Beyond hidden fees: a closer look at SMEs' £5.6 billion loss

Last week a group of 15 well-known fintechs, including Wise, Klarna, and Revolut, called on the UK government to "stop hidden fees in cross-border payments once and for all". They estimate that consumers and SMEs in the UK lost "a total of £5.6 billion in 2022 alone" due to these hidden charges. This is the latest proof that customers and businesses still have to pay attention to currency conversion charges for their cross-border payments. Despite reforms, regulations and increasing competition over the past decades, banks can still overcharge everyone but their biggest clients on foreign exchange transactions. More needs to be done by the industry to demonstrate the transparency that clients deserve and regulators expect.

 

While currency conversion fees have been a long-standing concern, at HedgeFlows we believe that this is just the tip of the iceberg for SMEs involved in international trade.

 

International trade is unfairly hard for UK SMEs, and the cost of cross-border payments is one uncovered and, thus, more talked-about part of the problem.  While more and more businesses know the excessive charges for converting currencies and learn how to shop around to get fair FX rates, many lack the support they need to grow and trade overseas safely.  In our latest survey, 70% of SMEs have told us they felt left behind by their banks.  From opening international bank accounts to protecting from greater risk of fraud and currency swings - tens of thousands of SMEs need more to grow and strive in global trade.

 

Ironically, the reason why banks can get away with charging "hidden fees" is simple. More importantly - it can also be behind more significant losses SMEs incur when they do business internationally. Yet very few accountants, business advisors or currency specialists discuss it with their SME clients. Currency exchange rates constantly move around, making it harder for an average person to judge a fair price at any given point and allowing banks to collect those "hidden" fees without much notice. 

 

A similar phenomenon unfolds with invoices in foreign currency, where the costs arising from FX fluctuations remain unnoticed until the annual accounts are prepared.

 

Most cross-border trade between businesses is made "on account", where buyers pay sellers weeks after invoices are issued and sometimes months after contracts are signed. If an invoice is in foreign currency, its value in home currency fluctuates as the exchange rates swing freely. This uncertainty starts when contracts are negotiated and it continues until invoices are paid and currencies - exchanged. Most SMEs often ignore the potential magnitude of these swings. Yet it often exceeds the ~2% that banks are accused of taking in "hidden charges".

 

For instance, the exchange rate between Pound Sterling and the US dollar moves more than that over a one-month period 42% of the time. These swings are even more frequent and larger if you deal with the Australian dollar, Japanese yen or emerging market currencies. A 2016 study by Bibby Financial estimated that an average SME in export/import industries lost £70k due to foreign exchange fluctuations. Even today, most SMEs continue to lose money due to these currency fluctuations.

 

Most large businesses don’t leave their profit margins exposed to currency swings. This is despite these larger, more diversified enterprises being less fragile in the face of economic risks than their smaller competitors. They do so because they have the know-how and access to the markets, where they can book exchange rates for the required conversions weeks and months in advance. In the same way as anyone books flights and hotels ahead of their holidays - to make costs more predictable and manageable.

 

Unfortunately, many SMEs don’t even know this can be done for foreign exchange. Banks do not offer the same service to SMEs because it is hard for them to deliver the service in a suitable and scalable manner. Yet most SMEs require a simple solution that would help them avoid such currency losses. Whether it is a purchase order for products in the Far East or a sales contract for services sold to an overseas customer - simply book an exchange in advance for specific amounts and estimated payment dates.

 

HedgeFlows makes finances in foreign currencies as easy and safe as your home currency. Thanks to our unique integrations with the most popular accounting and ERP systems, our clients can simply turn any foreign order or invoice into a domestic one with a click of a button, weeks or months before the payment are due.  Small finance teams can save up to 80% of the time on processing foreign payment runs, as our system automatically reconciles exact amounts, exchange rates and other details to your ledgers and sends remittance notices to your suppliers. The result is safer, simpler growth, and happier and more productive finance teams.

 

CONCLUSION

The recent call by leading fintechs to address hidden fees in cross-border payments has shed light on a significant issue faced by SMEs. However, hidden fees represent just one aspect of the broader challenges faced in FX international payments. Currency swings pose a considerable threat to SME profits, often surpassing the impact of hidden charges. At HegeFlows, we stand ready to provide a simple and affordable solution, empowering SMEs to safeguard their finances and streamline foreign currency transactions.

Get in touch if you'd like to find out more about HedgeFlows.