Foreign exchange (FX) inefficiencies represent a significant, yet often underestimated, drain on business profitability. These are obvious and static operational costs but dynamic, often opaque variables that erode margins in international trade. Of course, international trade no longer applies to just MNCs, but even solopreneurs selling items on marketplaces.
The cumulative effect of seemingly minor percentage points lost in FX transactions can directly impact bottom-line results.
The hidden FX charges
Beyond the explicit transaction fees, substantial FX costs are baked into opaque mechanisms. The spread between the interbank rate (think of this as the “real” rate) and the rate quoted to your business is the primary source of loss. Dynamic Currency Conversion at point-of-sale, often presented as a convenience, can obscure and inflate costs.
Relying on marketplace or payment processor default FX services, for instance, when allowing platforms like Amazon and PayPal to handle currency conversion for overseas sales, can cost businesses up to 5% of their revenue. The way to avoid this is to take control of your own conversions.
For businesses managing global talent or with regular payment obligations, such as needing to send money from Canada to the Philippines, it’s also important to find low-cost, efficient providers. It’s not just the spread, but there’s often an expensive wire fee when using traditional methods like a high street bank.
Quantifying FX losses in international operations
The impact of FX losses is surprising. Consider an e-commerce enterprise with €5 million in annual US sales. Even a seemingly modest 2.5% average FX margin loss to a non-specialist provider translates into a €125,000 direct hit to profit. But again, it’s taken from revenue, not profit, meaning it can even push low-margin businesses into a loss. Similarly, sending 10 overseas freelancers a monthly wire fee (remuneration) that costs $30 a transfer equals $3,600/year on top of the spread.
These figures are devastating to an entrepreneur who is facing rising overheads, diminishing margins yet an ever-globalized customer base. Such consistent erosion complicates budget forecasting too, especially in volatile currency markets.
Cost-effective currency management
Proactive currency management is needed, in which businesses must benchmark FX providers against the mid-market rate. Loyalty gets you nowhere, particularly with banking. Instead, specialists should be used according to their niche (some focus on the East Asian market, for example). Using multiple providers is usually rewarded.
Secondly, businesses must take control over their own exchange rather than letting marketplace platforms or expensive payment processors do it. This isn’t just to save money, but to gain control over the exchange itself. For example, instead of each exchange occurring at the point of sale, you could accept money from the customer’s currency into a virtual account. Given that larger transfers often lead to better rates, this allows you to wait and build up a larger volume exchange. Secondly, it’s also a chance to use a hedging product and secure a future rate – this also improves the accuracy of one’s forecasts, too.
Turning FX awareness into a competitive advantage
Oversight of currency exchange processes should be far more proactive compared to the passive acceptance of obscured spreads and high fees that businesses face. Ultimately, while we cannot time the market, we can still take control over our exchanges to lessen currency risk and benefit from economies of scale.