How can travel agencies protect against foreign exchange risk?

25 October 2019

Because access to good financial services should not to be confined to large groups, fintechs are the partners – sometimes unknown – for players in the tourism industry. Could innovation be the best ally for your trade margin?

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Foreign exchange risk: not a threat to be taken lightly

As a manager or owner of independent travel agencies, you are required to make numerous payments to your foreign destination management companies in multiple currencies, and are therefore constantly exposed to fluctuations in the exchange rate.
And yet, like many microbusinesses or SMEs, you do not have a specialist in foreign exchange operations. You deal with it yourself although, even outside of high season, you have little time to dedicate to this essential issue, in a highly competitive tourism market which has been changing considerably for the last 20 years.
You contact your bank to make your spot payments in foreign currencies. The bank charges very high fees for the exchange and does not necessarily offer foreign exchange risk coverage solutions. By using a payment institution, you could not only reduce your foreign exchange fees (by around 70%), but also secure your trade margin.

Which partner to choose: a bank or a payment institution?

The end of the banks’ monopoly

Foreign exchange operations have traditionally been carried out by banks and brokers, but two directives from the European Union, PSD1 in 2009 and PSD2 in 2018, broke the banks’ monopoly on bank accounts and payments.

Specifically, this means that you can now synchronise and consult your bank accounts, but also initiate payments (in euros or foreign currencies) from external service platforms.

Opacity and high cost of foreign exchanges with your bank

The cost of a foreign exchange operation carried out by your bank is as much as 70% higher than the same operation performed by a payment institution, for several reasons.
Firstly, the bank charges a foreign exchange commission, unlike payment institutions. Next, as an SME, you do not have access to its trading room, and cannot benefit from prices in real time. The exchange rates applied to your operations are out of line with the market, and the margins applied, also called spreads, are excessive. The term spread is understood to mean the difference between the interbank rate (rate at which your bank buys the currencies) and the rate it offers you.
Lastly, the system is opaque. When you instruct your bank to pay your supplier in their local currency, you do not know exactly when the operation will be carried out. As a result, you are also unaware of the exchange rate that will be used, or the margin that your bank will apply. You will only find out the true cost of the transfer later. With this in mind, the alternatives offered by fintech players should be considered.

The services of a specialist payment institution
  • Payment institutions offer a real-time exchange rate, closer to the interbank rate and therefore more favourable.
  • They do not generally charge a foreign exchange commission and are therefore more competitive than your bank, based on the same exchange rate.
  • The transaction fees are fixed, and lower than those applied by your bank.
  • Their experts in foreign exchange operations can offer you support for payments in foreign currencies and coverage solutions.
How is iBanFirst different?

Whereas its rivals only have pool accounts which negatively affect the quality of the execution of payments, iBanFirst offers registered accounts in foreign currencies, ensuring perfect traceability of the operations. In other institutions, the funds are identified by simple banking references and pass via accounts which do not belong to the instructing party. The registered iBanFirst accounts, located with its partner ING, ensure the funds are secure.

Using a specialist payment institution allows you to simplify the management of your foreign currency flows and save up to 70% on your current foreign exchange fees. You also have the option to fix the foreign exchange rate of your future operations, through coverage solutions.

The limitations of spot exchanges

The foreign exchange operations most commonly offered by your bank are spot exchanges, performed within a maximum of 2 working days. These expose you to a foreign exchange risk. With spot exchanges, you can see how the local currencies of your destination management companies (DMCs) and partners evolve in relation to the euro, especially since several months may pass between the payment of a deposit and the settlement of the balance of a quote.

You have the possibility of protecting against these risks using coverage products, which fix or limit the rate of your future transactions and thus protect your trade margin. This includes in particular forward exchange, flexible forward exchange or dynamic forward exchange contracts. Faced with this wide range of coverage instruments and the need to adapt them according to your foreign exchange risk, finding the right partner is crucial.

iBanFirst, the partner for players in the tourism industry

Léa Haran, specialist in the Tourism sector at iBanFirst, presents the advantages of the iBanFirst
solution for its customers who own travel agencies:

“To pay their destination management companies in their local currency, our travel agency customers open registered accounts in the currencies of their choice. They can thus make payments to 240 countries, 24 hours a day. They enjoy highly competitive exchange rates, in real time. Thanks to our coverage solutions (forward exchange, flexible forward exchange and dynamic forward exchange contracts), they can set their catalogue prices without worrying about the volatility of the currencies. Lastly, they have a team of experts in foreign exchange operations, and personalised support from a dedicated account manager, able to work with them to define a tailor-made strategy. This service offer dedicated to travel agencies forms part of our portfolio of offers designed for players in the tourism industry, also meeting the specific requirements of tour operators (TO) and destination management companies (DMCs) operating in France.”

Thanks to cutting-edge technology, iBanFirst allows you to make immediate and measurable savings in time and money in all aspects of your international transactions. It gives you back complete control over the process, whereas the lack of reliability of bank services leads to delays in payment which harm your suppliers and your partners.

Foreign exchange risk management is generally the domain of the trading rooms of international banks. iBanFirst has developed effective and flexible foreign exchange coverage solutions, easily accessible to SMEs. They are activated and used from a single payment and exchange web interface, combining modernity and efficiency.

Personalised support

“I manage a travel agency specialising in sports tourism. I called upon iBanFirst a year ago, to simplify my international payments. The tariffs of my bank were opaque, and I wanted to find out the exact cost of a transaction before its execution. Not only did the iBanFirst solution perfectly meet these initial requirements, but thanks to Léa's (note: my account manager) expertise in foreign exchange operations and personalised support, I was able to assess my foreign exchange risk and define a suitable coverage strategy for my activity. I now offer my customers fixed catalogue prices, without needing to worry about changes in the currency rate. My margin is secure and the future of my company assured. Lastly, I appreciate how easy the iBanFirst platform is to use, a genuine management chart for all my payment and coverage operations, which can be quickly integrated into my accounting software.”

If you too would like to optimise your foreign currency operations, our account manager specialised in will be delighted to give you more details.