Bank FX rates are often disguised in the total costs when it comes to hedging and currency transfers.
Many smaller companies have discovered that “going global” is a great way to grow their business. Having access to foreign markets can greatly increase sales of products and services, but globalization comes with a price. Trade with other countries means using more than one currency; however, exchanging dollars for euros, yen, or pesos isn’t as simple as it sounds. FX exchange rates are constantly changing, and there can be an array of costs involved in foreign currency exchange when doing business internationally.
For most companies, the first thought is to use an existing banking relationship to provide the necessary FX services. Most large banks are equipped with the tools to manage hedging, and they are already providing these services to their biggest customers. So why should a smaller company consider non-bank options for their FX needs?
- Hedging with a bank is expensive. Large banks tailor their services to meet the needs of big corporations with budgets that can easily absorb the normal bank FX rate fees that are charged. Those bank FX rate fees can be prohibitively high for a smaller company.
- Large banks often set minimum transaction sizes for hedging. Small companies might not meet these minimums, making it challenging to access bank services. Additionally, an increasingly large amount of world trade that flows through the United States now resides in the medium-size business market, not large enterprises. Innovations in technology, logistics, e-commerce, and telecommunications mean that even the smallest companies now engage in foreign currency transactions much earlier in their life-cycle and at greater volumes.
- Small companies have unique needs. “One size fits all” strategies don’t work when it comes to hedging, and banks can’t (or won’t) develop custom programs for a smaller business. Regional banks' client base are slowly eroding due to their lack of services and capabilities. They need technology partners to help them scale their capabilities so they can focus on what they do best: service.
Because banks don’t have the technology or technological partners to help them scale their capabilities and services, the actual cost of FX management for small or medium-sized businesses turns out to be much higher than they anticipate. Some of the “hidden” bank FX rate costs are:
- Wide bid/ask spreads. Banks see currency transactions as a way to generate revenue. By quoting their hedging clients a wider spread on FX transactions, banks are increasing their profits at the expense of the customers. The wider spread means it costs a bit more to enter and more to exit each transaction.
- Bank Wire Fees for Currency Exchange. Banks will normally charge a fee each time money is transferred. Multiply this over hundreds—or thousands of transactions—and expenditures spent just on transferring funds globally add up.
- Hedging During Illiquid Market Hours. Currencies can have less liquidity during low volume periods in the global trading day. Transactions made during suboptimal times can result in “slippage,” which means the client gets less favorable pricing.
- Over-hedging: Small businesses may inadvertently over-hedge their FX risk by relying on large banks, as these institutions tend to recommend standard and non-customized hedging strategies that might not align with the actual exposure of the company.
If small to medium sized businesses rely on the services of banks they have no way around bank FX rate costs and fees. That’s why it makes sense to utilize an entity that specifically serves small businesses. Pangea is the first company that is dedicated to giving smaller companies access to an array of cost effective, completely transparent hedging and currency transfer services.
The Pangea Advantage
Pangea was created specifically to give smaller companies the appropriate tools to hedge at the scale they need. With the advent of their flagship product, Pangea Prime™, there is now an intuitive, simple, and customizable platform that is designed to fit the needs of clients that big banks have left behind. With Pangea Prime™ your company can:
- Get a competitive quote for any hedging need (narrow spread).
- Know in advance the precise cost of hedging and currency transfers, realizing savings of up to 80% on fees.
- Be assured that your hedges will be executed during the most liquid time of day for the specific currency.
- Have at your fingertips an Ai-powered platform that allows you to plan and execute hedges in over 100 currencies. Pangea Prime™ will monitor your hedges 24/7 and immediately notify you if any changes need to be made.
Schedule a demo today and see how Pangea can help you save on your FX for business transactions where banks can’t.
Pangea Prime: Predictable, simplified FX management.
