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FX international payments fees explained

Costs of making international payments, especially when they involve paying or collecting in foreign currencies are often a point of frustration and uncertainty for many small businesses and their accountants.  We shed the light on the most frequent charges that arise when a business sends or collects currencies internationally.

International money transfer or payment fees

Payment (also known as wire) fees are the most transparent part of costs when sending payments internationally. Most banks will charge non-negotiable payment fees that they disclose and which can be discussed when a business first opens an account with a bank or during one of the periodic reviews with your bank.
Depending on the payment method these charges can range between 40p for a SEPA payment (for sending Euros to SEPA member countries) to £15 for a basic international SWIFT transfer. Currency brokers often claim to charge no payment fees as they are subsidising them from the currency conversion spreads that they charge (as explained below).   Most newer fintechs, including HedgeFlows, have adopted a transparency approach where they state clearly state payment fees on each transfer or offer subscription models that cover payment costs.  If the fintech specialises in international payments it is likely their payment fees will be significantly lower than bank payment fees.

Intermediate bank fees

Often one of the most surprising and frustrating areas for businesses making international bank transfers is the topic of the intermediary bank costs for SWIFT transfers.  When an international transfer is made using the SWIFT network, the funds often travel via a set of correspondent banks, which provide a service that helps funds reach the recipient. But it comes at a cost, and it is the way that cost is charged that comes as surprise to many.
For example, a UK-based business making an international payment to a Chinese supplier in US Dollars will see its UK bank sending the funds via a correspondent bank in the US first.  If the Chinese supplier’s bank does not hold a correspondent account with the same US bank, the funds would then need to be transferred to their own correspondent bank.  Furthermore, although it is less likely nowadays, it is still a possibility that two of the US correspondent banks may not have a direct connection and require the service of another intermediary bank.  To provide these services the correspondent and intermediate banks will most likely deduct so-called intermediary bank fees - as little as $3 and as much as $40 per transfer.  As these fees are deducted from the amount being transferred, the result is often that the recipient gets a smaller amount than what the sender has originally transferred!
One way to overcome this problem is to pay for the "premium" SWIFT (OUR) option - while costing a bit more, it covers all intermediate bank fees - instead of deducting these fees from the transfer amount, intermediate banks charge the sender’s financial institution for their transfer fees.  This is why SWIFT (OUR) costs a bit more upfront as the fee goes towards covering these costs eventually, while the payer’s service provider is obliged to cover intermediate bank fees no matter how those end up being.
Another to avoid SWIFT fees is to use other providers ranging from PayPal to other fintechs, but attention should be paid to other fees these providers may charge.  This foreign payments guide explains how to minimise the costs of doing business in foreign currencies in greater detail.

Foreign exchange or conversion fees explained

While intermediate bank fees are the frustrating area visible to most businesses who make SWIFT transfers, foreign exchange spread (also known as exchange fees) are less understood, yet often more important costs for many foreign transfers.  
An exchange fee is usually charged as a percentage of the amount that you need to exchange.  It comes in form of a spread that is applied to the exchange rate used when quoting foreign conversion. For instance, if the going market rate to purchase Euros is 1.20 Euros for every Pounds Sterling, it would cost your provider £1000 to purchase 1,200 Euros. But the rate they would quote to their customers would be slightly worse - for example, 1.1764 Euros for every Pound.  This means that a 2% foreign exchange spread is applied to the market rate [1.1764 = 1.20 / (100% + 2%)] and it costs the client £1,020 to purchase €1,200, where £20 is the bank’s foreign exchange fee. 
As a result, on larger transfers - anything in excess of several hundreds of pounds, the exchange fees will outweigh other costs without many providers mentioning it!  Leading banks are the most expensive and least transparent option when it comes to exchanging currencies.  Standard exchange fees that Barclays, NatWest, Lloyds and others charge in the UK often exceed 2%.  If your business sends tens of thousands of Pounds in foreign transfers via your bank, you may be paying hundreds of pounds in hidden charges.
Foreign exchange specialist firms and fintechs have been offering more competitive exchange fees to small and medium-sized businesses for more than a decade now.  With the right provider, a business can reduce the costs to a fraction of a per cent, dramatically reducing the costs.  
HedgeFlows Foreign Cost analyser offers an automated tool that checks your foreign payment costs and provides tips on how to manage them.