What Online Retailers Need To Know About Foreign Exchange?
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Although online retailers are obsessed with optimization of their margins, they almost never consider the little expenses that pile up. Foreign exchange costs make up a substantial portion of banking expenses and have a definite impact on the bottom line returns. For instance, when receiving money from an online marketplace like Amazon, to receive the funds in domestic currency, you will use Amazon’s embedded currency exchange rates by default. These rates are worse by approximately 4% than the real mid-market rates.
What do this 4 % stand for? Let’s use a practical example. If the Pound to Euro rate is approximately 1.16, the rate you will receive from Amazon is around 1.11. You will lose 5 euro cents for each pound you earned. That may not sound like a lot but in fact, a medium-sized online retailer who makes $10,0000 in international marketplaces each month, will pay around $4,800 for such fees.
How can you avoid this unfortunate situation? There are companies which offer merchant collection bank accounts abroad. These companies have specific programs geared specifically at online retailers on sell on the biggest marketplaces (not limited only to Amazon). The better-known companies in this field like OFX are in fact official Amazon partners. What these companies basically do for online sellers is enabling them to accept money in multiple currencies, and then exchanging them back to their bank account in whichever currency they would like. These firms charge much lower fees than Amazon or banks, 0.5%-2% depending on currency pairs and volumes.
How do these companies operate? Do they only handle Ecommerce clients?
Although these companies have expanded into the domain of e-commerce in recent years, they have been long in business beforehand. Some of the earliest companies like OFX have started exchanging currencies and moving it abroad some 20 years ago. At first, this entire industry was geared at particular small business. Importers, exporters, and overseas real estate funds. They needed to move significant volumes abroad and needed an expert to do that for them.
These companies offered the expertise of a professional who can help small businesses strategize their foreign exchange flow and reduce their fees. As banks were not making their best of efforts to retain this small business (and still don’t), more and more small businesses moved to work with currency transfer companies. It did not take long before they started approaching private clients, and property buyers/sellers abroad in particular, with a similar offering. High-quality service, guidance on the topic, and better rates than banks.
OFX is now a publicly traded company on the Australia Stock Exchange with an annual trading volume of more than AUD 20bn. That means that it is trusted by hundreds of thousands of individuals and businesses across the globe.
Remember to protect against currency hazards
As a final piece of advice, it is also recommended that online sellers with significant cash flow from overseas clients would prepare to currency fluctuations. The question is not whether these variations will ever happen, it’s happening right, right now. The Brexit made a massive downswing for the British Pound, and Trump is bound to either make or break the dollar. In fact, the most relevant markets for online sellers are at risk as China, and the U.S have both made threats to go to a full out currency war.
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