Changing to Local Currency Payment

Transcription

1 Changing to Local Currency Payment Move Your Business Forward By Switching From Home To Local Currency Payment By Timothy Woods and Marek Fodor London, May 2014 Share this whitepaper a j 1

2 If your company makes international payments in its own home currency, it is high time it considered switching to local currency payment. This may seem counterintuitive, as common thinking is that by paying in home currency, foreign exchange risk is avoided. This line of thinking may be wrong, and it is an easy trap to fall into. As business has become increasingly globalised, best practice on international payments has fundamentally changed. In the long run, a business never really avoids FX risk when making international trades, and by allowing its partners to take on the risk, it is likely damaging its profit margins or competitiveness considerably. Philippe Gelis, Kantox CEO

3 Companies that have traditionally made international payments to goods and services suppliers in their own home currency are increasingly choosing to change to local currency payment. This includes manufacturers of products, business service providers and also individual vendors providing contracted or freelance services to a foreign company. SMEs and mid-caps now rely increasingly on custom from overseas as globalisation and increased domestic competition lead businesses to target foreign markets. This has inevitably pushed currency of payment to the fore as a crucial issue in international trade. Many companies mistakenly believe that paying in their home currency removes the FX risk from their operations. This is simply not true. If a company trades with foreign suppliers using a different currency, FX risk will always be a factor. If a company pays in their own currency, the foreign supplier often raises their fees to help them deal with FX risk and rate fluctuation. It is now increasingly believed that paying in home currency actually harms a business more than it protects them through lost business with suppliers, incurring a supplier premium charge, and through conveying a negative impression as a company not concerned with the interests of its suppliers. Paying in the local currency rather than paying in the company home currency offers a number of considerable advantages to firms. Though there are many causes for concern when exporting, including the development of webpages in foreign languages and for foreign markets; local language, culture and laws; and level of trust from local firms and entities, the most important factor is the exchange rate. Money and the FX risks involved remain the number one concern for companies when conducting business internationally. 5 Reasons for paying in local currency 1. The main benefit to adopting a local currency payment model is that suppliers will no longer be at risk of FX rate fluctuation. This generally makes them more likely to do business, as they don t have to worry about the effects of a fluctuating exchange rate. 2. When a company pays a foreign supplier in their home currency, the supplier often increases their fees to absorb the FX risk. Paying in local currency eliminates this inflated price. 3. Suppliers can price their products/services easier in their local currency, avoiding the confusion of having to consider the exchange rate and ultimately, if an operation is worth taking on when receiving payment in a foreign currency. 4. By assuming the FX risk, the company is not looked on unfavourably by suppliers. Paying in their home currency can lose a company a significant portion of business or access to suppliers services/products. If a disciplined, prudent FX risk management strategy is pursued, the company will protect itself from exposure and reap the benefits of paying in local currencies. 5. if a company is able to handle FX risk in a more professional and efficient manner than their supplier (hedging cost is 0.19% with Kantox compared to typical bank/broker hedging cost of 2.5% bank/broker rate suppliers receive), it can win extra profit margin by paying in local currency.

4 Drawbacks of paying in local currency 1. The company assumes the FX risk on all international payments. The more foreign markets operating under different currencies a company is involved in, the greater the spread of risk and therefore, the greater necessity to manage and hedge that risk. Such management and hedging procedures, when executed effectively, can be expensive. It requires considerable labour time; skilled individuals to oversee the process, and some of the financial products used to hedge risk are costly, in addition to other overheads. 2. The initial period of change from home currency payment to local currency payment can prove costly and time-consuming. A company has to implement a new payment structure internally, fall in line with country-specific laws and with international banks, and adopting and successfully streamlining a comprehensive FX risk management strategy takes time, capital and knowhow. Advice on implementing a local currency payment strategy 1. Lose your fear and take the plunge. Your company will benefit substantially in the long run. 2. Expect to make mistakes as it is a trial and error process. 3. Invest the time and resources necessary for an effective, continuous FX risk management strategy. 4. Benchmark your FX service providers banks/brokers with alternative providers. Banks/brokers typically charge up to 2.5% on international payments / Paypal charges 2.9% / Kantox charges between 0.09% and 0.29% 5. Understand risk mitigation hedging products inside out before you commit to buying them. Banks benefit by selling expensive, complicated financial products which, in many cases, are not entirely necessary. 6. Develop a clear local currency payment plan, which requires understanding and fully adhering to local laws. 7. Make an exception for exotic and non-convertible currencies, ensuring you pay in your home currency. Exotics have poor liquidity, volatility, and high costs involved. These include the Saudi Arabian riyal, Argentinean peso and Egyptian pound. Non-convertible currencies are virtually impossible to change into other legal tender. They include the Philippine peso, Israeli shekel and Indian rupee.

5 If implemented and executed correctly, changing to payment in local currency is highly likely to bring with it many benefits. A company takes on the FX risk, but if managed correctly, along with the benefits to local currency payment, a company stands to gain significantly, through elimination of supplier premium charges for assuming FX risk, enhanced relations with suppliers and through projecting an image of a company with a global view, better to work with and more understanding of the needs of different stakeholders. Additionally, the initial period of change is only temporary. A company will likely have to invest considerable time and capital in ensuring a full transition, but in the long run, this will pay off in a number of crucial ways. Contact To find out more about how you can save with Kantox please visit or speak to an adviser directly: UK tel Spain tel If you would like to contact the authors of this paper, please Tim Woods at timothy.woods@ or Marek Fodor at marek.fodor@. Share this whitepaper a j 1

6 About Kantox Kantox is a pioneering firm in the FX industry, bringing light and providing fresh air in an obscure, static market. Expertise and passion result in an efficient and transparent solution to serve real economy clients. Trust and Security We are regulated by the Financial Conduct Authority (FRN ) and the HMRC ( ). All client funds are held in segregated bank accounts at leading banks. Transparency We clearly display the mid-market rates and the fees we charge. There is absolutely no hidden commission or fee. In other words, we are fair. Savings in 25+ Currencies 78% of our clients are saving more than 80% compared to their banks or brokers. For every Million USD they trade, they save more than USD Start Trading with Kantox

7 Headquarters Longcroft House 2-8 Victoria Avenue London EC2M 4NS UK (+44) Spain Office Torre Mapfre, Planta 10 Marina, Barcelona Spain (+34) Kantox Ltd is registered with the Financial Services Authority (FSA) under the PSR 2009 (reference ) as an authorized payment institution. HMRC Certificate of Registration for Money Laundering Regulation (MLR) is UK Data Protection Act Registration (Nr. PZ ). Copyright 2014 Kantox