Why are international payments still broken for SMEs?
Regulators have been pushing for more fairness and transparency, and new players and technologies have driven the costs of international payments down for retail and corporate clients. However, foreign payments are still too difficult and costly for most small businesses. Fortunately, fixing this is easier than most people think.
Business clients often expect their accountants to help identify ways that can improve their bottom line. For thousands of UK SMEs that trade internationally fixing how they invoice and pay internationally can dramatically improve their profit margins. Accountants can guide their clients on how to avoid excessive bank charges, reduce costly manual processes and avoid surprise costs from foreign currency swings.
Doing international payments is still too expensive
Many small businesses that trade internationally (export/import intermediaries, wholesalers, logistics and travel companies to list a few) have to grow in very competitive markets, often operating with profit margins in single digits. As a result, saving several per cent on their foreign turnover can have a dramatic effect on net profitability, boosting their sustainability and ability to grow.
Until a business reaches a certain size, most incumbent banks simply don’t offer competitive exchange rates and payment fees. While banks clearly disclose payment fees that they charge for international transfers, foreign exchange conversion costs remain less transparent and are often a lot more expensive for small businesses than payments themselves. Conversion fees are bank charges in the form of the difference between the rate that the bank charges its clients and the rate at which currency can be bought in the wholesale market. A typical “standard” foreign exchange margin for a business account is over 2% even for amounts in excess of £50,000 with mainstream banks in the UK. So a transfer of a thousand US dollars could cost around £40 - over 4% of the amount.
This is why a growing number of companies are using specialist currency providers, fintechs, or neo banks, which can save up to 80% on foreign payments. However, many businesses still remain unaware or sceptical as they ignore the impact on the operating leverage and consequently profitability. HedgeFlows' Cost Analyser helps accountants and their clients identify potential savings and quantify impact on the profitability of one's business.
Error-prone manual processes add to costs
Many businesses have already discovered the benefits of using AP automation, payment runs, and accounting system integrations for domestic payments but few solutions exist for SMEs when it comes to foreign invoices. Foreign payments often require more details and additional verification steps. Because of siloed systems, they are mainly done manually, taking hours and leading to numerous mistakes. Using payment files (the process first used in the 1990s!) still remains the only “advanced" solution offered by banks and providers to SME clients.
Cloud accounting systems offer the opportunity to streamline this process for foreign payments. While Open Banking is a viable option for domestic payments, it still remains out of reach for foreign payments (for now!) - not least because of the foreign conversion margins banks would still charge on such transfers. HedgeFlows combines its own multi-currency virtual accounts with direct accounting integrations to deliver seamless approval, payment and accounting reconciliation processes for payment runs in 30 currencies.
Currency swings that make or break one’s year
We live in a volatile and uncertain world - over the last 12 months Pound Sterling has weakened by almost 20% against the US Dollar, the prevailing currency in global trade. Large businesses have solutions in place to deal with currency uncertainty.
Yet, most small companies and their accountants see currency swings as a fact of life. Only 4% of the UK exporters surveyed by the British Business Bank for instance said they manage foreign currencies. Popular cloud accounting packages don’t make understanding Foreign exchange gains and losses easy so no matter what sign is in front of the FX Gains & Losses number on the management or statutory report, understanding it and managing it has to be simpler for SMEs.
At HedgeFlows we’ve reimagined how businesses can deal with foreign invoices - by simply turning each and every invoice into home currency from the onset. With a click of a button, anyone can plan and add certainty to their future foreign cashflows without worrying about making wrong decisions.
With our novel approach, businesses are able to trade anywhere in the world but manage their finances in one currency.