know. Or perhaps warnings over total currency collapses, like the Turkish Lira and Egyptian Pound may face.
Many brokers will also allow users to set up rate alerts. This is great when you’re flexible over when you exchange your money, as you can simply wait for an alert to signal that the currency is a certain (preferential) price. This is ideal for when prices are up and down.
Business Solutions
There are some other sophisticated business solutions that may or may not be offered, depending on the broker. For example, corporate finance services (support on overseas capital raises and structured finance), as well as trade finance services (support on imports and exports), and even cash management services.
Summary
When so much of the currency market activity is outside of our hands, it’s important to control everything that is controllable. Cutting costs on international payments is certainly one of them, but so is effective risk management through hedging and other solutions. Because many international businesses have little expertise in this area, particularly smaller firms, it is recommended to seek out a broker that can provide a competent and free dedicated broker with a focus on business.
