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When doing business internationally,the issues associated with making payments across currencies are a majorconsideration. The amounts of money lost or gained can be significant, and muchof it comes down to how a company manages its international transfers. In theworld of soccer, Chelsea Football Club of London, for example, savednearly a million euros by signing a player when the markets were in their favor, while Aston Villa lost around two hundred thousand eurosby getting their timing wrong. The stakes are just as high for U.S. companies topay attention to currency markets and their international payment processes.
As a quick overview, Continental Europeand Japan have been mired in a disinflationary stagnation since last year. Thishas resulted in tight credit, low investment, and weak consumer spending. Incontrast, robust consumer spending in the US and UK has allowed those economiesto rapidly expand and fully recover the losses incurred during the 2007-8recession.
This divergence has had a majoreffect on US companies operating internationally, with the resurgent US dollar substantiallyreducing overseas earnings while decreasing the cost of foreign procurement. Giventhe dollar’s 18% gain against all major currencies since July, the impact onbudgets can be substantial.
Against this backdrop, it is criticalfor companies have a process in place to utilize market movements to capitalizeon international payments and ensure competitive rates. A simple three-steppayments program can put in place best practices without disturbing existingbanking relationships or creating additional burden on the treasury team.
This three-step International Payments Program allows companies of allsizes to reduce risks and costs associated with making paymentsinternationally.
- The “one price rule” does not apply to exchange rates,which unlike publicly traded stock prices, can vary significantly between differentfinancial institutions.
Make sure to havea second offer or reference quote from an independent financial institution tocompare to the rate from your primary bank. Comparing rates from different institutionswill help you to get the most competitive quote for each particular payment.
- Take advantage of no-cost forward contracts. With a forwardcontract, you can lock in a rate for specified amount of funds for a futuredate – usually up to one year in advance – with no upfront fee and minimalburden on the existing line of credit. This can also be done in bulk; buying ablock of currency and drawing down on the forward on a need basis.
Forward contractsallow treasury and accounting to reliably manage the cost of futureinternational payments and avoid potential budgetary headaches, as once therate’s locked in, you know it can’t be affected by market moves against you.
- Streamline payments by utilizing advanced paymentstechnology. Most treasury platforms are difficult to navigate, and cannot becustomized to reflect the workflow of unique organizations.
However, there areinternational payments specialists who have developed user-friendly platformsspecifically designed for bank-to-bank transfers in foreign currencies, whichcompliment to existing banking systems. Such a system will allow treasury tocreate a customized and automated workflow that includes security hierarchy toincrease efficiency and save time. These systems also record transactionrecords and detailed history of each payment, enabling treasury to easilyconduct investigations and reconciliations.
Here’s the bottom line
Currency movements can have a realimpact on companies’ budgets. By implementing these three simple steps,companies can mitigate foreign currency risk and streamline their internationalpayment process.
About John Min
John co-founded World First USAand serves as Managing Director and Chief Economist. John has over 20 years offinancial service industry experience in sales, research and management. Prior to joining World First, John was apartner at Payment Metrics and consulted for companies such as JP Morgan Chase,Western Union, EverBank, and AFEX. Outside the company, John teacheseconomics at Northern Virginia Community College and graduate finance coursesat New England College of Business and Finance. John began his professional career after earning an MBA in internationalbusiness from the George Washington University and a Doctorate degree inEconomics from George Mason University. Outside the company, John teaches economics at Northern Virginia Community College and graduate finance courses at New England College of Business and Finance. John began his professional career after earning an MBA in international business from the George Washington University and a Doctorate degree in Economics from George Mason University.