The Remitsy Blog

Categories


Sign up for monthly newsletter


Recent Posts


hidden exchange rate fees4

The Pitfalls of Sending Money to China

Remitsy CEO Richard Bensberg recently spoke with Renaud Anjoran. Renaud runs the excellent QualityInspection blog where he writes about the many issues faced by companies sourcing products from China.

On his blog you can find general advice for importers, with a special focus on quality management, helping small and medium-sized buyers understand their suppliers better, adopt the right strategies, and use the right tools. Renaud himself has seen his fair share of payment issues and so was keen to get our comments on the topic.

Sending money to China is often complicated because inefficient archaic international payments

When you are sending money to China via international bank wire it is expensive, slow and complicated process.

In the interview, Richard explains there is no such thing as a “typical payment”. The method used to process an international payment still varies a lot depending on the input and output currency, and the countries and banks involved.

Domestic payments are generally quite efficient, but international payments – which are still using the SWIFT network – are slow:

“SWIFT was originally built in 1973 – long before the creation of the Internet. When money is sent overseas, physical assets don’t have to move. Instead, SWIFT acts as a messaging system between banks to clarify the ownership of assets on their books”

As Richard explains, SWIFT network is simply a messaging system. And in the case the payment gets stuck somewhere, it needs to be tracked down. To track the payment your bank needs to send follow-ups to find out what happened to the initial message. And the only way to get them to do this?

Get on the phone to your bank and ask for the Wire Transfer Department. And solving these issues can take up to several weeks. That can severely hurt businesses. During this time products are delayed and the funds are locked up in the system. This can be a killer for an importer’s cash flow and lead to some really angry customers. Luckily, with Remitsy these sending money to China headaches  are over.

The full article is available here.




Oliver LompartOliver Lompart

Breaking the US Dollar Addiction

This article first appeared in June’s issue of FOCUS Magazine, the official publication of the China-Britain Business Council and British Chamber of Commerce in China. Learn how you can read the current issue here

Many British companies pay their Chinese business partners in US dollars, despite the fact they operate in British pounds. But for businesses based outside the US, relying on dollars can lead to hidden fees and unseen risks that can hurt your bottom line.

US dollar alternatives, USD, GBP, RMB, sending money to China, paying supplier in China

Don’t be limited by US Dollar. There are now other alternatives for payments to China (Picture: FOCUS Magazine)

Why Do We Use Dollars?

For developed economies, it’s more convenient. Businesses purchasing goods or services know their supplier abroad will accept dollars, and suppliers quote invoices in dollars because they know their partners can pay in them. But UK companies getting paid in pounds, and Chinese companies buying raw materials in RMB are both paying currency conversion fees for these same dollars.

The Hidden Cost of Conversion

Savvy travellers steer clear of airport currency conversions, but few businesses question banks when making overseas transactions. Businesses need to be diligent in performing their own conversion calculations and ensuring they understand the mid-market rate. This is the mid-point between the buy and sell price in the currency markets, increasingly known as the real exchange rate. Deviance from this rate means that money is being lost in the transaction. In the UK, converting from pounds to dollars means losing between one to four percent depending on the amount. Smaller payments lead to greater fees, which means small and medium-sized businesses pay the most. And while companies usually account for every expense, few record their exchange rate loss or their payment processing costs. Things are even more confusing on the supplier side, where the dollars received must be converted to RMB. Luckily, converting foreign currencies within China is a far cheaper transaction, with currency conversion losses ranging between 0.5 to one percent.

Putting a Price On Currency Risk

Owing to varying exchange rates, suppliers need to protect themselves from USD-CNY currency fluctuations. The time between issuing their invoices and receiving payment can take two to three months – and anything can happen. In August 2015, the RMB was devalued by over three percent in just two days. Buyers in the UK should also worry about currency risk. If British companies do not maintain US dollar accounts (at the expense of cash flow), a depreciating pound versus the dollar would mean more expensive goods or services when it comes to the settlement date. Europe’s more mature financial markets allow companies to hedge products to fix an exchange rate for a set time in the future. But Chinese suppliers are often forced to take a cruder approach; they increase the invoice’s value to include a ‘buffer’ against any potential currency fluctuation. In general, this currency risk hedge used by suppliers is around 5 percent. If the RMB devalues against the dollar, then the supplier wins twice – but is unlikely to pass the savings on to you.

Costing It Up

Taking all this into account, value leaks from every transaction. Small business might lose up to 10 percent per invoice, just for paying with dollars. The wrong approach is to see part of these losses as ‘not our costs’. The invoice price versus production cost is all that matters. By reducing your suppliers’ costs you should also decrease the costs of the goods or services being purchased.

