What to look for in your Foreign Exchange Provider

For Small and Medium-sized Enterprises (SMEs), critical expertise or support may be missing when doing international business with a provider. It’s important for SMEs to find a foreign exchange (FX) provider that fills the void.

Many Small and Medium-sized Enterprises face the same challenges as larger companies when doing international business yet get little or no support from their banks or other financial service providers. Their bottom line may be affected by exchange rate fluctuations, and profit margins may suffer. Larger banks give SMEs access to an online platform to execute foreign currency payments and receivables, but many do not provide any education or access to currency risk management tools. Many smaller banks offer a more personalized touch but lack the expertise and resources needed to truly help clients. Furthermore, many of these smaller banks must go to the bigger banks for the FX, so the client is just using the “middleman.”

SMEs should look for the following criteria in an FX provider to help give their business an edge in international markets.

What experience should the provider have?

Your FX partner should have numerous years in the FX markets, a wealth of knowledge and experience of many situations and scenarios. They can use their experience to guide you through the most complicated cross-border transactions.

What education should the provider be able to give my business?

An FX provider should be able to educate on the characteristics of the foreign exchange market, how the foreign exchange market works and why it matters, what determines exchange rate fluctuations and what tools are available to manage the FX risk.

What foreign exchange services should be provided?

Your FX provider should know your business inside and out and be proactive to your needs. Instead of waiting to hear from you, they should be reaching out to you when market conditions are favorable. It should also not be a surprise to them when you call or email; they should be ready to help you with questions or problems. You should have an individual contact, as well as team members who can assist.

What risk management tools should be provided?

All the same currency risk management tools that are available to large corporations should be available to SMEs, with the predominant product being a forward contract. Forward contracts allow you to lock in exchange rates at the current time for a future delivery date or time frame.

Should my business receive access to a currency exchange platform?

You should have access to a comprehensive platform that will help ease your FX management process. The platform should allow you to book spot and forward transactions, in addition to having a function for transaction reporting. Ideally, the platform can also upload payment files.

What’s the cost associated with foreign exchange services?

Price is one component in a successful foreign exchange program. Many providers entice companies with extremely aggressive entry exchange rates which are not sustainable, only to raise the pricing to their client over time.  It is best to have an open and honest conversation with your provider, so the relationship is mutually beneficial.

Can the provider establish a foreign exchange credit facility?

Given viable financial statements, your FX provider should be able to establish a foreign exchange credit facility that allows you to hedge your foreign exchange needs. This means that you would not have to post collateral or prepay. Additionally, you should not be subject to margin calls if the market moves against the exchange rates on outstanding contracts. You should also be able to settle spot trades on value date, and not one or two days prior, thus enhancing your cash flow.

Is there flexibility with currency exchanges?

If the timeframe of your underlying transaction should change or other unforeseen circumstances require an extension of the hedge, you should have the flexibility to roll a forward contract to a future date or close it out altogether. You should also be able to settle your FX hedge earlier than originally planned, if needed.

We encourage you to consider all the criteria above in your choice of a foreign exchange provider. Learn more about what our Foreign Exchange team can do for you.

For more information, contact Angie Kappel today!