Introduction
International payments are an essential part of doing business globally. Companies may pay overseas suppliers, contractors, partners, or service providers regularly. However, the amount sent is not always the true cost of the transaction.
FX spreads, transfer fees, intermediary charges, and currency fluctuations can all affect what a business ultimately pays. Understanding these costs can help businesses compare payment providers and make more informed financial decisions.
International Payment Cost Calculating Process
1. Start With the Amount the Recipient Needs
The first step is to determine exactly how much the recipient needs to receive. For example, an Australian business may need to pay a supplier USD 20,000. The business then needs to determine how many Australian dollars are required to purchase that amount.
This provides a starting point for calculating the overall payment cost.
2. Check the Exchange Rate
The exchange rate has a major impact on the cost of an international payment. Businesses should compare the provider’s quoted rate with a relevant market exchange rate. The difference between these rates can represent an FX spread or margin.
Even a relatively small difference can become significant when large payments are involved.
For example, if a business makes frequent payments worth hundreds of thousands of dollars, a small difference in the exchange rate can add up considerably over time.
3. Identify All Visible Fees
The next step is to identify any direct charges associated with the payment.
These may include:
Transaction fees:
A fixed charge for processing the payment.
Transfer fees:
Costs associated with sending money internationally.
Service fees:
Charges for specific payment or currency services.
Receiving fees:
In some circumstances, the recipient’s bank may apply a fee.
Businesses should check whether these charges are paid separately or deducted from the amount being transferred.
4. Look Beyond the Advertised Fee
A payment provider may advertise a low or zero transfer fee, but that does not necessarily mean the payment is inexpensive. The provider may incorporate its margin into the exchange rate through the FX spread. Therefore, businesses should compare the effective exchange rate as well as visible transaction fees.
5. Consider Intermediary Bank Charges
International payments can sometimes pass through intermediary financial institutions before reaching the recipient. Depending on the payment method and banking arrangements, intermediary charges may apply. These costs can make the final expense different from the amount initially quoted.
6. Factor in Payment Timing
Currency markets fluctuate, so the exchange rate available today may not be the same rate available when a payment is made later. For businesses making regular international payments, currency movements can influence costs and affect financial forecasts. Payment timing should therefore be considered alongside exchange rates, payment deadlines and cash-flow requirements.
7. Calculate the Total Effective Cost
A useful way to assess an international payment is to consider all relevant costs together:
Total payment cost = Currency conversion cost + FX spread + Transfer fees + Other applicable charges
Businesses can then compare the total amount they actually need to spend against the amount the recipient receives. This provides a more meaningful comparison than looking at a single fee.
Conclusion
By evaluating the complete cost of each transaction, businesses can compare providers more accurately, identify potential FX savings, and develop a more efficient international payment strategy.
