Enhancing liquidity for international businesses with modern FX services

Exploring modern FX solutions to manage currency risk, streamline payments, and improve cash flow in global operations.

–

Foreign exchange or FX services are an essential component of modern business operations, facilitating cross-border transactions and international trade, enabling companies to invest and expand globally.

Liquidity, which refers to the availability of funds, plays a vital role in ensuring smooth operations for businesses that trade internationally. Cash flow management is also crucial, as is minimising currency risk exposure.

This post aims to explore business FX services that can help to enhance liquidity and optimise operations. By understanding the challenges associated with legacy FX services and exploring alternatives, businesses can optimise their FX transactions for improved financial and operational performance.

Challenges of traditional FX transfers

Traditional FX services typically involve established processes and legacy institutions for currency exchange and cross-border payments. Some common traditional FX methods are bank transfers (i.e. sending money through the SWIFT network), foreign currency accounts, currency exchanges, foreign exchange brokers, spot transactions or forward contracts.

These traditional FX transfer methods can present challenges that may impact a business’s operations, including the following:

• High costs: Traditional methods can be expensive, with fees and markups eating into your profits.
• Slow processing times: Settlement times can be lengthy, impacting cash flow and potentially delaying payments.
• Manual burden: Traditional methods often require manual intervention, which can be time-consuming and error-prone.
• Currency risk exposure: Businesses that trade internationally are exposed to currency risk, which can impact their profitability.

Fortunately, the digital age and innovations in the financial sector have led to the development of FX services that empower businesses to overcome the challenges associated with legacy providers.

The rise of innovative FX services

Innovative or modern FX methods differ from traditional methods in several key ways, focusing on efficiency, transparency, and enhanced user experience. These new-wave FX services include automated solutions, multi-currency accounts, transparent pricing, local payment solutions leveraging local payment rails, risk management tools and API integrations for FX.

Key benefits of these services include:

• Ability to hold funds in multiple currencies: Holding funds in multiple currencies allows you to easily convert between them, ensure liquidity and manage cash flow.
• Minimise currency risk exposure: By using hedging strategies and other risk management tools, you can protect your business from adverse currency fluctuations.
• Leverage instant or automated FX payments: Innovative FX services often include instant or automated payment options, allowing you to execute transactions quickly and efficiently. This can improve cash flow and reduce manual errors.

Understanding FX fees

When it comes to foreign exchange (FX) transfers, fees can vary significantly between providers. Understanding the different types of fees and how they are charged is crucial for making informed decisions and avoiding hidden costs.

Understanding the bid-ask spread

Most legacy FX providers charge a spread between the bid and ask rates. This is the difference between the price at which the provider is willing to buy a currency from a supplier (bid price) and the price at which they are willing to sell it to their customer (ask price). A wider spread generally translates to a higher cost to the customer.

Example

If an FX provider were to quote the following rates:

• Bid Price = 0.91 EUR/USD
• Ask Price = 0.93 EUR/USD

This means they will buy 1 USD for 0.91 EUR (the bid price) and sell 1 USD for 0.93 EUR (the ask price).

So, if you wanted to sell 100,000 USD, you would receive 91,000 EUR (100,000 * 0.91). However, if you wanted to buy 100,000 USD, it would cost you 93,000 EUR (100,000 * 0.93).

The advantage of live rates

Live rates are also known as the interbank rate or real-time exchange rate. As the term suggests, this simply refers to the actual market rate at a given time.

Fixed rates have traditionally been considered the norm, especially among legacy FX providers like traditional banks. However, live or real-time exchange rates are becoming increasingly popular among providers that wish to offer their customers transparent, more competitive pricing.

Bank exchange rates often have a wide spread to hedge against rate fluctuations and ensure profitability. At Fire, we use live, real-time exchange rates, which means we don’t need to hedge, allowing us to significantly reduce the spread and offer more favourable prices to our customers. This allows us to offer a clearer and more transparent rate to our customers, showing the actual cost of the transaction.

The use of live rates also enables Fire customers to avail of competitive rates and take advantage of fluctuations in the FX market. While it’s important to understand the risks associated with market volatility, the other side of the coin is that you can use this to your advantage and identify opportunities to purchase currency at lower rates.

For example, if you plan to buy a large quantity of GBP for EUR in the near future and a sudden geopolitical event causes the euro to strengthen against sterling, you may want to lock in the current rate to avoid potential future losses. This is known as hedging, which we’ll explore further later.

Additional fees

It is important to consider that FX providers may also impose additional fees, such as:

• Transfer fees: These fees are typically charged based on the amount of money being transferred.
• Maintenance fees: Some providers may charge a monthly or annual fee to maintain your account.
• Minimum transaction amounts: Fees below a certain threshold may incur additional fees, or be charged at a flat rate.

