Foreign exchange costs are weighing down Australian businesses, and the ACCC has announced a new investigation into the issue. According to the World Bank, Australia is now the third most expensive G20 country for small businesses and consumers to send funds from. Specifically, using traditional exchange services, a $1000 transfer from Australian would cost $9 more on average than one from the UK, and $23 more than one from the USA.
Considering that Australians send nearly $9 billion overseas every year, the economic impacts of this across the Australian economy amount to hundreds of millions of dollars every year. Those costs cut into the profits of Australian businesses, and can impact their ability to grow and compete, especially on the international market against businesses who enjoy more affordable international transactions. The Australian Competition and Consumer Commission’s investigation into this issue promises to finally begin to address the problem, and to eventually moderate transaction costs.
In the meantime, businesses aren’t left without options. A number of specialised foreign exchange services now exist that offer far more affordable options for sending money overseas. By taking advantage of modern financial technologies, these services can offer low-cost or free transactions. In an economic environment where international activity is increasingly important, these may simply replace traditional financial institutions as the de facto method for foreign exchange.
Mark ups and exchange fees have big impacts on SMEs
Traditionally, international transfers are handled by your primary bank or other large financial institution. To do this without losing money, they mark up the current exchange rate slightly. This is because foreign exchange rates are often volatile in the very short term, and making an exchange at an inopportune moment can result in a loss. Additionally, they’ll often also charge a processing fee to cover the operating costs involved.
While these costs make sense, it’s important for the businesses that use these services that they be as low as possible. Even a relatively small internationally active business might send out millions of dollars in a single year. Compared to an American competitor, it would pay tens of thousands of dollars more to make those transfers, and would find itself at a serious disadvantage in the larger global economy.
The ACCC aims to make SMEs more competitive
The ACCC is concerned that the current state of foreign exchange is interfering with the ability of Australian SMEs to operate internationally. This comes after numerous consumer complaints about high mark-ups and transaction fees, and the Report on Competition by the Productivity Commission, which recommended the investigation.
The ACCC has requested feedback from consumers, currency suppliers, businesses, and consumer advocacy groups to learn more about pricing transparency, barriers to entry, costs, and other relevant factors. In doing so, they hope to learn how to ensure that currency buyers have adequate disclosure, and benefit from proper marketplace competition. That competition may, in the end, be the solution to the current issue.
Businesses have other options
The most well-known and convenient way to transfer funds internationally is still our primary financial institutions. It’s not, however, the best or most affordable method available. Improvements in financial technology in the past two decades have transformed the foreign exchange market, and businesses simply don’t need to rely on traditional international transfers anymore. Instead, specialised foreign exchange services can make transfers at a small fraction of the cost, often eliminating the need for transfer fees entirely.
One of Fifo Capital’s partners, HiFX, is just such a service. Instead of charging fees from their customers, they transform the transfer itself into a profitable transaction. Using the latest technologies, foreign exchange services track exchange rates in real time, to within a fraction of a second. While the customer pays the normal exchange rate, the exchange service can use those funds to make transactions at very precise moments when the exchange rate favours them, and pocket the difference. In this way the customer enjoys a free transaction, and the exchange service gets access to the capital it needs to make profitable trades.
In effect, this means that Australian businesses already have the tools they need to avoid unnecessary exchange costs. The issue is primarily one of raising awareness. Despite this, it’s important for the ACCC to crack down on high foreign exchange costs with traditional financial institutions. The vast majority of foreign transfers are still conducted through these institutions, and ensuring that the rates paid by Australian businesses don’t excessively exceed those of their foreign competitors is essential on an economic level. Businesses who take the time to educate themselves about all their options, however, could eliminate nearly all of their foreign transaction fees.