The last time the Fed raised U.S. interest rates was nine years ago. It’s been a long wait, but as the dollar strengthens against the pound, U.S. demand for British goods and services will likely increase. This will bring some much-needed end of year cheer to UK small and medium-sized enterprises (SMEs) who are already looking beyond their borders for growth opportunities and eager to export more.
In fact, UK SMEs are some of the most internationalised in the world. According to figures from the latest ONS Annual Business Survey, 15.2% of all UK businesses (310,800 companies) in the non-financial business economy engaged in international trade in 2014, and the number is growing year-on-year. While this percentage is around the same for small firms (fewer than 49 employees), for medium-sized firms (50-249 employees) it is far higher at 42%.
It isn't just that we're trading overseas more – the map of who we're trading with is also changing. British businesses are increasingly trading with a far wider and more diverse set of economies – including, increasingly, the emerging markets. While Europe remains the UK's largest export market, its share of British exports has been falling for years, from a peak of 62% a decade ago to 47% last year. Meanwhile, China has risen to become the UK's seventh largest export market and our fourth largest trading partner overall. And, we’ll likely see an uptick with the U.S. following the Fed’s announcement.
Given all this, an ever-increasing number of SMEs are finding themselves having to transfer money abroad, with those that do having to make larger and more regular payments to a more diverse array of currency zones.
The flipside of this opportunity, of course, is risk. Currency-related concerns such as export competitiveness can cause major headaches. But direct currency-related costs – i.e. exchange rates or fees – can also cause pain to the bottom line, some of it unnecessary.
Until recently, data in this area has been scant. While the World Bank collects data for the lower end of the consumer market, and the Bank for International Settlements does the same for the Foreign Exchange market, there was an information gap regarding transfers in the region of £1,000 to a million. That’s why we developed the International Money Transfer Index (ITMI) to collect data on this middle market.
What the data unmistakably shows is that not all is equal in the world of international payments. Fees vary a surprising amount, depending on how much is being transferred, with whom, to who and when. For starters, the cost of transferring via banks typically compares unfavourably with the cost of using a non-bank provider, such as online-only services or foreign-exchange specialists. Data for November 2015 indicated that for a UK SME transferring £10,000 abroad, banks charged an average transaction fee of 3.6%, as opposed to non-bank providers which charged an average fee of just 0.9% - a saving of £270.
It is important for SMEs to bear these differences in mind, given that exchange fees hit smaller companies the hardest, and that these companies are disproportionately affected by the variance in rates. This is another clear pattern in the data: the cost of transferring money becomes far steeper the less you transfer, and differences between bank and non-bank fees become more exaggerated. For a customer transferring £100,000 in November, the average bank fee was 1.7% as opposed to 0.7% for non-banks.
None of these figures are static – far from it. Rates fluctuate significantly from month-to-month. Looking at average UK bank rates, for instance, the cost of sending £10,000 was 2.3% back in August, moving to an eight month high of 4.2% in October, before retreating back down to 3.6% last month.
Exchange fees are, understandably, not always front of mind for a business leader. The numbers can seem small in the grand scheme of things. But given the variety on offer, the differences can quickly add up. We estimate that UK companies wasted over £2.3 billion on non-EU international goods payments alone in 2014, with exports accounting for £670m of that. As the world continues to get smaller, SMEs stand to save a lot from getting smarter about their international payments.
By Daniel Webber, co-founder and managing director, FXcompared