Business FX Costs: Hidden Charges and Currency Risks

Key points

• Banks and brokers mark up the interbank rate – sometimes by as much as 5%.
• Payment fees of up to £35 per international payment add up quickly.
• Foreign receipts converted automatically into a sterling account usually carry a hefty mark-up – a currency account fixes that.
• Unhedged currency exposure can be a far bigger cost than the charges themselves.

4-minute read

For most companies, foreign exchange and international payments are byproducts of their core activities – and sometimes a nuisance. Inefficiencies in currency processes are often overlooked because the opportunities for improvement aren’t always immediately obvious.

In this article, I’ll introduce the main areas where inefficiencies exist, and the simple steps to strip out excess costs and remove the time, hassle and risk of currency dealing and cross-border payments.

We don’t know what we don’t know: currency costs often stack up because businesses don’t realise that there are better ways of working. At Oku Markets, we work transparently with our clients, and we work hard to deliver a high-value, efficient solution to whatever unique challenges our clients face.

Harry Mills, Managing Director, Oku Markets

Let me count the ways…

In much of finance, there is an asymmetry of information that favours banks and brokers. The FX market is no different – for decades, SME and corporate clients have suffered from unfair and opaque pricing, bad advice and inattentive service.

There are many ways that costs can mount up, but let’s explore the most common:

1. FX pricing: the exchange rate you receive versus the real, interbank (market) exchange rate. Banks and brokers mark up the interbank rate when trading with their clients to generate profit – sometimes by as much as 5%. For a business transacting £10 million of foreign exchange in a year, the over-charging could be between £100k and £500k!
2. Payment fees: most banks charge a payment fee of up to £35 per international payment, despite very low costs. The annual saving for an SME is likely to be thousands – and tens of thousands for larger companies.
3. Automatic conversions: a business that receives foreign currency into its domestic bank account will almost certainly be charged exorbitant conversion fees, in the form of the mark-up applied. Typically between 2.5% and 5%, this is one area that’s easily remedied with an efficient multi-currency account.
4. Inefficient processes: bank online portals aren’t up to scratch, and many brokers run old, legacy technology. Poor systems and processes are prone to costly errors and waste the time of team members at all levels. When senior leaders can’t delegate because of restrictive technology, they waste time on basic operational tasks – and when operators use clunky systems, they spend hours keying payments and managing what should be simple processes.
5. Unaddressed currency risk: FX markets can be highly volatile, and exchange rates can swing wildly over time. Between 2010 and 2020, sterling swung from a high of $1.72 to a low of $1.14 against the dollar! Currency exposure can materially affect a company’s financial health – it can mean the difference between a profit and a loss, and it can derail future growth and investment plans. Tackling this risk takes specialist skills, knowledge and experience, but it doesn’t need to be overly complex or difficult.
6. Bad advice: more businesses are listening to unqualified pseudo-experts at their peril. Untrained and bonus-greedy salespeople at dealing desks around the City peddle complex financial derivatives, inappropriate hedging strategies or ill-conceived market advice. Remember: nobody knows where the market will go next, if a deal sounds too good to be true then it is, and every day is a good day to trade (in the FX dealing world, at least). Salespeople earn a commission when you trade – their incentives are very rarely aligned with yours!

So what’s it costing?

Actual costs and risks depend on your providers, payment volumes, currency exposures and exchange-rate movements. The figures below are illustrative scenarios, not guaranteed savings or a forecast of losses. For context, £350,000 is a 7% adverse move applied to £5 million of fully unhedged exposure – it isn’t an estimate of the probability of that move.

By addressing the points above, businesses could reduce costs and minimise currency risk to the tune of…

• Small business trading £5 million a year: £50k in costs, £350k in potential risk
• Medium business trading £20 million a year: £125k in costs, £1.4m in potential risk
• Large business trading £100 million a year: £510k in costs, £7m in potential risk

In my time working with UK and International businesses, very rarely have I come across a business that couldn’t make gains in its currency operations. Whether it’s price, process, or the risk programme, Oku Markets has the capabilities, the experience, and the expertise to deliver meaningful improvements in FX services.

Harry Mills, Managing Director, Oku Markets

Still Need Convincing?

Currency risk is pervasive and extensive. You aren’t alone in not fully understanding the risks you face or the costs you’re incurring.

• Many SMEs suffered unexpected currency losses during the pandemic – and close to half hadn’t protected themselves (Nordea SME study, late 2020)
• 57% of CFOs report lower earnings due to unhedged FX risk (Citi, 2020)
• 70% of CFOs report reduced earnings due to avoidable FX risk (HSBC, 2021)
• 51% of CFOs say they are least equipped to deal with FX risk (HSBC, 2021)
• 90% of larger businesses have a formal FX policy (HSBC, 2021)

What Next?

A practical business FX cost checklist

1. Compare the quoted exchange rate with a market reference taken at the same time, allowing for transaction size and settlement date.
2. Add payment fees and any intermediary or recipient-bank charges to work out the total cost of each transfer.
3. Check whether foreign receipts are converted automatically. Business currency accounts can separate receiving the funds from deciding when to convert them.
4. Review approvals, reconciliation and payment workflows alongside your international payments arrangements.
5. Assess unhedged cash flows separately from transaction charges. Our FX risk-management service helps quantify the exposure – read about inherent and residual FX risk and choosing a hedging programme for the next steps.

Contact Oku Markets to review your currency costs and processes.

You can contact us for a review of your currency processes, and for our guidance and suggestions, at info@okumarkets.com or 0203 838 0250.

We’ll take the time to listen and understand your situation, challenges and objectives – and we promise to be fully open, honest and transparent in our dealings.

Frequently Asked Questions

What is the interbank rate?

It’s the wholesale exchange rate that banks and large institutions trade at with each other – often called the market or mid-market rate. The rate a business is quoted is the interbank rate plus the provider’s mark-up, so the gap between the two is the hidden cost.

How do I work out what my FX provider is really charging me?

Note the rate you were given and the market rate at the same moment, then apply the difference to the amount you traded. Add any payment, intermediary and receiving-bank fees. Do that across a year’s trades and you’ll have a fairly honest picture.

Why do automatic conversions cost so much?

When foreign currency lands in a sterling account, the bank converts it at its own rate – usually with a hefty mark-up and no chance for you to compare. A business currency account lets you hold the currency and choose when, and with whom, to convert.

Thanks for reading 👋