Overseas trading may well have changed since the days when Sir Francis Drake boarded the Golden Hind in the 16th century, but it remains as important as ever for the strength of the UK economy.
Amar Sodhi is managing director of Avatar International, an agency that represents property developers in emerging markets such as Bulgaria, Croatia and Turkey. He believes too many business owners are neglecting to take advantage of the savings that it is possible to make on foreign currency transactions.
‘There’s no competition between using a bank and a foreign currency exchange,’ Sodhi says. ‘It shocks me that so many people have an aversion to using foreign exchange companies.’
When Avatar was set up in 2002 Sodhi used a bank but, after checking out various options, he says the company now makes two main savings by going elsewhere: ‘With a bank we received money from a client and then forwarded that money to the developer, thus incurring bank charges. Using a foreign exchange for that alone, forgetting other transactions, saves us between £200 and £300 per month in charges.’
As for the other transactions, he estimates that using an exchange – or boutique, as they are also known – saves the business over £1,000 each month. ‘It’s a no-brainer to use a foreign exchange company,’ he says.
Spanish Tiles Direct has operated for five years, importing tiles, granite and marble from Spain. Company secretary Kate Fitchett tells a similar story to Sodhi, saying that in the early days she used a bank, but after deciding the charges were too high, she looked around for better offers.
‘It was very expensive [using a bank],’ she recalls. ‘We were paying at both ends. We paid £20 from the UK end, and then at the Spanish end we paid 2.4 per cent on the amount we were transferring. It makes a hole when you’re transferring £20,000 to £30,000 each month.’
A matter of margins
David White is managing director of the currency exchange Axia FX. Last year, at the age of 47, he was persuaded to come out of semi-retirement and spearhead the new business. ‘My background is in foreign exchange trading within the banking industry – I worked in it for 30 years, so I understand that side of it,’ he says.
When it comes to competitive rates, White argues that the rates offered by banks differ from those offered by boutiques due to the fact that banks have many more overheads, meaning higher margins need to be made.
According to White, there is a wide gap between the actual rate a bank pays when purchasing foreign currency and the price it quotes customers.
By contrast, a boutique, with fewer overheads and one specialist function, can quote and buy currency at rates that are more closely aligned. This means that while the margin of profit may be less, it is enough to enable the smaller organisation to stay profitable.
All part of the service
Another area where boutiques claim to outperform banks is service. Colm Gilhooly, a broker at Foreign Currency Direct, explains that with a boutique ‘you will be assigned an account manager or team of account managers’.
For Spanish Tiles Direct’s Kate Fitchett, quality of service is fundamental. ‘It always helps to have the same voice at the end of the phone,’ she says. ‘Not having the same person does make a difference.’
Fitchett rejected a number of boutiques before finding one that she liked. Her examples of poor service include having to chase up a boutique for confirmation of a transaction and finding it necessary to be put through to a supervisor as she knew the rate being quoted was uncompetitive (the supervisor recognised her voice and supplied the rate she was after).
As for the types of service that a business can use, the typical one is called a “spot contract”, whereby you phone up and ask how much a certain amount of euros, for example, is going to cost at that specific moment in time. Alternatively, you can buy a “forward contract”, putting a deposit down to secure a rate of exchange.
‘This is based on whatever the market value is today – you can price that into how far forward you go and work out a forward rate,’ says Gilhooly. This can be anything from two weeks to two years ahead.
Setting the limit
Fitchett recently arranged such a deal for her company. ‘It has been good because the euro has gone down in value, so we’re pleased that we did it,’ she says. ‘We were a bit nervous, thinking, “Golly, is it going to go up or down?” It is a gamble, but it worked for us this time.’
Within the terms of a forward contract, you can fix limits into market movements. Gilhooly explains: ‘A company may be looking for a rate at the moment of, say, g1.51. That may be slightly above where the market mid-rate is at the moment at g1.508. There is nothing to say that at some point between now and the future that rate of exchange may not become available.
‘So you can put a limit into the market and say, “I need to buy x amount of euros at this rate”. As soon as that rate becomes available, we would purchase the currency for you automatically – it is another way of ensuring that your currency is purchased at the best possible rate.’
In contrast to this, a company can ask for a ‘stop loss’. A business may be happy with the current rates but if the rate dropped it could make a contract less profitable.
Gilhooly remarks: ‘All you say to me is, “I need to achieve a minimum of g1.48 to make this deal profitable”. I will put a stop into the market at that level so that if it suddenly drops overnight you can guarantee your contract is not suddenly going to become unviable.’
A mixture of forward contracts and stop losses can be applied by a company to reduce risk exposure. Gilhooly states that these services are provided for free, with the only obligation in these instances being that the prices arranged are fixed. ‘No brokerage worth its salt will charge you anything in the way of commission,’ he says.
Knowledge is power
Axia FX’s David White believes that small businesses’ knowledge of foreign exchange is extremely poor. ‘I don’t think businesses understand or realise how much it is costing them to do money transfers [with banks],’ he says. ‘If they don’t understand the concept, they won’t understand [the charge].’
However, Paul Graydon, head of HSBC’s treasury business development team, suggests the dual criticisms levelled at banks – of inferior customer service and failing to offer competitive prices for SMEs – no longer apply.
Regarding service, Graydon points out that HSBC has set up a foreign exchange relationship management team and now has five regional treasury centres across the UK. ‘We have a group of people who keep in touch with a core of customers who value being periodically kept up to date with market movements and everything else. The customer can phone and speak to an individual who they are used to dealing with,’ he says.
Graydon accepts that certain standards needed to be raised. ‘Historically, I think the personal touch may be something banks didn’t tend to do, but we have responded to the needs of the client by providing that service,’ he says.
As for the rates offered, he doesn’t believe there is much validity to the argument any more. ‘Of course the boutiques are going to say their rates are better, and at times they may be a bit cheaper; but equally, we’ll be cheaper in other given cases,’ he says.
In terms of the range of services offered, Graydon notes that clients can use an online “trading platform” or phone up and be put through to a treasury centre – this is not, he adds, necessarily a bad thing. ‘A lot of our clients see their foreign exchange requirements as a very transactional thing and they want to get on and off the phone as quickly as possible – to do the trade and move on.’
In addition to offering forward contracts, Graydon says that other services can be provided to clients to help them reduce the risks of losing out to lower rates during a transaction, such as ‘currency options’.
A currency option is designed to guard a business against adverse exchange rate movements in the same way that a forward contract does; but it will also allow the potential for gains should the market move favourably (a charge is incurred for the full currency option service). Graydon adds that boutiques cannot offer these options because they are not regulated by the Financial Services Authority.
‘The big play we will make is not to put all of your eggs in one basket, so you might do some of your foreign exchange transactions in spot markets, you might do some forward contracts and you might do some currency options. What we will do
is try to get the balance right for you,’ he says.
With an estimated £268.6 billion worth of exports and £345.5 billion of imports in 2006, currency conversion is now a daily feature for many UK companies. Clearly it is a massive market, leading to stiff competition between banks and boutiques. This is good news for companies.
Be sure to shop around.