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The Most Expensive Mistake You Don’t Know You’re Making

By David Nicholls

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Many companies have no idea that paying employees around the globe in local currencies can become a costly problem. It’s one of the most common, yet least discussed, pitfalls businesses face. While the world of money transfers can be complicated, the stinging shock of currency risk is an avoidable surprise. It requires being supplied with the right information.

Let’s take, for instance, a financial technical services provider I’ve been working with for several years. When the company began as a start-up in the founder’s California living room, bookkeeping was just one of dozens of responsibilities he had to manage on any given day. And, like many startups, processing payments and handling other payroll requirements became a growing responsibility.

As the company enjoyed a successful launch and opened a new office in Paris, it needed to adopt more sophisticated payment and scheduling systems to keep pace with its international growth. This meant it now had to pay its contractors and other global employees, adding yet another responsibility. The founder’s to-do list was nearly never-ending.

 

A Champagne Problem

Because of the rapid expansion, excitement and joy overshadowed any fuss about fees. The company was growing—and growing fast—and had established a global footprint. If anything, this was a champagne problem.

Fast forward to today. The company now has eight offices around the world and more than 400 employees, touching currencies in the United States, Eurozone, Scandinavia, Poland, China, Indonesia, and the Philippines. It has achieved the type of success that all startups dream of, but that champagne problem turned into a hangover. The company had been paying thousands of dollars in exchange rates and bank transfer fees in order to pay employees in their local currency. It was an avoidable expense.

Despite the development of a sophisticated accounting system, the company’s wire transfer technology was lagging behind. Given the high volume of bi-weekly international payments being made, the company incurred thousands of dollars in transfer fees.

Similar to any company using a bank for this service, the fees were high, and the company paid a hidden cost in the exchange rate, often 3%. The company was essentially being hit with a double fee without knowing it, and as its business continued to grow around the world, the fees continued to build.

To compound the problem, each payment had to be processed individually, with hundreds of hours and added expenses for the payroll department.

Eventually, the company began exploring ways to reduce these costs and make its international payments more efficient. It was a lesson it had to learn the hard way. In our experience, the situation is far from unique.

Even established companies wrestle with handling international payments. The irony is that the larger the company, the more painful and expensive this process can be.

According to a 2013 Ernst & Young study, even established companies wrestle with handling international payments. In its survey of 160 multinationals, 46% of the organizations polled considered payroll process to be the first or second most pressing area in need of improvement.

 

Five Things to Consider When Taking a Payroll Global

 

Know Your Exposure
You must first understand and quantify your exposure. This costs nothing. Gaining a better understanding of the market is an important first step in mitigating your risk. Some questions to ask include: 

  • How much of your payroll are you transferring overseas? 
  • Do you make those payments at specific times, or is there more flexibility that could allow for new rates? 

The right currency exchange provider will help you ask the right questions to fully assess your currency exposure and better understand what the next steps are.

Be Clear on Fees
Many providers are unclear about the fee structure. They will frequently acknowledge a transfer fee, but there are often additional fees hidden within other costs. Be sure to go with a provider who can account for each cent.

Additionally, question whether the current fee structure makes sense for your company. When the financial technology company in this example first started transferring payments abroad, it had fewer than 10 monthly international payments to execute, so individual payment fees were manageable. Once the company grew, those minor fees added up and it forced the company to rethink its payments schedule. Companies that transfer money abroad should speak with their foreign exchange service provider, their bank, or an international transfer firm provider about its growth trajectory, not just today’s payments.

Question the Exchange Rate
Banks may charge up to, and sometimes over, 3% on the exchange rate. In other words, the bank is eating into your bottom line in more ways than just the wire fee it charges. You need to fight for the best rate.

Currency exchange specialists operate differently than traditional banks and wire services. Their incentive is to provide a much faster and cheaper international transfer service than the banks. Specialists often use proprietary technology that increases savings over the traditional banks, and whereas banks often focus on multiple products and services, from mortgages to checking accounts to wealth management needs, currency exchange specialists focus solely on transferring money abroad. Instead of you fighting with your bank to get the best rate, currency transfer specialists will do that work for you so you can use your time focusing on your business.

Track the Speed
The time it takes to receive payments can vary significantly depending on when and where you send the funds. Most companies should expect same-day or following-day payments as standard. However, delivery times can increase if you are paying to specific markets, such as China or India. Your provider should be able to track payments and ensure that they reach the destination in a timely fashion.

Implement a Hedging Strategy 
Compensation planning is difficult enough for multinationals as they struggle to plan for notoriously unpredictable global markets, and fluctuations in exchange rates can make this even worse. The EUR-USD rate in the summer of 2015 was 30% lower than in the previous June. While this is more costly for European companies paying staff in the United States—suffering a 30% increase in payroll cost—U.S. companies have realized a considerable savings.

A specialist could help a U.S. business lock in these savings for up to a year with a forward exchange contract (FEC). An FEC enables a business to secure today’s rate and use that rate, up to the quantum value of the contract, for up to a year. This not only helps you budget but can also protect your business if the rate gets worse.

FECs also allow you to stabilize at least one aspect of this complicated process when using major currencies. To use an FEC, a company purchases a fixed amount of currency at today’s exchange rate, but takes delivery of that currency at a later date. Therefore, if the rate gets worse over the duration of the contract, neither the company nor the individual is affected.

A hedging strategy can seem complicated, but it doesn’t have to be complex for the one making the payments. Talk to your currency provider about how it can help implement a strategy and lock in the best rates.

Global expansion and business growth can make any field exciting. But after dealing with regulations, language barriers, fluctuating markets, and so much more, there are simply other areas in which to allow for risk. Currency transfer doesn’t need to be one of them.