[Expert view] Purchasing departments need to retake control of their currency transactions

5 May 2020

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Purchasing departments have got into the habit of favouring contracts in euros with non-eurozone suppliers, meaning they have to pay management costs that are not always justified and can run, every year, into the tens or even hundreds of thousands of euros.

As the Covid-19 crisis overwhelms global economies, French importers need, now more than ever, to protect their cash flow. In a context of high currency volatility, importers are incurring direct costs in relation to their non-eurozone suppliers. That’s because to minimise risk in their international transactions, purchasing departments have got into the habit of favouring contracts in euros. They therefore leave it up to their suppliers to exchange euros into their local currency or delegate this job to their banks. In both cases, they have to pay management costs that are not always justified and can run, every year, into the tens or even hundreds of thousands of euros. In these troubled times, when every euro counts, retaking full control of your currency payments looks like an essential step.

International transactions: middlemen come at a high price!

In importer companies, purchasing departments closely manage relationships with overseas suppliers but ultimately pay little attention to the payment side. So, to limit risk and make life easier, they often favour contracts in euros, leaving it up to their suppliers or their bank to perform the exchange transactions. What they do not always identify is the cost of delegating FX. It is estimated that on average a company has to pay 1.5% of the value of every international transaction in exchange fees and other unjustified chargesMultiplied by the number of payments made every year, this cost can amount to thousands of euros.

Indeed, banks charge companies fees on their international payments ranging from 50 (0.5%) to 2 basis points. The Central Bank has calculated that this handling difference earns European banks 638 million euros every year. Similarly, when the supplier paid in euros has to exchange those euros into its local currency itself, in the process it takes an administrative margin of between 1 and 5% of the total value of its invoice.

The current health crisis is making protecting cash flow and finding additional margin crucial challenges for companies. Purchasing departments can therefore no longer allow this money to slip through their fingers.

A technological solution to an economic problem

To retake control of their international transactions, companies now have access to highly effective, latest generation multicurrency platforms. By making it easier to access FX, these platforms allow purchasing departments to renegotiate their contracts in the local currency, safe in the knowledge the payment will be smoothly executed. Available subscription-free, they deduct just 0.1% of the value of each transaction in exchange for the service they provide. So, by replacing financial middlemen, they enable purchasing departments to find the 2 to 3 points in margin they need so much at the moment, without having to renegotiate their contracts with their suppliers.

Another reason why companies should take a close interest in these technologies is their need to maintain excellent relationships with their suppliers, especially in a crisis. Payment is known to be one of the main sources of tension between these players. The problem is that, as international transactions pass through several middlemen before reaching a supplier’s account, they can often be held up at one of the steps in this journey. So it is difficult for a company to prove to its partner that the order has been placed, especially as banks are unable to track these payments. The new multicurrency transaction platforms, meanwhile, have an in-built feature allowing you to track, in real time, a transaction’s journey. Companies are at all times able to find out and above all inform their partners where their payment is and act quickly if it gets held up.

Ultimately, these new multicurrency platforms put companies back in full control of their transactions and the associated margins. This transparency also improves the relationship with their suppliers. And of course, while this optimisation may prove crucial in a crisis, it is just as compelling in a period of growth.

By David Remaud, Chief Marketing Officer, iBanFirst

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