It is helpful to understand these fees and find an FX provider that is transparent with their fee structure and the amount you will pay for a transaction. This is essential to choose the right provider for your needs and ensure you are paying a fair price for your FX conversions and cross-border transfers.

The importance of transparency

Understanding the nuances of FX pricing can help businesses to make decisions that enhance their operational efficiency.

As we’ve described above, FX providers employ fees or markups on exchange rates to ensure they generate revenue. While this is common practice, a lack of transparency can make it difficult to understand the true cost of transfers when comparing FX providers.

Seeking out a provider that values transparency and offers clear pricing structures will help you to make informed decisions and optimise cost efficiency.

Choosing a transparent FX provider

When selecting an FX provider, it’s essential to prioritise transparency to avoid hidden fees. Here are some key factors to consider:

• Live rates: Opt for providers that use live rates to ensure you always get the best possible exchange rate.
• Transparent pricing structures: Look for providers that clearly disclose their fees and charges, with no hidden markups or additional costs. You should be able to easily understand what fee will be charged and how it is calculated when making the transfer.
• Hidden costs: Be aware of potential hidden fees and don’t hesitate to ask about any additional charges that may apply.

By understanding the different types of FX fees and choosing a provider with transparent pricing, you can save money and ensure that your international transactions are cost-effective.

Minimising currency risk

Businesses that trade internationally can be victims of fluctuating exchange rates, which can impact profitability. In the wake of Brexit, a global pandemic, and ever-increasing political unrest across the globe, this problem is only exacerbated. However, there are new and innovative FX services that can help to mitigate currency risk.

Leveraging local payment rails

One effective strategy for mitigating currency risk is to leverage local payment rails. By choosing an FX provider that allows you to make international payments to a domestic account (rather than using SWIFT), you can avoid the currency risk associated with exchange rate fluctuations. This method is also typically as fast, if not faster, than SWIFT payments.

Choosing FX services with instant transfers

Another valuable tool for managing currency risk is to choose FX services that offer instant transfers between currencies. This allows businesses to take advantage of favourable exchange rates and manage their cash flows more efficiently. By executing transactions in real time, businesses can reduce their exposure to currency risk and improve their overall financial performance.

By seeking out these FX services and features, businesses can effectively manage currency risk and improve their international operations.

The need for speed

In today’s fast-paced business environment, speed and agility are paramount for foreign exchange (FX) transfers. Traditional bank-based payments at legacy institutions can be time-consuming, often requiring manual input and physical branch visits, with settlement times spanning several days. This inefficiency can hinder cash flow and create operational challenges.

The power of instant conversions

Instant FX conversions can provide the liquidity and efficiency large businesses need to operate effectively.

By partnering with an innovative provider like Fire, businesses can significantly enhance the speed and efficiency of their international transactions. This not only improves cash flow but also allows for greater agility and responsiveness in today’s competitive marketplace.

• Make payments quickly and easily. Enjoy a seamless online experience or automate payments through API capabilities, eliminating the need for manual processes.
• Optimise your cash flow. Reduce the risk of missed payments and improve cash flow by eliminating settlement delays.
• Enhance your liquidity. Instant FX conversions allow you to execute transactions in real time, ensuring that your funds are available immediately.

Improving liquidity with dual accounts and hedging

An effective way to enhance liquidity in FX transfers is to use dual currency accounts and hedging strategies. Hedging refers to the practice of buying currency in anticipation of a future need to protect against losses incurred from fluctuating exchange rates.

Holding funds in more than one currency enables you to make and receive payments in the desired currency without minimal exposure to currency risk. This can significantly improve cash flow management and reduce transaction costs.

Other considerations

Businesses that trade internationally need more than great FX services to succeed in streamlining operations and reducing overheads. Choosing a provider that offers multiple services is a cornerstone of operational efficiency.

Fire provides several payment services in addition to our FX services, all accessible through the same account and API integration.

Whether you need to manage expenses both domestically and internationally with flexible debit cards, automate disbursements using multiple subaccounts for fund segregation, or receive payments through open banking, having a single provider streamlines the process and offers more convenience.

Modern alternatives

By recognising the limitations of legacy FX services and adopting modern alternatives, businesses can boost liquidity, lower costs, and strengthen their overall financial performance. Implementing the strategies outlined in this article will help you optimise FX transactions and maintain a competitive edge in the global market. In summary, we suggest to:

• Utilise instant conversions,
• Automate international payments,
• Choose FX services that use local payment rails for cross-border transactions,
• Opt for FX providers with transparent pricing,
• Manage liquidity and hedge hedge against currency fluctuations with dual currency accounts.

Contact our team to find the right solutions to meet your specific needs.

Learn more about Fire’s FX and international transfers and start your payments journey today.