International Payments – One Of The Easiest Areas to Save Money As a Startup

The United States alone has an impressive number of 71,000 startups currently in various stages, which have raised about $330bn in 2021 alone. Truly, these are exciting times and it means there’s a lot of money in the financial system which is being spent by young companies led by young people whose mind is more preoccupied with creating new and exciting things than optimizing the spend. 

There are many areas  on which startups or other multinational businesses spend excessive money on, but one particularly overlooked is the cost of sending an international payment or receiving international payments. The cheapest way to make international payments can save startups and other business clients a big chunk of money; for a well-funded startup that receives its funding and U.S dollars and constantly exchanging money to local currency that can be hundreds of thousands of dollars in excessive foreign exchange fees over the years!

Yes, I didn’t not miswrite or misrepresent anything by saying that banks charge ridiculous sums of money off of international payments, and specifically – currency exchanges. This article will deal with how international payments work, how come paying a bank abroad is so expensive and which steps any startup can take to save money on international fx payments.

Making An International Business Payment – How Much Are You Paying Now?

In this highly globalized world all kinds of businesses have all kinds of reasons to send money abroad. It could be a case of paying an exporter for goods, paying an offshore contractor or even funding a global payroll. It could also be about repatriation of money from abroad, as American corporations are repatriating tens to hundreds of billions each year.

However, when a business sends a payment abroad or receives a payment from abroad, there are associated banking costs which surpass any expectations in this regard. 

It’s common knowledge to say that whenever we use our banks to handle any kind of international transaction, the banks charge a fee. This applies for both personal and business customers’ accounts and the fee is charged whether we are sending or receiving the money. The transaction fees vary pretty wildly between banks but in the US, the range is between $2.50 – $15 per transaction. 

Banks and International FX Payment

It does not end there though. Whilst the fees are kind of annoying, paying $10 is kind of small fry for a business sending say $50k. However, the much bigger concern is bank forex mark up fees.

Whenever a business relies on its bank to handle an international, cross currency transaction the bank gets to set the exchange rate. Rather than using the standard, open market exchange rate the banks usually capitalise on their hegemony and instead use a rate that favours them and lets them make a profit on the currency exchange usually of 2 – 5%.

Let’s look at how this works in practice with a quick illustration.

In this example, an American business is paying a £40k invoice to a British supplier. The current exchange rate is $1 – £0.82 which means that the business needs to send $49058.00 in order to pay the bill.

However, the American business banks are using a different exchange rate (markup) and inform the business that they need to send $50,156.69 in order to complete the transaction in addition to paying the $10 bank admin fee. Therefore the transaction is costing our business $1,108.69 more than it necessarily should. 

While some large corporations may be able to absorb these costs, start ups cannot (and in all honesty larger corporations are actually paying less because their premium banking accounts have better spreads than what’s offered to individuals and small businesses). 

Another very annoying aspect of paying these “baked into the exchange rate” fees is that you don’t get clarity on how much money will be received on the other end of the transfer. A b2b payment may arrive to its recipient abroad for less than the amount invoiced, creating hassle, overheads and even business disputes. 

Receiving Business FX Payments – How Much Are You Paying For Them With Your Bank?

Paying a bank abroad from your own bank is costly, but things are usually significantly better when it comes to receiving payments if you get them in local currency. 

This is because the currency conversion should already have been handled by the sender’s bank. Provided that you stated clearly that you expect to be paid X amount in your chosen currency, it is firmly on the sender to ensure that this is the  amount remitted. However, your bank will charge a transaction fee simply for receiving the money which they will deduct from the payment before they credit it to your account. As we have seen the fee typically ranges from $2.50 to $15 in the US which is OK for large payments, but far from ideal for small customer payments coming in day after day.

If you were to receive payment in foreign exchange and the bank would have to exchange that automatically to local currency to deposit it into your bank account expect to pay gruesome fees on that.

Cheaper Ways of Making and Receiving International Payments

The simple fact is that the banks have gotten away with this purely because they can. However, there are actually many alternatives out there in the form of dedicated international payment specialists. Companies like Moneycorp offer better-than-bank exchange rates, no fixed transfer fees on receiving international payments or sending international payments, and it’s all done through a comfortable online system or through the phone with a currency broker. 

About Multi Currency Accounts 

Any start up that regularly transacts in certain foreign currencies, may also wish to consider opening a multi currency account. Multi currency accounts allow account holders to hold balances in different currencies in addition to their native one. Therefore a US based business that deals with clients in the UK may wish to open a sub-account in British Pounds which it can then use to pay UK based suppliers, or receive payments from UK based customers. The advantage in this is that it avoids the currency conversion and forex fees and also provides a degree of certainty against fluctuations in the currency exchange rates.

Final Thoughts On Sending An International Payment

Running a startup is exciting but challenging. There is a lot to learn and a lot that can go wrong so it is essential to be prepared for the worst and to minimize unnecessary costs at every opportunity. This is why startups should pay close attention whenever they need to make an international payment send or are receiving international payments. By avoiding using their bank and instead seeking out a money transfer specialist, there is serious money to be saved. While paying a bank abroad or making an international business payment will always incur some fees, the fact is that international fx payment and sending an international payment need not cost as much as type banks would have us believe.