How much do your international payments cost? You’d be surprised!
According to research from Goldman Sachs, the average cost of an international payment (and profit of banks on it) is 6%. And that’s not the only cost to be considered. Add in the time spent preparing the transaction, time spent waiting for the payment to arrive and the potential risks involved.
International payments are big business for banks and others. Paying suppliers can be troublesome
Paying a supplier, outsourcing services abroad, or expanding to the market in another country? In today’s connected world, these transactions are now done on daily basis. But sending and receiving money internationally can be a huge burden for your company.
The Business of Business Payments
International business payments are different from other transfers of money abroad. Aside from the extra paperwork involved, international business payments have a direct effect on the profits of you and your business partner. And they also impact the rest of the business processes: production cannot start; goods cannot be loaded; services cannot be rendered… until the money arrives.
I’m Only Paying the Processing Fee, Right?
There are three costs for businesses when sending money abroad. Processing fees, hidden exchange fees and time costs.
The processing fee is a visible cost for the company. It is usually a fixed amount per payment, a percentage of the amount transferred, or a combination of both. The fee varies based on where your supplier is located, what currency you choose and how fast you need it.
Let’s look at an example. Barclays’s fees for an international payment start at £25 (outside of SEPA) (2). But then there are also fees on the supplier’s side, which are much less clear and often not specified. For example, in the UK if you were to receive money from abroad in a different currency, Barclays would charge you an additional £6.
No fees! Zero percent commission! Sounds like you are saving a lot of money, doesn’t it?
Do you also wonder how it is possible that the exchange rate you look up on the internet is never the same as the one offered by your bank? That’s the second way of charging you for the international money transfer.
Why don’t banks use the official, market-determined exchange rate? Because banks are smart. Internally they use it, but for customers, they add a percent here and there. They know that most people are happy to overlook these charges or don’t even know about them. Out of sight, out of mind — banks are taking advantage of our unawareness.
If you want to use real exchange rate, look for the mid-market rate. You can find this through websites such as XE and Oanda. The mid-market rate is the true exchange rate — unlike the adjusted exchange rates quoted by banks and brokers.
Difference between exchange rate used by HSBC and true mid-market rate available at XE.com
Let’s look at HSBC and their exchange rate. Imagine business owner in Hong Kong who needs to pay his business partner in UK 10,000 GBP. On 17th December 2015, he would have to pay 11.6242 HKD for every GBP. It is worth mentioning that this is “better” business exchange rate, which is only available for online transactions with minimum transaction amount of USD 10,000 or its equivalent (source). At the same time, real mid-market exchange rate from XE.com was 11.5919 HKD per GBP. With HSBC exchange rate business owner from Hong Kong would have to pay 116,242 HKD (and other bank fees as well). If HSBC was using real mid-market exchange rate, you would only have to pay 115,919 HKD. This is roughly 250 HKD (20 GBP) difference.
Time is money. The third cost of your international payment is time. Not only your time battling with extensive bank paperwork, but also the transfer time, when the payment is on its way to your business partner. During this time, these funds are frozen, so they can’t be used by you nor the receiver.
Production and shipping may be delayed if funds do not arrive on time (things get even worse if the payment gets lost in the system!). This can lead to upset customers and has serious consequences for either party’s cashflow. Any business owner knows how stressful it can be to wait for money to arrive.
Innovation in International Payments
In the past few decades technology has changed our lives and made many things easier. But international business payments still remain largely untouched by innovation. We are still sending money to our suppliers mostly “the old way”, using the system that was developed in 1971 before the internet. That old way is expensive.
And why would banks want to change? International money transfers are good business for them. The market is valued at more than half a trillion dollars and is expected to grow further. Goldman Sachs estimates that the banking industry’s total revenue from international money transfers is around 30bn USD. This is the value created by businesses like yours, taken by the banks — just for moving your money from A to B.
However, personal international money transfers are seeing more innovation. Companies like Transferwise and Xoom are now common choices and are seeing increasingly fast adoption. Why?
Imagine an individual working abroad, who is sending money every month to his wife and child at home. This person has strong motivation to save on his international payment costs so that his family can buy more things. By using Transferwise instead of a bank, he saves up to 90% on fees. And because they use the mid-market rate he knows exactly how much it cost.
On the other hand, businesses often don’t even think about doing things differently. If you have always sent money abroad in the same way, you may not be aware there are now other, better ways of doing it. Don’t businesses also need to look for savings?
Money Saved is Money Earned
We spend a lot of time trying to increase our revenues and profits. We come up with sophisticated sales strategies, marketing campaigns and company’s processes to achieve it. Each expense is meticulously accounted for. And yet when you ask a business owner or accountant how much their payments are costing, more often than not they don’t know.
How much does it take for a business to add 2–3% to its margins? Maybe just paying more attention and switching your international payment method can add that kind of savings and more.
After all, a penny saved is a penny earned.