If your business trades or transacts internationally in any way, shape or form, then you will know all too well how high the costs of currency transfer and international payments can be. In this post, we will take a look at the reasons behind this and what you can do about it.
Generally, whenever you pay for something, send money or receive money using your own currency in your own country then you don’t pay a transaction fee of any kind. Whilst the slightly older amongst us may well remember the ‘Debit Card’ charges of the early 2000’s, these were soon dropped by the banks as customers were simply not prepared to accept the absurdity of being charged money every time they spent money.
But whenever we make a payment internationally or into a different currency, then suddenly spending money gets rather expensive. Why is this? Well, whenever you make an international payment your bank will charge a transaction fee which may be a fixed amount or it may be a percentage of the transaction value. What’s more, the recipient’s bank will also charge a fee – in some cases, you will be charged for this and in other cases the recipient will be charged in which case they may end up receiving less than they expected which they will usually hold you responsible for.
There is more. If any 3rd party intermediary banks are involved (ie acting as a liaison between 2 banks that do not have a relationship, they will also charge a fee. As well as fees, you also need to factor in that the exchange rate used in any cross currency transactions will be the one which favours the bank – if you ever have changed currency at an airport counter you know how the buy/sell market works.
There are real world examples of individuals and businesses’ effectively being charged $20 when making $100 payments of transfers. If you are running a business then these kinds of costs are simply unsustainable.
Fortunately, there are much better, cost effective and altogether more savvy ways for you to send and receive money internationally.
These are our top 6 tips for maximising your business’ foreign exchange and international business payments.
1. Remember There Is More To Life The Banks
The first tip is more about creating a mindset than giving exact tips (these will come). Basically, whilst your bank is good for holding cash and transacting domestically, remember that it is not your friend when it comes to international trade.
Anytime you need to pay for goods from overseas or invoice a foregn client, your default option should not be to just use your bank. Instead you should always be shopping around to explore other options. Options such as..
2. Use an International Payment Service
Have you ever heard of Western Union? Well they are a classic example of an international payment service provider. Their raison d’etre is moving money around the world and changing currencies quickly and cheaply. International payment services operate by bypassing the banks completely – you pay their office in your country and they then instruct their office in the recipient’s country to forward the monies to the relevant recipient bank meaning it is treated as native transaction.
Money transfer services do leyv fee but they are almost always a lot lower than the banks and more importantly they are clear and transparent. They are also a damn site faster than the banks and transfers take minutes rather than days. Whilst I mentioned Western Union as being the most famous example, they are by no means the best of cheapest so do shop around.
3. Use a Currency Broker
If your business needs to move large amounts of a foreign currency, then it is worth “shopping around” for the best price. I know it sounds strange, but when you change currency you are effectively “buying money” and just like when you buy anything, scale of economics is a big factor and there is always room for negotiation.
Currency Brokers specialise in helping their clients “buy” foreign currencies and can help get them excellent deals. This is really useful for businesses who do a lot of business in a single foreign currency and know that they will need a large, regular reserve of it. If you are looking for a broker then check out the MoneyTransferComparison’s TorFX review.
Another option here is…
4. Open a Multi Currency Account
Some banks offer multi currency accounts. This is increasingly true of challenger and fin-tech banks like Monzo, Wise and Revolut. Having a multi currency account means that you hold your monies in different currencies in separate pots within a bank. This means that you are guarded against fluctuations in the exchange rate and forex markets.
However, note that even if you hold an Euro account, your bank will probably charge the transaction fee for handing a Euro transaction outside of your native country.
5. Forward Contracts
If you know you will need to buy a certain amount of a foreign currency in a given financial business period but are not yet ready to pay for it, then you can enter into a Forward Contract. A Forward Contract is an agreement you make with a currency provider to purchase X amount of Y currency within a Z period (usually 12 months max).
By entering into the forward contract you “lock in” the exchange rate protecting your against any changes in forex markets. Of course this may mean you end up paying more or less for your currency than simply hedging your bets but what it does offer is certainty which is invaluable for any business.
6. P2P and PSP Payments
Payment Service Provider (PSP) is a secure, global payment gateway allowing users to transact internationally safe and fast. PSPs basically serve as the broker between banks and businesses and by taking the banks share of the labour, can save the payee banking fees.
A similar option is Peer to Peer (P2P) transactions which are essentially fin-tech services which allow users to send money directly to one another circumventing the bank. I initially used Monzo as a P2P service to split bills with my friends and relatives but is increasingly commonly being used by business as ways of making payments – as long as you both java the same P2P service and there is sufficient trust, it is a fast, cheap way of moving money.
In conclusion, if you need to move money around the world for whatever reason then you don’t have to rely on your bank for this. There are plenty of options available to savvy businesses looking to save a few bucks on international payments.