Potential pitfalls that businesses should avoid when making international payments
Whether it’s a business buying or selling goods and services abroad, repatriating income from overseas operations or even managing international payroll, when making international payments, there are a number of common mistakes that businesses make that can result in unnecessary costs, delays and additional work.
Whether it’s a business buying or selling goods and services abroad, repatriating income from overseas operations or even managing international payroll, when making international payments, there are a number of common mistakes that businesses make which result in unnecessary costs, delays and additional work.
Over the next few months, our colleagues at XE, Alliott Group’s Global Preferred Partner in Foreign Exchange will be offering insights into the most common pitfalls that firms and their clients should be aware of when making international payments.
This week Xe asks if we really understand how exchange rate movements can affect a business.
Fluctuating exchange rates can have a significant impact on a business’s financial performance. However, in the drive for growth, foreign exchange is rarely a top priority for small and medium sized businesses, with many not fully understanding to what extent, exchange rate movements can affect their bottom line or what they can do to manage this more effectively.
There are two sides to every story and currency fluctuations are no different; if one currency gets stronger, then another weakens. The positives and negatives of this are not always as clear cut as they first may seem depending on what type of international activity a business is engaged in. In the days following the World Health Organisation’s declaration of Covid-19 as a pandemic on March 11th 2020, the world reacted, as did the currency markets. Whilst countries were planning and implementing safeguards to protect their citizens, currencies were rising and falling at unprecedented rates;
The USD gained strength against other global currencies maintaining its status as the traditional safe haven whenever there is uncertainty. There were even noteworthy gains against other currency ‘giants’, like JPY and AUD who’s values also dropped against USD in the initial days following the announcement by the WHO.
What does this mean?
By way of illustration we can look at the EUR to USD exchange rate which dropped from 1.1317 to 1.0657 in just 9 days, to explain the impacts on businesses at times when there is market volatility.
EUR – USD: The falling domestic exchange rate meant Euro sellers buying USD faced an increased cost of around €550 for every $10,000 purchased. A 6% increase in cost over 9 days.
The impacts – good and bad:
• Domestic products become more competitive against imported products.
• Improved exporter competitiveness.
• Increased costs to import goods and services.
• Increase the costs of investing in overseas operations.
• International payroll becomes more expensive.
• Increase the cost of servicing foreign currency debt.
• Make a business a more attractive investment proposition for foreign investors.
USD – EUR: The rise in the domestic exchange rate for USD sellers meant that buying EUR priced products and services became cheaper saving nearly $660 for every €10,000 purchased.
The impacts – good and bad:
• Savings to costs of international payroll
• Reduces the cost of foreign raw materials, giving importers a competitive advantage.
• Less cost to service assets and liabilities held in a foreign currency.
• Goods and services for exports are less competitively priced for foreign clients.
• Reduce foreign currency income from investments.
• Less value in physical assets held in a foreign currency.
• Make a business less attractive to foreign investors.
What can be done:
The simple message is that any business with foreign currency exposure should consider how any change in foreign currency markets can affect them and what they can do about this. Not everyone is sure how to assess currency exposure and even fewer are aware of the services that currency specialists like Xe, can offer to make this easier to manage.
Consider the questions below in relation to your business and those of your clients:
1) Is it a business with multi-currency bank accounts?
2) Is it a business with international payroll commitments?
3) Is it a business importing or exporting goods or services?
4) Is it a business with international clients?
If the answer to any of these is ‘Yes’ then the business should consider reviewing their options with an FX specialist like Xe.
Your local Xe representative will be very happy to discuss your business’ foreign exchange requirements and answer any questions about best practices and the services they offer.
Don’t forget about the benefits of introducing your clients to XE:
As a partner to Alliott Group, Xe provides foreign exchange and international payment services that can be offered to your clients via their Introducers model. It is as simple as you introducing Xe and their services to your clients and Xe will take care of the rest.
Furthermore, Xe can help your business manage its own international payment requirements. Whether you are still using your bank or already using a specialist provider, why not at least benchmark their foreign exchange rates and services against your current provider, as part of your duty of care obligations.
To learn more about Xe's services please reach out to your local Xe representative:
Eleri Howe – UK and Europe – email@example.com
Kevin West – North America – firstname.lastname@example.org
Vanna Kadir- APAC - email@example.com