If I learned anything over the past decade, whilst working with cross border transactions, it is that we seldom learn. I have honestly lost count the number of times I have asked the question to CFOs “Do you like working with your bank” for the person on the phone to say “No not really!” (or some other explicit variation). So, why do we continue to use them for our Foreign Exchange (FX)? I have decided that there isn’t any sane reason other than a lack of time or knowledge how to switch. Although I can't manufacture more time, I can attempt to educate, so here goes...
1. "I expect payments to take 3 days to reach my vendor"
Payments should be there tomorrow by the latest possibly (time zone depending), same day. The delay that banks use is because of their own internal red tape and are nothing to do with the ability to transfer money from one account to another.
2. "Wire fees are so expensive"
In over a decade I have never charged a client a wire fee for a transaction that has involved a conversion from one currency to another. The bank's conversion and overnight fees more than cover their international “wire costs”.
Use an FX Specialist and their direct debit features to bring down the wire fees to $0 for FX payments and $5 for the same currency. Also, ask about low value vs high-value payments this can be a huge saving for those finance teams that send batch payments to hundreds of vendors. ACH can also reduce wire fees significantly but can often delay payments to vendors.
3. "I am only allowed to wire a certain amount of money at a time"
A common problem CFOs face when transacting is being limited by their banks to sending increments such as $10,000 or $100,000. Banks would have you believe that this is solely for their clients protection, but let’s be real the wire fees we mentioned above can be significant, especially if a transaction is split up into multiple payments (not to mention inconvenient). A quick conversation with a branch manager (or their automated phone system) can remove these limits allowing your accounts payable teams to send what they want when they want.
4. "I have multiple banks for multiple countries"
Gone are the days CFOs need to deal with sophisticated and confusing Swiss bankers. FX payment companies can open multi-currency accounts at the parent company level pretty much anywhere in the world and accept payments from clients and international subsidiaries in over 40 local currencies. This also means that you can hold currencies in local currency converting only when you need to or it is best for your business.
5. "I’m not affected by currency moves"
Whether CFOs like it or not, if any part of their supply chain or client’s supply chain is global, then they are potentially at risk.
CFOs can learn more about this by reading our article on "Why your business is affected by currency moves, even though you think it isn't".
6. Using an FX Specialist is more expensive than using a Bank
This couldn't be further from the truth. Banks have carte blanche to charge what they like on cross border transactions and we have seen them as high as 3.5% of the total transaction. Any FX Specialist with a modicum of intelligence will be able to show value using a side by side rate comparison and can cut this cost dramatically to <1%. The really good guys will show CFOs value above and beyond just pricing and offer further risk management strategies.
7. "Foreign exchange specialists are riskier than banks"
The important thing to understand is that the FX Specialists are actually extremely large clients of the banks (it is this buying power that allows them to provide better pricing). In fact, they are handling the clients that the banks are no longer able to service. When was the last time your bank called you up to let you know the market dropped 3% in your favor and why?
FX Specialists have to be licensed and regulated in every state throughout the US and undergo regular checks and audits. The vast majority do billions of USD through the banks and have been around for decades.
8. "It will always be a headache to set up a bank account"
Remember how easy it was to open up that Luxembourg bank account for the latest investment vehicle… Oh, that’s right it took 3 months and a new voice box. The truth is a bank account is not required for these types of entities anymore. Investment managers can use multi-currency accounts that can be opened in a day with proper ownership documents and a clear and concise description of the flow of funds. It can be used to pool approved investor capital and deployed directly to the seller.
9. "Hedging is risky"
This is one of the craziest things I’ve heard. The idea that taking all of the FX risk off of the table to stabilize returns is the exact opposite of that. This statement though, is usually followed with “what happens if the market goes in my favor?”. The truth is, greed gets the better of all of us and yes hedging using forward contracts will cost points and upside. There are other products CFO's can use that actually do both. The truth is rather than the bank saying “I can’t be bothered to explain to you again” they say “It’s probably not for you, as you’re too small”.
10. "Once the transaction is completed then my job is done"
FX risk exposure is a dynamic target and CFOs can quickly destroy returns on an investment or profits for a company, without consistent monitoring and effective risk management strategies. The solution is not for a CFO to look at their FX exposure every day (although this won't harm), but more have a quality risk management plan in place that can help with your forecasting and that can evolve with the business and the market.
Points to consider
$6Tn+ is traded on the FX markets a day. Payments make up a tiny sliver of that and if anyone says they know which way the market is going, ignore them, they don’t. Affect what you can by hedging what you know.
Not all specialists are created equal. I have worked with 100’s of FX salespeople and account managers and sold against even more. Some were great, others wanted to make a quick buck and others wouldn’t know what a buck is. Choose your FX partner wisely.
Transparency is key to any healthy relationship. The more information you are willing to share with your FX partner the more they can do to help. Similarly, demand the same back through transparent pricing. I was always very open with my pricing to my clients and I would like to think that the reasons why my clients worked with me and my team were because I showed value above and beyond my rates.
It’s just a case of more zero’s. The truth is that whether you are transacting $100,000 or $10,000,000 there really should be no difference in the way you manage your FX risk. The key is to determine what percentage of your profit margin will be affected by a negative currency swing and what that would do to your business. If you feel it’s substantial then we should probably talk.
About us
Deaglo has 40 years worth of combined experience working with Investors, Investment Managers, Corporate clients empowering their finance teams to execute and mitigate their cross-border transaction and FX risk more effectively. Our team is more than happy to sit down with all clients both great and small and discuss the best practices we have learned. You can reach out to us HERE or book a time in the calendar using the button below.
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