Exchange-rate risk is at the forefront for businesses that have operations, customers, suppliers, or manufacturers in other countries. Business owners who have had to make international payments understand how high and volatile foreign exchange fees can be. In this article, we will look at some ways businesses can reduce these costs, which is one of the most significant barriers to international business growth in Africa.
What Are FX Fees?
FX (or foreign exchange) fees refer to all expenses incurred as a result of carrying out transactions in foreign currencies. They could be direct or indirect, or hidden mark-ups by banking institutions.
Foreign exchange is volatile by nature, more often than not, there is an unpredictable movement of exchange rates in the global foreign exchange market. This volatility can lead to large losses for businesses that trade in international currencies.
The costs incurred while trading currencies in the foreign exchange market are FX fees. Just as foreign exchange is volatile, FX fees are equally as volatile.
The world is becoming a global marketplace, with more and more people setting up businesses in foreign countries, and often trading overseas. But the reality for many businesses is that where they can trade directly with customers is limited by the presence of foreign exchange fees.
Local banking systems could also have inflated exchange rates and take the hidden markup as a “processing fee”
What Causes FX Fee Instability?
Market inflation fluctuations can cause changes in FX rates. A country with a relatively low inflation rate will experience appreciation in the value of its currency and will cause the foreign exchange with that country to be more stable than others. Therefore making international business transactions with that currency would present low FX fees and vice versa.
- Interest Rates
FX fees, interest rates and inflation rates all go hand in hand. If interest rates decrease, the currency value will depreciate and this would lead to some instability in foreign exchange, therefore carrying out transactions in that currency will be at the risk of volatile FX fees.
- Socio-economic and Political Factors
A country's political state and economic state will have an effect on its currency strength. A country with less risk for political and socio-economic instability is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. An increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency, therefore creating a stable foreign exchange market with more stable FX fees.
What Kind of Businesses Are Adversely Affected by Unstable FX fees?
- Exporters: For businesses that sell goods, services and have operations overseas, unstable FX fees will have a direct impact on their financial performance. The risk here is that prices may become uncompetitive as a result of variations in exchange rates. This would lead to a loss in market share.
- Importers: Businesses that engage in buying goods, services and human capital from international suppliers, are vulnerable to unstable FX fees. For instance, a retailer in South Africa wishes to purchase goods from a wholesale supplier in Ghana and makes a payment of 300,000 Ghana Cedis, with an exchange rate of 8.74%, the present invoice would sit at 803,592.34 Rand. In a month’s time for the same purchase, the exchange rate could be 10% and the new invoice for the same shipment would cost the retailer 812,915.23 Rand, and vice versa.
Some businesses can be indirectly affected by fluctuating exchange rates, even when they do not operate overseas. For example, if a business transports products within the country using delivery trucks and the cost of fuel rises due to exchange rates fluctuations, higher costs will be incurred for goods and services to be delivered.
Few times, exchange rate fluctuations can be beneficial to local businesses by eliminating foreign competition. Depreciation in local currency will make importing goods expensive, which would lead to a decrease in the volume of imports. Domestic companies would benefit from this as a result of increased sales and profits.
Here are 3 ways businesses in Africa can eliminate these unstable FX fees:
- Take a local approach - Operating like a local in each of your international operating regions can significantly reduce your FX costs. Socio-economic factors, political instability, as well as a bunch of other factors that are out of an individual’s control, like the global COVID-19 pandemic, can adversely affect the foreign exchange market and cause FX fees to fluctuate more frequently than normal. Therefore if a business operates in various countries, it should do its best to alleviate the risk of running losses because of the unstable foreign exchange market. A simple way to do this is by partnering with a payment solution company that offers a multi-currency account or wallet. This allows you as a business residing in Africa to collect and hold multiple foreign currencies and wait until exchange rates are favourable before making conversions.
- Know that timing is key - There are times when international business transactions are convenient and easy to carry out, there are other times when they should be avoided altogether. There are key windows in which profitability will rise up and vice versa, for example, market volume and prices fluctuate rapidly in the early hours of the day, and business transactions should be avoided at that time because of the heavy FX fees that may come with the instability. Similarly, during the weekends when the foreign exchange market is closed, FX fees would be high, so it is advisable to not trade during the weekend.
- Create an FX policy and stick to it- Creating an effective FX policy for your business would involve identifying what your financial objectives are and how FX fee volatility would affect those objectives. The key is to look inwards and understand how your business would generate any form of FX risk i.e identify when risk starts for your business and not so much the ups and downs of the market. An FX management policy will ensure that whatever the financial objectives are, FX risks that may jeopardise those objectives are identified and mitigated, accordingly.
Fliqpay offers businesses an efficient and secure way to make international transactions seamlessly and at the best FX rates. With a reliable payment infrastructure, Fliqpay is able to provide businesses operating in Africa with a multi-currency wallet with access to transact in multiple currencies. Fliqpay offers real-time transactional currency conversions which eliminate unstable FX fees and hidden charges that hinder cross-border transactions.
As a business that intends to expand and make international payments in huge volumes, you don’t have to worry about how secure your funds are. Fliqpay is safe and licensed by the Financial Transactions and Report Analysis Centre of Canada.
Fliqpay’s FX conversion solution is a relevant solution in modern business today as it makes cross-border payments easier, at cheaper rates and in record time. Fliqpay provides a sustainable means to mitigate the risks that accompany FX fee volatility, by allowing customers to monitor the foreign exchange market and trade at the most convenient times in accordance with their business FX policies. Get in touch with us.
The following are the main takeaways from this article:
- FX fees are volatile and unpredictable.
- The instability of FX fees is a great hindrance to international businesses, in terms of cost and time.
- A local approach, strategic timing and an FX policy for a business are key factors that can help mitigate the risks that are associated with unstable FX fees.
- Unstable FX fees are sometimes beneficial to local businesses.
- Fliqpay offers a viable solution that can eliminate unstable FX fees from the business process with no hidden charges, therefore making room for businesses to expand.