The Cost of FX Payments via Banks is High, How to Overcome That?
Payments abroad can be an overlooked expense for businesses. Receiving sales revenue from abroad can eat directly into your gross profit margin, whilst overseas supplier payments become more expensive. The two major costs involved are the transfer and wire fees, and the second is the poor exchange rate that banks often provide.
These can really add up. Frequent small payments can be dwarfed by fixed fees, such as the common $45-65 wire fee. But perhaps more pernicious is the poor exchange rate, in which banks regularly take up to 5% as their cut on each conversion of currency. We can quickly see how high-volume, low-margin businesses could be rendered completely unprofitable by business FX payments alone.
Thankfully, there are a lot of fx payments bank alternatives out there, each with its own strengths and weaknesses. But, one thing they tend to have in common is a shared interest in being cheaper than a bank.
Option 1: Brokerages
A brokerage feels like a very formal and traditional route for FX dealings, which can be off-putting for a smaller business. But, the barriers to entry have decreased dramatically in the age of the internet, as most brokers seek to serve businesses of all sizes.
Brokerages are the specialists of all specialists. And, when a company is purpose-built for only one thing (efficient currency exchange), then you will be greatest by efficient systems and expert professionals.
So, not only do brokers offer cheaper foreign exchange payments (sub 1% exchange margins), they offer expert advice. And, this advice usually brings sophisticated solutions. For example, brokers usually offer advanced FX solutions like exposure hedging and forward orders to lock in preferable rates and mitigate the risks of FX fluctuations. The world is in a vulnerable state right now, so taking measures to limit exposure and risk is more important than ever.
Option 2: Multi-Currency Accounts
Efficient and cheap currency exchange can also be tackled through a multi-currency account wallet. These are usually offered by money transfer companies, who operate somewhat similarly to brokers. But, whilst brokers focus more on sophisticated FX solutions, and buying/selling currency, a money transfer company will often focus on simple solutions like multi-currency accounts.
These solutions are often based on the idea of receiving and sending money as cheaply as possible (again, sub 1% margin usually, like brokers). A multi-currency account means you can open virtual bank accounts around the world to receive money and payout from there. Businesses can use these to receive sales revenue without any currency exchange taking place. So, they can hold currency around the world simultaneously and perform the exchange as and when they like.
The virtual account details are just like an actual bank (i.e., with an IBAN or SWIFT Code) and can be opened in seconds. Multi-currency wallets give the power back to businesses, who can then avoid native exchange systems on marketplace platforms and elsewhere. Plus, they’re just ideal for paying small, frequent amounts to overseas employees.
Option 3: Business eWallets
The above two are fantastic at performing cheap transfers, but many businesses enjoy the specific business eWallet benefits that the likes of Skrill provide. These business benefits include chargeback protection, fraud protection, integration with other business software, and a lot of payment options that are built into their ecosystem.
The drawback, of course, is that they’re not currency exchange specialists. So, whilst they do offer accounts that can hold multiple currencies, exchange rate margins will often be similar to a bank at around 4%.
This puts business eWallets in a strange space. On the one hand, businesses may see the higher costs as worthwhile due to the broader business solutions and infrastructure it provides, like having an API that can integrate well and cover chargeback fraud. But ultimately, many businesses prefer the much better FX rates at currency specialists, with the drawback of being slightly more hands-on.
Option 4: Crypto
Crypto is certainly an option if you conduct business with firms that handle and accept crypto, which may or may not be likely depending on your field. On paper, crypto aims to solve all of these foreign exchange friction issues that result in higher costs. They avoid the need of using SWIFT, expensive brokers, and fraud compliance officers. Instead, blockchain technology and miners are self-sufficient, meaning there are no real costs involved when conducting transactions with overseas entities.
But, there are two issues here. Firstly, it may not be a bad thing to work with intermediaries that use fraud compliance officers and such. These systems may be seemingly archaic, but they’re pragmatic and have proven to work reasonably well so far at reducing business risks like a fraud.
Secondly, the theoretically frictionless act of sending coins on a blockchain exists in a vacuum, where the coin is the currency at the beginning and the end of the transaction. But as we know, the tax must be filed, or at least denominated, in dollars and many of your overheads will be in dollars. And, it’s this conversion from crypto to dollars that stings us as the commission is often close to 4%, similar to pricey eWallets and banks. Plus, there’s a whole lot of currency risk involved because of the volatile nature of crypto.
