Currency Costs & Risks

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 improvements aren't always immediately obvious.

In this article, we'll introduce the primary areas where inefficiencies exist and discuss the simple steps to strip out excess costs and remove the time, hassle, and risks 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, CEO & Founder 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 and, 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: this means the exchange rate that 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 £450k! 
2. Payment Fees: most banks will 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 their domestic bank account will almost certainly be charged exorbitant conversion fees in the form of the mark-up applied. Typically between 2.5%-5%, this is one area that is easily remedied with an efficient multi-currency account solution.
4. Inefficient Processes: bank online portals aren't up to scratch and many brokers have old, legacy technology. Poor systems and processes are prone to costly errors and waste the time of team members of all levels. When senior leaders can't effectively delegate tasks due to restrictive technology, they waste time performing basic operational functions, 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 in value over time. Between 2010 and 2020, the pound's value against the US dollar swung from £1 being worth a high of $1.71 to a low of $1.17! Currency exposure can materially impact a company's financial health, it can mean the difference between making a profit and a loss, and it can destroy future growth and investment plans. Knowing how to tackle this risk requires 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 (transactions), inappropriate hedging strategies, or their 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?

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

• Small Business trading £5million/year: £50k in costs, £350k in potential risk
• Medium Business trading £20million/year: £125k in costs, £1.4m in potential risk
• Large Business trading £100million/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, CEO & Founder Oku Markets

Still Need Convincing?

Currency risk is pervasive and extensive. You aren't alone in not fully understanding the extent of risks you face or the costs that you are incurring. 

• 72% of SMEs incur losses due to currency fluctuations (Nordea FX study, 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?

You can contact us for a review of your currency processes and for our guidance and suggestions at [email protected] 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. 

Thanks for reading 👋