International money transfers for UK business: the how-to
Photo by Eric Prouzet on Unsplash
It’s done – the United Kingdom is no longer part of the EU. In spite of this, however, our nation is no less interdependent on the EU than it was a month ago.
Businesses continue to sell goods, run factories/branch offices, and hire employees in Europe. As a result, approximately 2 billion GBP changes hands between the European Union and us every day.
Brexit issues aside, foreign exchange is among the biggest problems small and medium-sized enterprises (SMEs) face. Lacking the leverage of major corporations, they often settle for terrible rates.
It doesn’t have to be this way. In London alone, there are hundreds of FX brokerages. Virtually all provide a better deal on international money transfers in the UK than the banks.
Don’t have much experience with FX transactions? In today’s blog, we’ll show you how you can save money on international money transfer.
Your firm is at a disadvantage to big corporations
Life is easier when you have billions of GBP at your command. Put yourself in the shoes of an FX provider in the City of London. You make money by charging fees and margins on the real, or interbank exchange rate.
Let’s say Tesco, who made nearly 64 billion GBP in 2019, comes knocking on your door. They want to move millions of GBP through your firm every day. However, before they say yes, they have a favour to ask. Before signing on the dotted line, they want you to lower your margin to 0.3% from 0.5% off interbank.
0.5% is already a razor-thin margin – why would any self-respecting FX firm cut it further? Because, when a big corporation moves millions of GBP daily through you, you stand to earn tens of thousands of GBP from them.
Let’s say Tesco wants to move 15,000,000 GBP through your firm daily. In return, you waive fees and give them a rate of 0.3% off interbank. For this example, we’ll assume the GBP/EUR interbank rate is 1.1500. That means you’re offering a GBP/EUR rate of 1.1465.
When Tesco moves 15,000,000 GBP to the EU daily, they get 17,197,500 EUR on the other end. Had they been able to move it at the interbank rate, they would have 17,250,000 EUR. That means your firm makes over 50,000 EUR, or 42,000 GBP every day.
With that kind of money on the line, they’ll accommodate all sorts of special requests. Whilst these companies can be a pain to deal with, the profits make enduring them worthwhile.
SMEs struggle to get the best rate from money transfer providers
Meanwhile, smaller operations (like yours) don’t get anything close to that treatment. When you’re moving hundreds or thousands of GBP daily versus millions, FX firms make peanuts.
Because of this, they charge you higher fees and broader margins. Banks are shameless about this. In 2020, they know that only unsavvy consumers and businesses will use them. So, their costs are ridiculously high (Lloyd’s charges as much as 28 GBP per wire), and their margins are extremely wide. For some currency pairings, they take cuts as wide as 5% off the interbank rate!
Rates offered by non-bank FX brokerages are much better than that. Nonetheless, their prices for smaller transfers are substantially less favourable than those offered to large corporations. It’s true that rates of 1%-2% off interbank are a drastic improvement over those charged by the banks. However, they are still a far cry from the 0.15% margins that World First offers big customers.
Why are fees/margins for SMEs higher/wider than those extended to big corporations? As we’ve already discussed, top-tier customers can deliver huge revenue at minuscule rates. To buy the loyalty of these customers, FX firms will slash their margins to the bone.
Of course, most customers of FX firms move hundreds or thousands of GBP per day, not millions. These customers, as a block, do make up a considerable portion of an FX firm’s clientele. At the same time, losing a customer here and there won’t hurt their bottom line much. What’s 1% of 2,000 GBP per month? Exactly.
So, there’s little harm in charging SMEs a higher rate, especially when your competition is doing the same thing. This is how FX firms make the rest of their money. By making this move, they can pay their staff, expand their business, and increase profits/dividends for shareholders.
Competition in the UK’s money transfer industry is intense
Even so, your small operation can do better than 1% off interbank. As we mentioned at the start, hundreds of FX houses operate in London. In such an environment, foreign exchange becomes a commodity.
Many businesses start their FX search online by googling something like “international money transfer UK.” However, they then make the mistake of clicking on a paid ad. The wealthiest firms (i.e., the ones that get away with charging the highest rates) run those listings.
Instead, we advise sticking to review sites like MoneyTransferComparison.com. This particular website ranks most major money transfer providers in the UK. In addition to disclosing rates, they score them based on their credibility, client feedback, global reach, and the services they provide.
If you’re strictly looking to save money, you will find that World First would be a good fit. They offer margins of 0.5% on annual transfers below 5 million GBP. If you were paying 1% before, then you’ll cut your FX losses in half!
However, as you read through the reviews, you may find it’s worth paying a bit more for functionality. Some providers offer more currencies, offices in more countries abroad, and hedging products like forward contracts.
By doing your homework, you can find the money transfer provider that best fits your business.
Every pound counts when you’re a startup
For British SMEs, access to the European market (and others abroad) is essential for growth. As your business scales up, there may be times when you experience cash flow issues. When this happens, every Pound you have in reserve matters.
In short, getting the best possible rate on international money transfers could make the difference between success and failure. Choose your FX firm wisely.
