According to a report by McKinsey & Company, flows of goods, services, finance, and people have reached unimaginable levels, to the extent that by 2025, global flows could reach $54 trillion to $85 trillion, doubling current levels.
As more businesses extend their supply chains and establish connections in far-flung destinations, the requirement to trade in ‘exotic’ or local currencies increases.
This is even though the US dollar is overwhelmingly the dominant currency in the world. It has gained this coveted place in trade for a variety of reasons but primarily because nearly all commodities are priced in dollars.
Another important reason, according to Central Banking, is that around 40% of global trade is denominated in US dollars.
It has become the norm for Irish and British companies to pay Asian and South American-based suppliers in US dollars. The marriage of convenience with the world’s most traded currency continues while acceptance of other major currencies like the euro and sterling for goods traded is also common in some developing economies.
What is an ‘exotic’ currency?
Contrary to its label, the term exotic has nothing to do with the location or size of the countries where these currencies are used.
An exotic currency is a term given to a currency that is thinly traded and highly volatile. Access to buying and selling is often difficult and the general lack of liquidity can result in increased price volatility.
Some of the most commonly traded exotic currencies are the Chinese Yuan or Renminbi (CNY), Russian Rouble (RUB), Hong Kong Dollar (HKD), Singapore Dollar (SGD), Mexican peso, (MXN) Turkish Lira (TRY), South Korean Won (KRW), South African Rand (ZAR), Brazilian Real (BRL) and Indian Rupee (INR).
Why trade in exotic currencies?
As previously mentioned, more businesses are trading with partners in far-flung destinations with many also setting up subsidiaries in these locations. The coronavirus has also disrupted supply chains and squeezed profit margins to the extent that many Irish and UK businesses are now seeing the value in seeking goods from markets outside of the traditional sources.
The ability to pay in the local currency of developing markets has opened up access to new products and customers that were previously closed to businesses. Insurmountable barriers to entry to these markets primarily due to delivery issues associated with exotic currencies meant that many European companies were missing out on an untapped resource.
Flexibility with supply is becoming more essential, especially for smaller businesses, and sourcing from African, Asian, and South American partners means less reliance on conventional markets, typically saturated by larger competitors.
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Typical benefits to paying in local or exotic currencies
1. Improves trading partner relationships
Paying in the local currency can engender loyalty and goodwill with overseas suppliers and could even mean the difference between winning and losing certain contracts internationally. When negotiating contracts globally, paying in the home currency of the trading partner is often a unique selling point as opposed to paying in EUR, USD, or GBP.
2. Get a discount on purchases
It may be a little-known fact, but foreign suppliers build a premium into the price of goods to protect against possible fluctuations in USD, EUR, or any other major currency of the buyer. They will ‘pad’ the price of goods by a couple of percents to offset any fees charged when converting back into their local currency. By paying in the local currency, importers can potentially negotiate a discount.
3. Ability to negotiate longer payment terms
When a foreign supplier is paid in Dollars or other major currencies they often demand shorter payment terms to minimise the time any currency fluctuation issues could occur. Cash flow issues are another reason. By paying in the local currency, the buyer assumes the FX risk and in this instance, suppliers are more likely to negotiate extended payment terms.
4. Competitive edge over the domestic competition
Closely aligned with the first point, businesses paying in local currency can achieve price stability, and lower costs, and the quality of goods can often be higher bringing greater returns. When domestic rivals are offering payments in dollars or other majors, offering a local currency payment could well give a business a competitive edge.
According to Eurostat, EU imports from China reached a high of EUR 361 Billion in 2019, underlining China’s progress as a global trading powerhouse. With this, the Chinese currency (Yuan or Renminbi) has also witnessed a degree of internationalisation with China no longer willing to conduct international trade solely in Dollars, as was the norm. A report in chinadaily.com highlighted the increasing use of the Yuan in global trade:
“The growth of cross-border transactions using the yuan and increased international cooperation in the use of yuan have given a boost to the currency’s rise as an international currency,”
China has been pushing the yuan’s global use, as it looks to lower international trade transaction costs, which are mostly settled in USD. A global payments provider with expertise in the transfer of exotic currencies like the Yuan could offer Irish and UK-based businesses a competitive gain for access into one of the world’s largest and fastest-growing markets.
Challenges associated with exotic currency payments
Businesses trading internationally to developing countries need to be vigilant with rules and regulations around paying in exotic currencies. It is not unknown to have payments declined or misplaced in the banking system due to errors at the execution stage.
Bank codes for certain locations can differ from the familiar BIC and IBAN requirements and additional information may also be required when making a payment. It is fundamental therefore to employ the services of a provider with an exotic currency delivery experience.
The banking sector has also been de-risking its international payment operations and pulling back from dealing in these types of transactions primarily due to strained relations between Europe and the US and these countries. As a result, there have been delays in the delivery of these currencies to certain countries.
There will always be barriers to entry, most notably language and trade restrictions but as the world gets smaller, the requirement for payment in exotic currencies will grow. The draw of untapped markets in far-flung destinations seems to be worth the risk for businesses who wish to expand supply lines outside of the mainstream markets.
Fexco has the technology and payment experience to deliver exotic currencies to suppliers internationally. Create a better payment experience for your trading partners with a solution that guarantees secure and swift payment delivery.