When your business operates in the global economy, how you make and receive international payments can have a significant impact on your bottom line.
Covid 19, the war in Ukraine and rising inflation have all had an impact on businesses, with closures a stark reality for many. Today the impacts of the pandemic are still being felt and this, coupled with rising interest rates and geopolitical tension, makes forecasting future profits even more difficult.
Businesses large and small should be aware that the methods you employ to make and receive foreign currency payments can have a significant impact on your bottom line. It can also impact the business relationships you have with overseas suppliers, clients and partners.
1. Foreign exchange rates:
One of the most significant impacts of international payments on your bottom line is foreign exchange rates.
When you make a payment in a foreign currency, you are exposed to fluctuations in exchange rates. These fluctuations can either work in your favour or against you, depending on the direction of the exchange rate movement.
For example, if you are a UK based company paying a supplier in Europe, a strengthening of pound sterling can result in lower costs for you, while a weakening of the pound can result in higher costs.
But currency fluctuation is not the only thing to factor in here. Many businesses have built up relationships with their bank over several years, availing of services like loan facilities, credit and investment services and more.
However, when it comes to making and receiving cross border payments, many don’t realise that the foreign exchange rates offered by your typical high street bank are not very competitive.
On a typical spot payment, banks can charge up to 5% margin on top of the mid-market rate, doing so because of the low number of transactions they handle.
On the other hand, an international payments provider handles larger volumes of transactions, making it possible to operate on thinner margins, with profits passed down to customers.
For too long, businesses have been forced to accept poor value foreign exchange (FX) rates as simply the cost of doing business.
One way to mitigate the impact of foreign exchange rates is to use hedging strategies. Hedging involves taking positions in the foreign exchange market to offset the risk of unfavourable currency fluctuations.
For example, a business can enter into forward contracts, which allow them to lock in a specific exchange rate for a future payment. Alternatively, a business can use options contracts to protect against adverse currency movements while allowing them to benefit from favourable movements.
2. Transaction fees:
International payments also come with transaction fees. Banks and other financial institutions charge fees for processing international payments, which can vary depending on the type of payment, the destination country, and the currency involved.
These fees can add up quickly, especially if you are making frequent international payments. This lack of transparency on fees charged by traditional banks can cause budgeting and forecasting difficulties for finance managers.
A recent study by finder.com revealed that some UK banks are charging up to £35 for an outgoing international payment. This adds up over the course of a year, especially for smaller businesses growing their supply chains overseas.
To mitigate these costs businesses can explore alternative payment options, looking to payment providers with the processing technology that reduces cross border payment costs. Negotiating payment terms with suppliers to reduce the frequency of payments.
3. Delays in cross border payments processing:
International payments can also impact your bottom line if there are delays in processing. Delays can result in missed opportunities, such as a supplier offering a discount for early payment or the inability to meet a deadline.
International payment delays can have a significant impact on the bottom line of a business. When a company operates internationally, it is essential to have reliable and timely payment processing to ensure smooth operations.
Delays in payment can cause cash flow problems, which can impact the company’s ability to pay suppliers and other expenses. In addition, payment delays can cause strain on business relationships, leading to a loss of trust and credibility with partners and customers.
This loss of trust can also negatively affect the company’s reputation and make it difficult to attract new business. Furthermore, delayed payments can cause disruptions to the supply chain, leading to production delays, which can result in missed deadlines, lower productivity, and increased costs.
These factors can add up quickly, leading to reduced profits and lower overall business performance. Timely payment processing is crucial for businesses operating internationally to maintain a healthy cash flow, preserve business relationships, and ensure smooth operations.
To mitigate the costs associated with payment delays, businesses should embrace digitalisation and strive for automated processes which will streamline the entire payments process. Fintech companies provide payment platforms that reduce the reliance on manual processes with batch payment facilities to execute error -free and timely payments in multiple currencies and payment methods.
4. Compliance requirements:
International payments are subject to various compliance requirements, such as anti-money laundering (AML) and know-your-customer (KYC) regulations. Failure to comply with these regulations can result in significant fines and legal costs, which can impact your bottom line.
To mitigate compliance risks, businesses must conduct due diligence on their payment recipients, including verifying their identity and ensuring they are not on any sanctions lists. Additionally, businesses can implement internal controls and procedures to ensure compliance with regulations, such as limiting payment amounts and requiring multiple levels of approval for large payments. A compliant and regulation-aware payments partner can also offer businesses valuable expertise and knowledge.
5. Fraud risk:
International payments also come with a higher risk of fraud. Criminals may attempt to intercept or redirect payments or use fake invoices or other fraudulent documents to trick businesses into making payments. Fraudulent activity can result in significant financial losses and reputational damage.
In one incident of fraud, Bank of Ireland reported to the Garda National Economic Crime Bureau (GNECB) that a business customer of theirs had lost over €2.1m in an invoice re-direct fraud.
The Dublin company was making a payment to a UK based business when they got an email purporting to be from the UK business asking them to send the payment to a new bank account number.
The new bank account was in Hong Kong however, and it was established after funds had been transferred that the change of detail request had come from fraudsters.
In many cases, the business does not know it is a victim of this crime until sometime later when the legitimate supplier sends a reminder invoice for payment.
Businesses can reduce the risk of fraud to not only protect themselves financially but also to safeguard their reputation. International payment providers offer enhanced security features, such as multi-factor authentication and encryption, which can protect against fraud and cyber-attacks.
Staff should also be trained to recognise phishing attacks and email redirection fraud. When receiving requests for payment to new bank accounts, always verify by using a contact phone number for the supplier on record to confirm the change. Never rely on a phone number on an email and never reply by email when you are unsure of the authenticity of the source.
Now that you understand how international payments can impact your bottom line, it is also imperative that you choose the right partner to process those payments. Many businesses, however, choose their high street bank to make cross border payments, unaware of the challenges involved. Check out our recent post on the 4 challenges of managing international payments with traditional banking systems and the options for your business to make the process more efficient.
International payments can have a significant impact on your bottom line, but with the right strategies in place, businesses can mitigate the risks. By choosing the right payment method, monitoring foreign exchange rates, using reputable payment providers, and implementing compliance programs, businesses can ensure that their international payments are processed efficiently and securely, helping them to achieve their financial goals.
FEXCO International Payments provides cross border payment solutions to SMEs and corporate clients seeking to reduce costs on overseas funds transfers. Protect your bottom line with bank beating FX rates, lower fees and innovative payments technology that will save your business time and money.