In the United Kingdom, the average daily reported foreign exchange turnover is approximately 3 trillion US dollars. The top three most frequently traded currency pairs are EUR/USD, GBP/USD, and USD/JPY. Spot FX trades account for 28% of the overall FX conversion volumes, with the remaining 72% comprising FX swaps, non-deliverable forwards, and forward contracts. This data comes from the October 2023 semi-annual turnover survey conducted by the Foreign Exchange Joint Standing Committee (FXJSC), which included participation from 27 financial institutions active in the UK foreign exchange market.

For businesses and individuals involved in this foreign trade activity, it is important to understand currency dynamics and how they can impact your business. The primary focus should be on the costs associated with the spread and fees of your FX transactions, as well as how movements in the mid-market exchange rate affect you.

Today, in the FX payments space, there are two primary ways to pay international recipients and make FX conversions: through a traditional high street bank or via a cross-border payment specialist.

Cost and Transparency

Using a traditional high street bank can be expensive, slow, and not very transparent. In contrast, a cross-border payment specialist, such as a currency broker, typically offers faster service, the ability to track the deliverability of payments, and significantly lower costs compared to banks.

Firstly, some high street banks do not disclose the exchange rate until after you have made a conversion with them, which is unacceptable in today’s market. They exploit the fact that some people believe the rate offered by the bank is simply the current rate, with no possibility of obtaining a better rate. In reality, banks apply a markup to the mid-market exchange rate that can be as high as 6% in some situations. The rate often depends on the volume of currency you move through the bank. For example, a small importer buying $10,000 per month worth of USD to pay suppliers in China may be charged much more by a bank than a large manufacturing company with a turnover in the tens of millions.

However, a cross-border payment specialist can bridge this gap significantly, allowing smaller businesses to access much better exchange rates. Although currency brokers’ rates are often volume-dependent too, they are still significantly better than those offered by banks in most cases. On a transfer of $10,000, this can result in savings of more than £300, especially considering that most of these specialists do not charge fees.

Receiving Funds

In terms of receiving funds, for example, if you export products to other countries and your customer pays you in their currency, the bank will convert it at their “best” rate of the day when it hits your account. This rate typically includes a large markup, and it also means you have little ability to manage your cash flow since the amount you receive might be uncertain until it hits your account.

Currency brokers can let you know exactly how much sterling you will get back for a customer paying you in euros, for instance. In some cases, they can also provide you with a euro account to receive the payment in euros first. This way, if you have costs in euros, you can spend in euros again instead of converting the funds, avoiding unnecessary conversion fees. All in all, regarding costs, a currency broker is a significantly cheaper way to move money across borders.

Hedging and Risk Management

Currency brokers also offer advanced tools for hedging and risk management, such as forward contracts. These contracts allow businesses to lock in an exchange rate for a future date, protecting against adverse currency movements. This can be particularly beneficial for businesses with predictable future expenses in foreign currencies, as it helps in budgeting and financial planning by ensuring exchange rate stability.

Speed and Efficiency

Speed is another critical factor where currency brokers excel. Traditional banks can take several days to process international transfers, whereas currency brokers typically use the SWIFT network, which is much faster. SWIFT payments can be tracked, providing transparency and peace of mind. This ability to track payments through the SWIFT network ensures that businesses can monitor the status of their transactions in real-time, reducing uncertainty and improving cash flow management.

Dedicated Service and Support

Currency brokers also offer dedicated agents who take the time to understand your business and its specific needs. This personalized service ensures that you get the best possible advice and solutions tailored to your circumstances. In contrast, banks may not provide the same level of individualized attention, often treating currency exchange as just another service among many.

To manage your business’s currency exposure effectively, it is crucial to take a calculated approach. Understand your currency needs, monitor market trends, and use the tools and services offered by currency brokers to mitigate risks. By doing so, you can minimize costs, improve your cash flow, and protect your profit margins from unfavorable currency fluctuations.

In summary, using a cross-border payment specialist offers significant advantages over traditional banks in terms of cost, speed, transparency, and service. Whether you are paying international recipients or receiving funds from abroad, a currency broker can provide more favorable exchange rates, faster transfers, and personalized support, helping your business navigate the complexities of the global market.

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