The effect of Brexit on international payments and transfers - managing currency risk
As the shock of last June’s vote to leave the European Union slowly wears off, the reality of a post-Brexit Britain is starting to emerge. The pound dropped to its lowest value in 31 years directly after the referendum and is currently hovering around £1.22 to the dollar. Once Article 50 is triggered sometime in March, official divorce proceedings will begin. Like any divorce, ending the relationship between Britain and the EU is guaranteed to be an emotional and drawn out negotiation. During this time, the one currency everyone will be trading in is uncertainty.
While 52% of Britons voted to leave the EU, that does not mean that Britain has closed its doors to the rest of the world. SMEs - a major driver of the UK economy - will continue to import and export despite currency fluctuations. In fact, the low pound may prove to be very lucrative for the export industry and could very well open up new markets and opportunities for UK businesses. And unless Brexit has a dramatic effect on the weather, retirees and holiday makers will continue to search for sunnier shores or off-shore investment properties. In short, despite the tumult Brexit may bring, the need for international payments will not disappear. The question is, when you’re swimming in unchartered waters do you pack a life preserver – or build a raft?
How to manage currency risk in an age of uncertainty
Transparent exchange rates
Currencies are influenced by a number of different factors. Knowing exactly how much the exchange rate will be, including the transfer fees you will need to pay, allows you to budget accordingly and avoid any unexpected costs.
In the currency market, there are buy or sell rates (weighted towards one or the other) and the mid-market rate. The mid-market or ‘interbank’ rate for each currency is the point where supply of a currency equals demand. Banks and foreign exchange providers often add hidden fees and large profit margins to the mid-market rate when setting their buy and sell rates which can leave a customer paying far more for a foreign currency exchange than initially planned. It is advisable to always check the mid-market rate (published in real-time for Money Mover customers or on sites such as Yahoo! Finance) before making a foreign exchange payment.
Money Mover customers receive live market rates provided to us by our payment services providers and counterparties. This rate is typically at or around the mid-market exchange rate for the currencies that you wish to buy and sell. The Money Mover fee that is added to the market rate is all-inclusive and transparent. You will know exactly how much you will be paying at each step of the transaction.
You can reduce your exposure to widely fluctuating currency rates by locking in a favourable exchange rate for a future date. Forwards are payments which are due to settle three working days or more into the future. Forwards are useful if you know you have a purchase to make for a fixed amount in the future or want to lock in a preferential exchange rate for a conversion you know you will make in the future, such as a salary transfer or revenue repatriation. Visit Money Mover for more information on how Forward payments can help you mitigate your exposure to currency fluctuations.
If you are regularly receiving payments in a foreign currency, banks will convert the amount to your home currency automatically and charge heavily for the service. By setting up multiple currency accounts you can, for example, have Euro payments made into a Euro account and convert the money to your home currency only when needed. Using an international payments provider like Money Mover to move money from one currency account to another will save you money in excessive banking fees.
If you are regularly purchasing from overseas suppliers, ask for invoices in both currencies, (for example, GBP/EUR). This allows you to see exactly what you are paying in both currencies, you can then make an informed choice as to which currency you will use for payment, reducing overall currency conversion costs.
Other articles you might be interested in
- Cambridge round table insights with Adrian Watson - Portfolio Finance Director
- What’s keeping most small business owners up at night
- The challenges and opportunities presented by Brexit
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