The Coronavirus pandemic has had a huge impact on the global economy. For all the obstacles to trade that it has caused, it’s brought on a paradigm shift in the minds of the consumer. Any resistance to shopping online has been obliterated, normalising online shopping in almost every sector.
You only have to look at the strong growth that Hermes and other couriers have experienced to see that demand has risen. It used to be that domestic sellers and overseas sellers were in competition, often dividing businesses on their size. However, it’s becoming increasingly common that even micro businesses and now international traders, leaving absolutely no barriers to entry for the worldwide stage.
This has brought on the rise of another industry – foreign exchange brokers. Currency brokers who specialize in large transfers have experienced rising demand as a result of this prospering international trade.
It’s not just the best currency exchange rate that businesses are looking for, though it is a huge reason for their demand. Exchange rates are certainly preferable at FX brokers than they are at high street banks, and competition is getting fierce.
So fierce, in fact, that currency specialists are now competing through differentiation. Rates are so low, and in some cases, they aren’t even charging commission or taking a significant margin, that there’s been a race to the bottom. Fortunately, the volume of transfers as well as side-revenue streams mean that they’re still profitable.
The way they have been differentiating comes from this rise in demand from international sellers – in particular, micro businesses. Many of these companies were too small to previously gain preferable deals with banks, and so FX brokers set up accessible ways to deal with currency.
Multi-currency wallets through exceedingly easily managed mobile apps are one form of competition, as these sellers can now benefit from wasting zero time at all when managing multiple currencies. This also gives them the power to exchange whenever they like, or even keep hold of overseas currency to reduce friction when buying overseas supplies.
Another form of differentiation has been through different pricing models. Revolut introduced the freemium model to currency, where you can get free exchanges that are capped, or pay a monthly premium for more access. Likewise, TransferWise and some others have flipped fees on their head, saying there’s zero margin being taken, but we will take x% of a fee, which will always be clearly denoted. This removes the need for checking exchange quotes with the mid-market rate, which is always a chore.
The damage of high-spread exchanges
Ineffectively dealing with currency is one of the most damaging things to inflict on a business, yet it isn’t talked about all that much. Given that almost every seller is open to international sales now, we need to be more educated on the matter.
For example, those trading on Amazon and eBay may be getting rinsed from the in-house (or PayPal) exchanges, which are known to take upwards of 3% spread. This is 3% of revenue down the drain, which could be a serious percentage of your profit margin gone.
That’s just revenue of course. Many businesses will purchase stock supplies from abroad too, again using bank cards, PayPal and other inefficient methods. For most businesses, this is going to be thousands lost each year in inefficient transactions.
The biggest issue here is not just the high margins, but the lack of transparency. You would have thought that wasting thousands each year would be accounted for, or at least be on the radar. This isn’t the fault of the sellers though, as many of these companies hide the margins and fees in the T&Cs, whereas we just assume that we are getting a reasonable trade – after all, PayPal is huge and this is supposed to be its speciality, right?
Using currency brokers for large buys
As mentioned earlier, FX brokers are fighting for different ways to stand out. This results in them specialising in different things: high frequency transfers, multi-currency accounts, large volume trades and so on.
As a business looking to buy supplies, you want to make sure that the FX broker supports the currencies necessarily. Secondly, it would be wise to use an FX broker that has dedicated account managers, so you can receive specialised business support. As great as TransferWise is, they are not going to give you personalised advice, let alone business-related advice.
Another key factor is hedging – not all FX brokers do this. This is vital in times of volatile markets, so you can mitigate currency exposure risk. Again, accessibility is a key driver of competition, so this industry has got to the stage where even hedging is now uber accessible and user-friendly.
Finally, using a company that has varied levels of margins would be preferable for large transfers, as they’re likely to reduce their rate for big transfers. On top of this, companies that err on the side of fixed fees instead of % fees could be great (though hard to find), as the fixed cost will become more insignificant the larger the transfer.
Putting this together results in a hedged transfer with a very competitive spread (perhaps sub 1%), that was solicited through the advice of an expert over the phone. Or, if you’re confident in your currency knowledge, facilitate through a mobile app at the click of a button.
Going from an unhedged 3%+ margin to an assured <1% margin could be a key factor in turning a surviving company into a profitable one. Managing costs and increasing the certainty over future costs is absolutely vital in such turbulent times.