Hiding in plain sight: How businesses routinely overpay on foreign exchange rates

Aug 27, 2019

Over the past 8-months, Spotlight's foreign exchange rate audits uncovered SMEs, mid-size companies, and large corporates losing between $30,000 to $250,000 annually. Put simply, nearly every one of our dozens of clients were executing transactions with uncompetitive exchange rates on simple business payments.

While our audit findings led a handful of CFOs to confirm their worst suspicion, most were surprised to find massive gaps in their payments processes.

Let’s have a closer look at why.

How financial institutions set foreign exchange rates for their clients

When a business approaches a financial institution to execute an international payment/remittance, the financial institution's contracts often promise to offer clients the “most competitive foreign exchange rate” in the market. The definition for 'competitive' unfortunately lacks any meaningful benchmarking - as a result, financial institutions have significant leeway in the foreign exchange premiums they can charge their clients.

Currency markets fluctuate 250,000 times a day

The premiums charged by a bank on a loan to a business are very easy to estimate — take the interest rate charged to a business by a bank, and subtract the prevailing country's interest rate. This method works well because interest rates are relatively stable within a day.

However, currency markets move once every microsecond, around 250,000 times a day, often with huge variances between days. Such prolific movement means the premiums on foreign exchange rates charged by a financial institution are nearly impossible for a business to uncover.

The significant savings potential for businesses

How do financial institutions profit in a constantly shifting market? The answer is simple – they offer businesses rates that diverge from the exchange rates they can procure for themselves. An SME receiving an exchange rate of 1.2 U.S. Dollars to Euros instead of an exchange rate of 1.1 for a $1M transaction would lose >$75K on that singular transaction!

From our example, the higher exchange rate of 1.2 would be marketed to businesses as the 'most competitive' available rate at the time, despite it containing a significant premium. These premiums often go as high as 10% of the value of a transaction. Any additional fee that a financial institution adds is over and above this hidden cost.

This is the truth behind why your business is most likely not receiving exchange rates befitting its needs. On average, businesses lose 1-2% of their overall transaction value due to these hidden charges.

Globally, businesses generating over $5M a year in revenues lose >$120 Billion collectively on an annual basis due to uncompetitive exchange rates. Numerous publications such as the Wall Street Journal, the Financial Times, CNN, and pymnts.com have documented the significant costs faced by businesses, proving businesses having significant sums they can persevere to save on.

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