Foreign Exchange | Articles
The big revenue drain
It’s time to start using foreign currencies
The vast majority of Americans, both consumers and businesses, elect to pay international invoices and transfer funds in U.S. dollars. It’s estimated that four times out of five, we pay in U.S. currency.
No big deal, right? The U.S. dollar is the most dominant in the world, so surely it makes sense that we don’t bother with other currencies. But this habit of paying in American dollars results in an erosion of revenue for U.S. banks, ultimately benefiting foreign banks. And it costs American businesses and consumers far more than they realize.
Community banks and credit unions lose revenue
Here’s a little-known fact about international payments: the bank that converts the currency frequently makes the most revenue on the transaction.
Since most small to mid-sized companies make foreign payments in U.S. dollars, the currency conversion often happens on the receiving end. This means that foreign banks make far more on these transactions than U.S. banks. It also means that American businesses assume the inherent foreign exchange risk – since the foreign bank decides what exchange rate to charge.
Financial institutions and businesses have a lot to gain when they start paying international invoices and conducting fund transfers in foreign currencies. But what will it take to change our default behavior?
An outdated assumption among banks
There’s an outdated assumption among small and mid-sized banks and credit unions that there’s not much revenue to be had in foreign exchange. This may have been true decades ago, but it doesn’t reflect current reality where importers and exporters come in all shapes and sizes – and many do their banking at smaller institutions.
Currently when businesses make international payments at community banks, bankers typically send those funds in U.S. dollars without a second thought. In doing so, they essentially extend a gift of foreign exchange revenue to their overseas counterparts.
The lost revenue is more than they know. If a bank or credit union conducts 50 international transactions a month in U.S. dollars, this may amount to $10,000 in monthly lost revenue. Extrapolate that across 10,000 community financial institutions in the U.S., and we see a profound revenue drain – as much as $100,000,000 a month – on our national banking sector.
Why do we do this to ourselves?
The preference to pay in our own currency is unique to us. It stems from the fact that the U.S. dollar is the most widely accepted currency in the world – we’re not used to needing to convert. As a result, foreign currencies are less on our radar. We tend not to think about them.
In the meantime, the rest of the world is onto something we’re not: when you make international payments in foreign currencies, you eliminate all foreign exchange risk. Businesses in other countries understand this. They tend to pay foreign invoices in foreign currencies, knowing this minimizes their risk and transaction fees.
Cost-control for businesses
Most business owners know a little something about conversion rates. They’ve sent a payment in U.S. dollars to another country only to discover that the exchange rate applied by the overseas bank is less favorable than anticipated – so they owe more money. This is what happens when you lose control of the exchange rate. You pay an unnecessary premium.
There is a better way. If businesses convert up front and pay in the recipient’s local currency, they take all the guess work out of the conversion rate. They know the rate up front and account for it in your payment.
If an invoice is for 5,000 euros, they send exactly 5,000 euros. If the exchange rate changes before payment arrives to the recipient, it doesn’t matter. This is the magic of managing foreign exchange risk.
More direct payment routes
There’s another benefit to currency conversion. Foreign currencies travel a more direct route than U.S. dollars sent abroad.
Foreign currency payments are transmitted directly to local clearing houses – a quick, easy journey from an American bank. Payments made in U.S. dollars hop, skip and jump through a series of intermediary banks using an international, correspondent banking system connected via the SWIFT network. More banks are involved and as a result more fees are charged.
Making a behavior shift
With so many benefits to financial institutions and businesses, it makes sense to shift our cultural norm and start using foreign currencies for international payments. But shifting human behavior is always a journey.
Community banks and credit unions are the logical starting point. If financial institutions recognize the revenue potential of foreign exchange, they will quickly realize the importance of allowing clients to make international payments online and educating clients about managing foreign exchange risk.
About Western Union Business Solutions
Western Union Business Solutions is a global leader in foreign exchange services and international payment enablement for credit unions and community banks. Our financial strength, technology and experience help facilitate new revenue opportunities for over 1,800 financial institutions globally. With hassle-free implementation, we offer a world-class, 24/7 digital platform where customers can send and receive foreign funds with only a few clicks. Each institution is offered a customized solution and dedicated support, with access to payments in over 130 currencies in more than 200 countries/territories. This simple, white-labeled addition can add not only a new revenue stream to any institution but also a way to help increase customer satisfaction and attract new business.