We decided to pen this article as a result of conversations with 100’s of growing businesses we speak to on a daily basis. If your business is paying suppliers overseas or receiving payments in foreign currencies, there is no shortage of banks, online platforms and brokers to choose from. Making the right choice will make a significant difference to profitability, volatility of earnings, your stress levels and ultimately give you the freedom to focus on your actual business. To make the right choice it is important to know the difference between conversions, payments, exchange rates and different components of fees.
EXCHANGE RATE
The exchange rate you get from your bank or broker will be the midmarket rate plus a margin which is called the FX spread. You can see the mid market rate on sites like xe.com. Banks generally charge FX spreads of 3-5% on majors and higher on exotics. The FX spread is a cost to you, so you should try to minimise this. FX Brokers can help you access tighter FX spreads as they aggregate wholesale rates from a number of banks and thereby help increase your profit margin.
TRANSACTION FEES
They are a fixed fee in the range of $20-35 which banks charge for processing international currency transfers. This is in addition to the FX spread. FX brokers can help you get around transaction fees provided your trade is above a certain threshold Ie $0 fee for transactions above $10,000. There are also intermediary fees which are charged by banks who handle your transfers along the way. Intermediary fees mean the money received by your beneficiary is lower than the foreign currency amount you sent, usually by an amount of $20-25. Whether or not you get charged an intermediary fee depends on which intermediary your bank uses to process the currency you are sending and will be deducted from each transfer. FX brokers often aggregate payment systems and can potentially offer an alternate route which can help you avoid intermediary fees.
ACCOUNT FEES
Aussie banks generally charge a monthly fee to open a foreign currency account for your business. For instance if you hold USD and Euro business accounts with your bank, you will be charged USD30-40 and EUR30-40 per month. If your business is not getting paid frequently in those currencies and hold balances, it may make sense to use an FX broker as they will allow you to use a list of foreign currency accounts which can receive payments and hold balances on your behalf without any account fees. You can open a Tat Capital FX account and use our foreign currency trust accounts free of charge.
SUPPORT AND SIMPLICITY
The support and simplicity you get could arguably be the most important consideration in choosing an FX broker. Ultimately you want to have the freedom to focus 100% on your actual business knowing your FX broker has got you covered. Unfortunately, this is not easy to evaluate without trying and trust only comes with time. But here is a checklist which will help.
- Will they watch market levels? Ie: call me when AUD/USD reaches 0.7750
- Will they take orders for you? Ie: buy 50k EUR when AUD/EUR reaches 0.6950
- Do they ask about your payments cycles and stay informed on your foreign currency requirements?
- Do they have an online platform you can access 24 hours a day?
- How simple is the platform to use?
- Can you contact them after hours?
SECURITY
Fortunately, all Australian brokers and financial service providers are regulated by ASIC which is one of the most stringent and respected regulators in the world. ASIC requires that we hold our clients funds separate from our own operational funds in segregated client trust accounts at APRA approved banks. We are also required to meet numerous regulatory and compliance requirements which protect you and your funds. You can read more about this on www.asic.gov.au.
TRUST AND TRANSPARENCY
Trust is something that will be built overtime dealing with an FX broker through the inevitable highs and lows of the market. A broker who is transparent with transaction costs, payment processing times and is contactable after hours is a very good start. Beyond this, its a 2-way relationship which is improved by the broker getting to know your business’ requirements and FX payment cycles and keeping on top of the FX market.
If you’re looking for an FX broker, please give us a call on 0283875901, email [email protected] or find us on skype at tat.fx.
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