Corporate FX Services Explained
Corporate FX is one of the key factors for success for any international business, and in particular, for retailers. An adequate fx strategy can help a business keep cash flow and expenses level at a steady rate, and contribute directly to that business’ profitability, while a badly executed strategy can cause it to lose ground. While large corporations have a treasury department that deals with this aspect of international business, smaller corporations, and in particular SME’s, are likely to pay it very little attention.
To understand just how much impact this can have on a business, try to remember how volatile were the last few months since the UK referendum at the end of June. A US-based business that sells in the UK and generates foreign revenues of USD 300,000 through H1 2016, will now have to settle for USD 240,000, as the GBPUSD rate dropped from around 1.5 to around 1.3.
Of course one way to go around currency fluctuations is to constantly tweak the product’s pricing abroad, but this is a strategy that cannot sustain for long, and could even easily fail in the short-term. Drastic rate movements, which will lead to a drastic repricing, will have an immediate impact on sales, and even the slightest price movement can lead to a negative sales trend (it is scientifically proven that there’s a negative significant relationship between change in price and profit). Even if a certain business would be somehow able to pull through, and maintain the same profit margins upon adverse currency movements through repricing, how will it handle its outbound fx i.e. overseas suppliers?
Taking no position in the market, when a significant amount of your inbound or outbound payments is in foreign currencies, is a gamble by itself. It may benefit you, and it may severely damage your business.
The FX Game - Large Corporate Clients Get Better Terms
Corporations which are generating 8-figure revenues each year, are likely to have:
a. Direct access to the FX dealing room at their bank.
b. Access to information and expertise in fx within their treasury department.
c. Access to unique “wholesale” exchange rates which are closer to the interbank rate than to what private clients are paying.
d. Enough securities in their bank account, backed by a solid credit rating, so they won’t have to pay an upfront deposit on future deals (like Forward Contracts). That means these corporations would be able to accumulate interest on these funds until the trade is executed.
Alas, smaller business clients won’t be able to enjoy these benefits.
a. They will book trades through their banker and not directly from the fx dealing room.
b. Their lack of expertise in the field of fx will often make them choose a sub-par fx strategy.
c. The rates that will be offered to them are similar to the rates that private clients get. Banks are notorious for taking wide spreads and high wire fees, in USA, Europe, UK or Australia you could be paying up to 4% of the lump sum transferred into foreign currency.
d. Banks may not be selling fx options to these small businesses, and thus, not enabling them to hedge against adverse currency movements. If the bank does offer fx options, a 10% upfront deposit will always be required, and the spreads on the Forward rate will be brutal.
The corporate FX game is all about size and quantity.
Commercial Foreign Exchange Services for SME Clients
The need for better business fx services for smaller businesses was identified by a few market players as early as the 1990’s. Companies like Moneycorp, Global Reach Partners, World First and HiFX started offering SME’s better currency rates, free wire transfers, diverse fx options and perhaps most importantly, free market guidance by certified corporate fx dealers.
Sites like MoneyTransferComparison.com reviews such companies, and rates them specifically for corporate clients based on their reputation, client experiences, rates and fees, and credit ratings.
You can find their tips for finding the best corporate fx services:
- Focus on size. As mentioned earlier size is everything in the fx game, and this aspect is no different. Size means these companies have higher liquidity from more providers, and thus can theoretically offer better rates. Size also means experience, and higher chances they have dealt with a client like yourself.
- If you are looking to buy derivatives, look at the company’s credit rating. Overseas payments per se are regulated by the FCA, and clients accounts are segregated from the company’s funds. The means that if the company defaults, the money would be sent back to where it came from. Foreign exchange derivatives are a bit different because you are in a risk if the company defaults before the execution date. It’s not only the deposit that you would be concerned about, it is the deal in its entirety. High credit score means that there are smaller chances of that firm’s defaulting.
- Always read the terms and conditions carefully. If they are too loosely phrased and do not protect the client as much as they do for the service provider, it’s an alarming sign.
- Focus on companies whose business is focused solely on payments. If it’s a company that also offers fx trading derivatives like CFD’s, it carries a higher risk.
- Form an opinion based on your impression from your dealer. If the corporate dealer seems to get a good grasp of your business quickly and offers valuable advice right off the bat, it shows a great deal about the professionality of the company he is working for. If the corporate dealer is pushy and unhelpful, you might be look at a bucket shop.
It is particularly important for corporate clients to find an fx brokerage they are happy with, because it is exponentially more difficult to file complaints as a corporate client as opposed to a private client. It is also extremely important because your funds are not protected in the same fashion they do with banks who have to undergo much harsher regulation than medium-sized financial service providers.
Foreign exchange is a concern every international business, large or small, should have in mind. Larger corporations will get everything they need from their bank, but smaller businesses should consider using commercial corporate fx services. If they do choose to use such service, it is important to carefully scrutinize the company you will be dealing with.