Saving real money on Foreign Exchange (FX) transactions

Corporate Finance

8 April 2022

Foreign exchange (FX) transactions are an area where businesses can often end up paying significant but hidden transaction fees. By correctly, identifying foreign currency exposures, knowing the costs involved in transacting foreign exchange and taking advantage of new entrants into the FX transactions space, businesses can make material cost savings.

Findex Corporate Finance has a specialist Debt Advisory team with significant experience in identifying foreign exchange exposures for businesses and helping them transact in the most efficient manner.

Whilst banks have always been the traditional “go-to” for foreign exchange transactions, like many industries, the FX market has been disrupted, presenting opportunity for businesses to make real savings on their transactional business.

Starting a conversation with our Debt Advisory experts and undertaking the following three-step process provides a pathway for businesses to potentially save real money on their FX transactions.

1. Correctly identifying foreign currency exposure

The first step is to ensure all foreign currency exposures are clearly and correctly identified and quantified.

Often this will be easy, for example when a business buys a new piece of equipment from a company in Germany and pays in EUR. However, if the same German company offers an AUD price to sell the equipment, the exposure can be more difficult to uncover.

Many businesses will not see the implied foreign currency exposure in the latter example, however, the German company has used an exchange rate to generate the AUD pricing that, more often than not, will include a significant buffer for their transaction costs.

2. Determine the real cost of FX transactions

Charges will vary from business to business, bank to bank and even by the way foreign currency transactions are entered into.

Whilst simply clicking a button on the bank’s online banking system is easy, this can cost companies thousands or tens of thousands of dollars as the exchange rate provided to the business can mask the true cost of the transaction.

Even if the bank assures you they get a special rate, these costs and charges are affected by more than just the official exchange rates. Transaction volume, timing, processing fees and the bank’s own costs impact on the overall rate provided.

The team at Findex has access to real time market information and can quickly and efficiently determine the real transaction costs your business could incur for FX transactions and whether savings are possible.

3. Execution

There are numerous reputable disrupters in the FX market available to your business. These firms compete directly with the banks, providing competitive rates by using innovative solutions to reduce capital requirements for transactions, while also providing superior customer service on easy-to-use transaction platforms.

This table shows an actual transaction executed by one of Findex’s non-bank FX provider relationships demonstrating the savings achieved for the purchase of equipment.

Bank 1

Bank 2

Non-Bank

Rate
0.6951

0.6937
0.6979
USD amount
1,100,000
1,100,000
1,100,000
AUD amount
1,582,506
1,585,700
1,576,157

Saving vs Bank 1
$6,349
Saving vs Bank 2
$9,543

The non-bank provider was around $6,300 cheaper than Bank 1 and around $9,500 cheaper than Bank 2. That is just for one transaction, so for businesses that transact quarterly or even monthly, that would increase significantly.

It would be reasonable to assume that the business in question spent a good deal of time and effort negotiating the purchase price and terms/conditions for the parts purchased. To ensure these hard-fought wins are not lost, businesses need to carry this negotiation through to the completion of the FX transaction.

Given our established relationships with key trusted non-bank participants in the sector, we are able to help clients execute FX transactions in the most efficient manner.

Complimentary FX risk review

This three-step process requires businesses to look beyond the obvious to identify where foreign exchange risk lies so they can establish the actual cost of transacting and identify the potential savings. The Debt Advisory specialists in the Corporate Finance team can be your fresh set of eyes to help assist you to accurately identify your business’ foreign currency exposures.

To organise your complimentary risk review, pleasesubmit this formand we’ll call you back.

Author: Tony Krohn

Tony is an experienced financial markets practitioner with over 30 years’ experience in advisory, treasury, portfolio management, risk management and securitisation businesses. He has specialist knowledge in capital structuring, debt syndications, loan markets, debt capital markets, interest rate and foreign exchange risk management, securitisation, treasury operations and business change management. Tony possesses a strong commercial acumen combined with excellent technical and interpersonal skills resulting in the provision of high quality advice for clients. Tony has been married for 19 years and has a daughter aged 13 years and a son aged 11 years.