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| No.6 December, 2011 |
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Western Union joins HKABA as National Sponsor |
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The dollar is not your only option
By: Tony Crivelli, Vice President, Asia Pacific, Western Union Business Solutions |
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Did you know that it often makes sense to pay international suppliers in their own local currency as opposed to Australian dollars? Despite notions of struggling with foreign bank accounts and the whims of currency markets, local currency payments are easy and can encourage better product pricing. Leading international payment providers offer sophisticated electronic solutions that make international local currency payments as simple as dollar payments.
The Australian dollar is a foreign currency to international suppliers
When an importer pays a European supplier in dollars, for example, it's highly unlikely that supplier holds a dollar account. In most cases, the beneficiary will hold a local currency account (EUR) and the dollars will be converted into the local currency before reaching the recipient's account. This poses certain risks or costs to foreign suppliers, and they will price this into their product.
By offering to pay in local currencies instead, importers will relieve the supplier of the risks associated with receiving dollars, and should be able to negotiate a better product price as a result. A discount of two to ten percent could be expected given the benefits of a supplier receiving payment in local currency.
What costs might a foreign supplier face on receiving a dollar payment? Dollars will be converted into the local currency at a rate prescribed by the foreign bank, and the beneficiary will have little influence over this rate. The beneficiary account holder is a captive market for the foreign bank which is likely to leverage the fact that the beneficiary has no opportunity to shop the exchange rate.
Currency exchange premiums up to ten percent over interbank spot rates are not uncommon in some parts of the world, not to mention transaction fees for processing a foreign currency (i.e. dollars). The costs and delays to a foreign recipient of dollars can be substantial, which presents an opportunity for the importer to negotiate better pricing by alleviating these costs. Less money in the hands of the foreign bank means more money to be shared between the supplier and the importer.
A risky business for suppliers
Suppliers also assume considerable foreign exchange risk by invoicing and receiving in Australian dollars. In developed countries, exporters can hedge their dollar receivables in the forward foreign exchange market. But, in developing markets like Mexico and South Africa the forward currency markets aren't established enough for companies to hedge their dollar receivables. Their only option is to increase prices, which are then absorbed by importers. Here is another opportunity for importers to eliminate foreign exchange risk to the supplier and positively influence product prices.
The local side of international payments
So far so good for the supplier, right? But isn't the importer now stuck with managing the foreign exchange costs and risks? The short answer is yes, but it is important to realise that the initiator of a foreign currency payment has a lot more flexibility around associated costs and risks than the recipient. For one, the payor is able to shop their foreign payment business to various providers and negotiate competitive exchange rates and transaction fees.
With advances in technology, paying a supplier in MXN, ZAR or EUR is just as easy as dollar payments. Independent payment solution specialists offer sophisticated electronic multiple payment platforms that make it easy to upload instructions to accounts systems for various currencies and payment methods (wire, cheque, draft etc). The payor quotes the cost of processing in dollars based on pre-negotiated exchange margins and transaction fees, then approves the payments and settles in dollars with the solutions provider. Foreign currency payments made simple and easy.
International payment providers also maintain extensive correspondent bank relationships that enable them to process foreign payments quickly and accurately. They minimise reliance on intermediary banks by operating local currency accounts in-country, and also provide expertise on what information should accompany foreign currency payments. Whether it's identifying the need for an IFS code for a payment to India or an RUT number for a payment to Chile, payments specialists can speed up processing to minimise costly delays and problem payments.
Take charge of foreign exchange
When effectively managed, processing international payments in local currencies can lead to cost savings. As discussed above, paying international suppliers in their local currency does not have to be an onerous undertaking, and doing so puts the importer in a position of price negotiation strength. You will save the supplier from considerable exchange rate risk and cost, and should negotiate accordingly.
At the very least, when contracting with a foreign supplier have your invoice quoted in both dollars and the local currency, and then check with a payments provider whether it's more cost effective to pay in the local currency. As the saying goes, it doesn't hurt to ask.
Tony Crivelli is Vice President of Asia Pacific for Western Union Business Solutions. With 15 years industry experience he has an acute understanding of the foreign exchange needs of SMEs in the region.
Western Union Business Solutions is a global corporate foreign exchange provider owned by Western Union, a Fortune 500 company. Find out more at www.business.westernunion.com.au |
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