The evolution of foreign exchange companies

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When managing international transactions it used to be the case that most companies had one bank managing all their money transfers. Some employed multiple banks to work on their behalf, but the majority still relied on just the one. In the last decade or so, a new group of foreign exchange payment institutions has arrived to provide a valuable alternative to the banks.

While the largest FTSE100 companies were generally already receiving good rates, service and advice, small and mid-sized companies were not afforded the same time and attention. When it came to foreign exchange transfers, it was the norm for a bank to only offer executional support to everyone outside the top echelons of business, and not much else. Whilst big business was taking a strategic approach to currency planning, most SME’s were just using simple spot contracts.

Furthermore, larger companies with multiple banks usually found their rates improving due to the competition factor, but not all companies merited or wanted more than one bank. This is where brokers have stepped in, to offer price competition and the kind of customer care that was previously reserved for a select few by the banks. It is a growth industry – it is estimated that these companies have grown from making up about 1% of the corporate market in 2000 to around 20% in 2011.

As their market share grew, some brokers began thinking of themselves as ‘foreign exchange companies’ rather than brokerages.

Many also realised that the payment element of the transaction was as important to businesses as the actual rate itself. As a result, some of these foreign exchange companies have developed sophisticated and efficient systems, enabling them to offer payment services to the high volume corporate.

Most banks and some foreign exchange companies have developed the ability to upload files, which often accept the standard file format from treasury or accounting systems. However, automation and straight-through-processing is the real ‘Holy Grail’ for treasurers, particularly those with subsidiaries or high volumes of payments.

You should also be able to get a better rate by dealing with a foreign currency specialist than going to a bank. The exact rate you receive relative to the interbank rate will depend on the amount you’re transacting, the frequency of your transactions and whether you are booking an immediate transfer or forward contract. However, unless your transactions are small (under £1,000) you should normally expect to be no more than 1% from the interbank rate.
There are many foreign exchange companies out there to choose from, but for additional peace of mind it helps to use a broker that is authorised by the Financial Services Authority (FSA). A major stipulation of this regulation is to safeguard client funds by segregating client money.

So there are ways of managing your risk and planning ahead efficiently and with confidence, making sure that your bottom line doesn’t fall victim to the perils of the currency markets. It is important that you are aware of the options that are out there, and that you go to a company which is properly authorised and big enough to ensure your financial security too.

No longer do SMEs have to suffer second class service and inferior exchange rates at the hands of their FX provider. ‘Foreign exchange companies’ have evolved to meet the demands of more and more businesses in an ever more global economic landscape.

Due to import and exporting cost variables an increasing number of companies have found that they have become overexposed to the erratic nature of the currency markets. Foreign exchange specialists have been able to offer a range of flexible and efficient solutions to these challenges.

Automated Payment Interface apps will streamline the procedure further still, saving costs and improving the process of making international payments significantly for businesses of all shapes and sizes in the years ahead.

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The evolution of foreign exchange companies

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