Why Currency Risk Is Very Real In 2023
By Justin Grossbard, Sean A’Hearn
High inflation, interest rate rises, a looming recession - the global financial horizon looks rather unstable in 2023.
These factors all have a huge impact on the value of money and different currencies from around the world.
This is why it’s more important than ever to maintain the value of the money in your denominated currency in 2023.
Justin Grossbard of CompareForexBrokers, who has over 20 years of experience with the currency trading industry, says “as the foreign exchange market is extremely volatile, you need good research to plan ahead. This can save businesses a lot of money when it comes to international banking.”
As such, planning for FX costs can be tricky but vital in the world of international banking.
Currency risk is a financial risk that exists when a financial transaction is denominated in a currency other than that of the domestic currency. I.E. the change in the price of one currency against another.
A business will be exposed to currency risk if it:
- Makes international payments
- Receives international payments
- Pays employees overseas
- Has non-domiciled assets in need of maintenance
This will cause uncertainty about how and when to make payments.
Decreasing Currency Risk
While almost impossible to eliminate entirely, here are some banking methods to use that can potentially decrease your currency risk:
Despite the plethora of e-wallet and online banking methods that exist today, banks are still one of the safest and most secure ways to do international banking. It’s also important to consider there are disadvantages with traditional banks, especially in the rapidly evolving, online banking world.
- Direct and secure payments
- Free from international fraud
- No bankruptcy risk (for major banks)
- Expensive (E.g. receiving fees, wire transfer fees)
- Small businesses disadvantaged as highlighted by the Financial Times
- Long processing time (up to 5 business days)
- Currency conversion fees
Since it’s inception as Confinity in 1999, PayPal has grown to become the most popular e-wallet banking method globally. There’s a reason for this: PayPal is one of the most trusted and easy-to-use e-wallet funding methods. Other popular e-wallets include Google Pay, Apple Pay, Skrill and Neteller.
- Safe and convenient
- Buyer Protection - up to $20,000 of an eligible PayPal purchase
- Redeem points by linking your credit card to your PayPal account
- Potential exchange rate charge by PayPal (unless dealing with local currency) - up to 4% above exchange rate
- Rare fraud risk due to ‘critical login hack’
Credit cards have many advantages when changing over currencies. For one, credit cards often give better exchange rates than ATM machines and currency stands. Each credit card varies however, depending on the issuer, so it’s important to be aware of the potential risks involved too.
- Some credit cards offer no currency conversion fees
- Low or no interest fee credit cards
- Rewards credit cards for businesses
- Some credit cards may apply a currency conversion fee
- Potential fraud risk as online payment activity has increased
Wise and OFX
Platforms like Wise and OFX are online money transfer companies created to make international transfers quickly and more affordably than traditional intermediaries like a bank.
- Transparency around pricing
- Only direct debit and currency conversion fees
- Low fees (E.g. 10 to 20 times cheaper than PayPal)
- Exchange rate locking
- Cheap fees for debit cards
- Over 40 currencies to deal in (read more: Ecommerce Platforms)
- Not ideal for local banking
- A larger FX institution such as Moneycorp or Western Union may be better for large sums of money
- Better exchange rates than banks (ideal for large money transfers)
- No fees when transferring over $10,000
- Long list of supported currencies
- Quick registration process
- Speedy transfers
- 24/7 customer support
- Regular payment and Forward Exchange Contract options to protect against exchange rate fluctuations
- $250 minimum transfer amount
- $15 transfer fee for any transfer amount less than $10,000
- Credit cards not accepted
- Don’t offer foreign currency accounts
- No 24/7 support for personal financial advice
There are many variables that affect currency risk for new businesses dealing internationally. As such, you should shop around to find the best rates as there are many competitive alternatives out there.