Many businesses importing or exporting goods to countries outside the eurozone make their foreign currency payments in Isabel 6. Incoming foreign currencies are also converted into euros here at the click of a button. However, what we often overlook is that these currency conversions can lead to substantial costs. Particularly businesses with a lot of smaller flows notice the margins on international transactions significantly increasing as the year progresses.
This is a guest blog written by Ivo Mertens – Senior FX advisor iBanFirst.
Paying more attention to international transactions is worthwhile
As an entrepreneur, what interests you most are opportunities and growth, and new markets and products. A few aspects, like the conversion of currencies, are not considered “core issues”, while exchange rate transactions should be at the top of the agenda for every entrepreneur.
Suppose you import toys from China. Suddenly your supplier decides to increase the prices by 1 or 2 per cent. Of course, you will fight like a lion against this unilateral price increase. If your suppliers refuses to budge, he will be facing difficult negotiations indeed! Why should you accept the fact that a similar percentage is skimmed off when you make international payments in foreign currencies? In this case, an equal share of your margins is at risk. The reason for this is that you know the market for your own products through and through, and you know when your supplier is going too far. However, you are not as familiar with financial markets and simply don’t have the same keen understanding of margins in exchange rate transactions.
A report by the European Central Bank that was recently published in the Financial Times, for example, revealed that banks make smaller customers pay more for protection against exchange rate fluctuations. In some cases the rates were even 25 times higher than those charged to big customers. To arrive at this conclusion principal researcher Professor Harald Hau and his team examined half a million contracts in which the exchange rate between dollars and euros was fixed for the duration of the relevant contract. Over 200 banks and more than 10,000 customers, varying from big multinational companies to small import-export firms, were involved in the deals that were investigated. Ultimately, the researchers calculated that banks rake in 638 million euros each year by charging higher rates.
Greater transparency through legislation and innovative payment platforms for payments in foreign currency
So, where can businesses in the SME segment go? How can financial and accountancy professionals obtain full transparency with regard to the cost of payments in foreign currency? How can they make sure that these payments are cost-effective and efficient – and that the costs in question are fully transparent and clear right from the start?
Insight into “hidden costs” associated with foreign currency payments can help businesses limit their risks and optimise their cash flow. To prepare for the future a business should look beyond the traditional currency transaction model and consider the latest innovations presented by primarily FinTech pioneers who are trailblazers in the implementation of the newest legislation.
On the one hand, there are recent amendments in European legislation (PSD2, Article 45) with regard to primarily international payments, which demands full transparency and clear, neutral and understandable communication about the costs associated with currency conversion and the related payments as from 15 December 2019. From that date onwards, payment institutions must offer full insight into the total amount to be paid, including transaction costs and the exchange rate margins that are taken. Also, this information must be provided before payments are executed. As a result, businesses will be able to more easily compare the various providers and competition will be increased among the various parties aiming to offer the best possible prices.
On the other hand, there are the FinTech players that grant SMEs access to real-time information about the FX market (which is normally accessible only to big multinationals) in order to help these smaller businesses make better, well-considered decisions for long-term growth. By gaining access to these real-time exchange rates businesses will get the exchange rate that applies at that point in time rather than the less favourable daily exchange rate.
If you put all the benefits together you will arrive at the conclusion that the costs paid by SMEs for currency conversion will drop in the future, while their margins will increase – thus creating more room for them to invest in growth. These are exciting times!
Senior FX advisor iBanFirst
Ivo Mertens works as an external consultant for iBanFirst. iBanFirst is a Belgian payment institution that offers a specialised online platform for transactions in multiple currencies. As an alternative to traditional banks, iBanFirst offers a completely transparent payment experience and a package of financial services (e.g. currency conversion, futures contracts, import financing). Thanks to iBanFirst financial divisions will be able to pay and receive money in any currency or currencies, cover currency risks and finance international growth. iBanFirst is also fully integrated into Isabel 6.