By Bruce Kaposy, Raphaels Bank
First it is important to separate the two process - 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 for the SME to find a partner who will manage both processes, cost-effectively and efficiently.
However for a business unused to the issues around international trading, the options can seem daunting and confusing.
Cross border supplier payments are growing year on year, to be affective, it is important that the SME protects its bottom-line costs or incoming revenues for services supplied, by understanding the affect the currency movement can have on their business.
A foreign supplier/ customer may take the pain away by invoicing/ paying in your domicile currency, but that just means they will be weighting the invoice to protect themselves against the inherent currency risk.
So it is best that SMEs work with a specialist supplier or the foreign exchange desk of a bank, that will help them best understand the market and its movements.
The FX Market moves quickly
Market prices / rates move every 2-3 seconds, dependant on information fed into the market, i.e. Country interest rates, GDP figures, House prices, Manufacturing output etc. These all affect the price of currencies in exchange for each other. This market information is delivered on set days and times during the week or month. Poor figures in most cases weaken the currency in question while positive country figures strengthen the specific currency. As a consequence, FX Market rates of exchange can move every 1-2 seconds and over a day the difference in value can be considerable.
Banking partner, specialist broker or specialist bank
Businesses have the choice to work with a current banking partner, a specialist broker or a bank that will allow the SME to use their international FX desk without being a corporate customer. Whichever route they go, clear and understandable market information is vital so that businesses can be aware of when information coming to the market will affect their specific currency pair, they can then make an educated decision on when to transact rather than a blind trade.
The customer facing side of a High Street bank will not be able to book orders from live market prices, but they will be given a ‘day sheet’ with rates adjusted to protect the bank from losses as the customer facing personnel will have to feed the order, to the international dealing teams. This can mean that the rates can have margins of anything from 0.5 — 4% added.
In contrast a broker or specialist bank will allow the customer to have access to rates that move in line with the market with less margin attached.
Looking in more detail at the pros and cons:
The current banking partner
•All UK banks are FSA regulated, the FSA tightened regulations so that they are all adhere to ‘balanced capitalisation’ to protect them and in turn their customers.
•All current accounts, savings accounts and small business accounts, are protected by The Financial Services Compensation Scheme (FSCS). This only applies to organisations regulated by the Financial Services Authority (FSA).
•All transactions will be held in one place.
•Dependant on their size they will often quote more competitive rates of exchange than the high street bank, as they do not have the overhead costs of a high street bank
•There is a large choice of companies to choose from all fighting against each other on a rate basis
•In most cases they will offer live foreign exchange market pricing.
•They will have market information to offer
•This will offer the same protection as the SME’s high street bank
•The SME will have direct contact with the international dealing desks
•Information offered can only be ‘fact’ as all FSA regulated entities must adhere to ‘Treating the customer fairly’ (TCF) legislation, this gives true transparency of cost to the customer.
•A specialist bank will offer competitive pricing from live market rates as it is all they do, they are not trading off one portfolio product against another, they focus in this area alone.
The current banking partner
• There can be high exchange margins, in some cases you may only find out the final exchange cost after the transaction
• Currency account management costs will be incurred
• It’s usually a reactive service
• There is no dedicated FX account management
•Regulation - Brokers can be regulated or just registered with the FSA. There is a huge difference, you can register with the FSA as a payment services provider (PSP), this however does not mean that the businesses processes are vetted or audited by the FSA.
•Sustainability - Brokers will be buying from a Bank, admittedly they are aggregating their clients’ FX usage to buy in bulk and offer at lower rates than the High Street banks, you may well be quoted the tightest rates initially, however stop and think can this level of pricing be sustained for the long-term? If it seems too good to be true, it probably is.
•Time limits - Brokers in the main will not be able to offer true currency accounts, the larger brokers will offer ‘holding accounts’ at their Banking partners, with time limits attached which may cause issues with flexibility and international clients wishing to pay unknown third parties.
•Credit facilities — these may sound interesting to an SME, but be aware any business offering credit will be clawing it back in charges or the exchange margin, if not you need to question how the business can stand up, over the long term.
•Finding one! - Unlike high street banks they don’t have multi million pound marketing strategies, to keep overheads to the minimum and be able to maintain brokerage pricing, proactive service and balanced capitalisation.
•Documentation request - the specialist bank may well ask for personal and business documentation over and above some brokers, they are FSA registered and regulated and must adhere to anti-money laundering legislation to protect their other customers and themselves.
•Check if they have online facilities, not all Banks offer a complete service to match your needs.
Incoming and outgoing payments are the life-blood of organisations. Finding a provider who can do both FX and payments seamlessly at the right cost is worth investigating as it can heavily impact cash flows.
What to look out for:
Cost to you and your suppliers
High street banks, send electronic funds transfers (EFT’s) to correspondent banks to get to their final destinations, if they are not routed correctly it will add cost and time to your payment.
Correspondent bank charges
A good payments provider should be able to divert these or at least advise you prior to payment release
Pre-emptive error checking
If the payment provider does not check the detail of a payment entered, you run the risk of payments disappearing in the correspondent bank network. This can be extremely painful as they need to be located, which can take weeks in some cases, forcing you to pay twice, to the same supplier. To add insult to injury, you may also find, when the funds are returned they have been exchanged on a number occasions and had charges applied.
Some of the largest global Banks still leave the liability with the customer. This means if you enter the detail incorrectly they can still release the payment and not repair the anomaly of the data. The first thing you will know about the problem is the beneficiary chasing payment.
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