International payments - how to make your life easier
As businesses expand to work on a global scale, the requirement to make international payments cheaply and efficiently becomes increasingly important. However, despite advancements in FinTech international payments remain a costly hassle for many.
The cost of sending money abroad has two elements:
A transaction fee, and the financial exchange (FX) rate.
Heads up - watch out for providers who offer to charge no fee, as it might not be transparent that they will compensate for this with a particularly poor FX rate.
Transaction fees can vary substantially; most high street banks charge around £25-30 per transaction, which is often applied to both the sender AND the recipient.
The FX rate is more difficult to assess and compare and it's always worth using an online currency converter to see how competitive the rate really is. The currency market is constantly fluctuating, so if your business is making and accepting payments without monitoring these movements, it could be losing money on every transaction.
If you’re using a high street bank, the payment will most likely be sent via the SWIFT network. Although the time can vary, it could take up to five days for the funds to be received.
Just because a bank may claim it processes the payment on the same day, this doesn’t necessarily mean that is when the recipient will receive it!
Firstly, an approach to avoid these problems would be to take advantage of free bank transfers between the same bank. HSBC is one provider that allows free transfers of funds to any other HSBC bank, as long as you are a Premier / Advance account holder.
There is also an alternative to SWIFT offered by most banks: SEPA.
A SEPA payment is a Euro payment made between members of the Single Euro Payments Area (SEPA). Compared to a standard international payment, this is a simpler and cheaper way to make Euro payments; typically, they arrive in one business day. Payments are currently capped at EUR 15,000, but on 1 July 2020 this limit will increase to EUR 100,000.
For smaller amounts, online services such as Azimo offer very low fees to most countries in the world. However this is only suitable for small, low volume transactions.
PayPal can also be a convenient and surprisingly cheap option for low value transactions. However if you’re transferring more than a few hundred pounds it’s usually one of the most expensive methods.
Another option is TransferWise, a peer-to-peer currency service. Technically, they don’t transfer any money; TransferWise has reserves of currency in several different countries, so when you pay into the UK pot, the recipient is paid out of the the relevant EUR, USD or AUD pot, for example.
When the amount to transfer is substantial - above £5/10k - then its best to go for specialised foreign exchange brokers. Small fluctuations in FX rate can have a big impact, for instance, 1% rate movement on £100,000 will make or lose you £1,000.
It’s also essential to check if the firm is authorised with the FCA and therefore covered under the compensation scheme. If not, you may lose your money if the company goes under.
If you find yourself making or receiving large payments to/from the same territory it's also worth looking into opening up a bank account in that location.
In summary, great progress has been made in FinTech over recent years, yet the problem of sending and receiving money internationally still remains, particularly for larger sums.