Soft costs matter too: how the benefits of peer-to-peer FX stack up for smaller clients
Small corporates and not-for-profit organizations are increasingly looking at peer-to-peer FX as a way to lower costs. Euromoney speaks to four customers who have taken their business away from banks.
Peer-to-peer (P2P) providers are increasingly being identified as the best option for some corporates and not-for-profits when it comes to FX business.
Consultancy Oliver Wyman estimated in 2015 that transaction volumes for specialist distributors such as P2P players had doubled since 2007 to around $200 billion – with some 80% of that business being done with corporates.
Euromoney has spoken to four such organizations that have opted to use P2P FX solutions. The top reason is consistently cost – not just pure fees but also soft costs associated with doing business with big banks, such as the time and resources needed for engagement and administrative processes. Small firms might not have the transaction sizes to make using a big bank efficient. Others might prefer to be able to deliver FX to international counterparties or suppliers without them incurring bank fees.
Irish mobile canning service provider Irish Craft Canning, which launched this year to service the craft brewing sector, deals primarily with suppliers who operate in GBP and USD. It was attracted to P2P FX by the ability to convert funds at a target exchange rate and then settle foreign invoices quickly.
“The market exchange platform has allowed us to secure exchange rates which have been much better than available elsewhere,” explains co-founder Ciaran Gorman. “Like many businesses, we operate with a tight margin and ensuring we get the best possible exchange rate is important to keep costs down for our end-customers.”
The currency turmoil caused by the referendum was particularly stressful since the majority of the company’s start-up costs were sterling denominated – the specialized equipment and stock required was not available in Ireland.
“In the months running up to the vote and the weeks thereafter, we had GBP commitments of close to £100,000 to settle,” says Gorman. “We used CurrencyFair to manage our exposure throughout that period by setting target exchange rates to convert whenever the market rate moved to a level we found acceptable.
“We secured rates which were at times 5p or more better than we would have secured if we had just done a single conversion in January/February as we had originally planned.”
'Attractive, repeatable, reliable'
It is a similar story at Swiss content management solutions provider Nemetos, which also has offices in Denmark, Germany, the UK, Ukraine and Romania, and uses P2P FX to reduce its foreign exchange costs.
“We have saved approximately £30,000 a year by using freemarketFX's platform,” says Nemetos CEO and co-founder James Derry. “Our average transaction size is too small to generate significant FX savings from our banks. Using a peer-to-peer exchange generates attractive, repeatable and reliable foreign-exchange execution with considerable savings for our business.”
When Receipt Bank, a book-keeping automation software developer based in the UK, was looking for a solution to reduce the cost of paying overseas employees working in its cost centres, it chose Midpoint’s P2P FX platform.
“We do three different types of business,” explains Receipt Bank operations assistant Alex Mooney. “The first is paying the wages of contractors who work abroad and invoice in a foreign currency. The second is to pay suppliers who are based in foreign countries. The final one is to move money between cost centres as intracompany transfers.”
The financial benefit to Receipt Bank of using P2P FX is that it receives a much better rate than sending payments directly from a bank. “On top of this we are able to send the exact amount of currency that will be received, which means that reconciliation is easy and the recipient is happy that they don't have to incur bank fees which would lower the amount they receive,” adds Mooney.
Chris Ninnes, ASC
The Aquaculture Stewardship Council (ASC), meanwhile, is a not-for-profit organization that sets environmental and social standards for certifying responsible and well-managed fish farms. The ASC logo appears on almost 6,000 products in 60 countries. Around 1,000 companies are involved in the distribution of these products and about half of these also place the logo on certified seafood products.
While income comes from grants denominated in GBP, USD and EUR, revenues are also generated through logo licence fees in GBP, USD, JPY and EUR. The bulk (80%) of logo revenue is derived in EUR, but a similar percentage of grant income is in USD. This meant there was a mismatch between EUR receipts and USD payments.
The ASC saw P2P FX – specifically, the freemarketFX platform – as an opportunity to significantly reduce its FX costs, explains CEO Chris Ninnes. “Transaction costs are always going to be important," he says. "FreemarketFX charges 0% for charities, but this would still be true if it charged its standard market rate of 0.2%.
“More significant are the soft costs – both brokers and banks have heavier engagement and administrative overheads. Simplicity is the key to our success, so not having to deal with brokers and/or banks is also an advantage.”