Obstacles to Change: Tax Avoidance and Inertia

One factor behind Chinese suppliers’ preference for US dollar settlements is tax benefits. Exporters in China may set up offshore bank accounts in jurisdictions such as Hong Kong, Singapore and Taiwan. After receiving payments to these locations, the Mainland company re-invoices the offshore company at a lower price, leaving the majority of profits in offshore accounts – which, owing to looser financial regulations, are more liquid and flexible. Furthermore, the exporter only pays taxes on the small margin between their expenses and the new invoice. Despite the conversion costs, tax savings are a big incentive for suppliers to avoid seeking any other solution. Unfortunately, this can sometimes scupper attempts to improve the payment process.

Breaking the US Dollar Addiction, US Dollar losing its power, US Dollar and RMB, CNYUSD

Breaking the US Dollar addiction in trade with China

Times are changing, however

China’s stellar economic growth is slowing, and regulators are realising that well-earned export profits are languishing outside the country’s coffers. On-shore settlement will soon be the only available option for payments to China, and suppliers will be looking to optimise margins. The other big obstacle to change is familiarity. Processes have been established around using US dollars in trade, and asking either company to upend years of tradition can be challenging.

What Are The US Dollar Alternatives?

As a British company making purchases from China, the obvious alternatives are RMB or pound settlements. Either option means that payments are only subject to one conversion loss, and one dimension of currency risk.

The Rise of the Redback

Increasingly, companies are turning to RMB settlement. By paying in RMB, the supplier no longer has to worry about currency fluctuations, and discounts should be more easily negotiated. According to a 2014 HSBC survey, 55 percent of Chinese suppliers are willing to give discounts of up to five percent if the buyer can settle in RMB. A prime example is British supermarket chain Tesco. Realising the possible savings gained through clever currency management, the company has insisted that all Chinese suppliers accept RMB settlement. By controlling the payment process, Tesco has minimised the value leakage during transactions.

Pounds Are Good Too

While Chinese suppliers should technically prefer RMB settlement, it’s not always an option – and in this case, UK businesses should push for invoices in pounds. This still pins the currency risk on the supplier, who will implement the usual price buffering. However, at least the payment undergoes only one conversion, which ideally should be performed within Mainland China where exchange rates are better.

Weighing Up Your Options

The US dollar is still, without a doubt, the world’s dominant currency, but thanks to a fast-evolving cross-border payment space, it is no longer the only option. Investigating new payment solutions takes time, but long-term rewards will more than cover the investment in research. It is no longer acceptable to ignore the costs of dollar overuse. By taking responsibility for the total cost of cross-border payments, businesses can improve their bottom line.




Neil WoodfineNeil Woodfine

Blockchain Powered Payments to China

Recently we had a couple of interviews with Juliette Boulay from Daxue Consulting (link) and the guys from LNP China (link) when we chatted about how Remitsy was started and how we work. We thought it’d be a good idea to share some of the highlights on our blog!

Why Remitsy payments are powered by the blockchain

Everywhere we go, people are asking us about blockchain and what it is. You have surely heard about blockchain as well, but might wonder how it really works and how it helps Remitsy to transfer your money to China. We are lucky to have Richard and Neil on the team, as they are some of the few blockchain experts in China.

A blockchain system can give businesses a lot more confidence when making transactions. The blockchain is essentially a ledger – which is distributed across all users of the system. If someone makes a transaction, everyone’s version of the ledger is updated. And each user is automatically checking all others to make sure a mistake hasn’t been made. Every transaction is time stamped so nothing can be changed subsequently. This results in a very transparent and secure payment system, that no longer requires a centralized third-party to verify each transaction.

Blockhain Powered Payments to China, sending money to China, paying supplier in China, business payments

Your Remitsy payments to China are also powered by the blockchain!

What we do is take advantage of blockchain technology’s ability to digitize value across a decentralized network, and thus make funds accessible almost instantaneously anywhere around the world. In other words, this allows us to convert from one currency into another via a record on the blockchain – for example making GBP in the UK available to us as CNY in China within seconds. This method is so efficient that it allows us to convert currencies at the real exchange rate (the mid-market rate used across the financial sector).

Bank fees and costs of other payments solutions

When we started Remitsy, our original aim was only to disrupt the traditional banking sector’s dominance in the business payment market. But we quickly realized that a lot of small business were using PayPal and other online platforms to complete their international payments. Even though the processing fees, exchange rate spread, and withdrawal fees adding up to 9% of the total invoice value! And we thought banks were charging a lot! The fact that businesses are forced to choose these payment options is evidence of the huge inefficiencies of modern international payments, and we want to solve it.

As Richard says:

The most important thing is that companies have got to understand their costs. Companies will just accept charges that are given to them by their banks, but if you look at exactly what you are being charged, you will realize you can usually save a fair amount. Also, foreign companies don’t realize that when Chinese companies receive foreign currency they will be hedging their currency risk. Usually, they will add 5% to the price of their invoices in order to cover potential exchange rate fluctuations.




Oliver LompartOliver Lompart

The Truth About International Payments

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.

Payments are mysterious

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.

International payments. Exchange rate fee

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

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.




Oliver LompartOliver Lompart