HOW TO LOWER COSTS WITH LOCAL CURRENCY PAYMENTS

moving money for better

CASH MANAGEMENT

Foreign payments strategy for international business

A sound strategy can turn international

payments into a key competitive

advantage.

Paying in dollars: a costly convenience

Today, North American businesses are in a privileged position when it comes

to making international payments. Dollars are accepted almost everywhere,

so if an American business doesn’t want to worry about dealing in foreign

currencies, it doesn’t have to. On invoices, everyone speaks in USD.

But, whether your business is based in North America or elsewhere,

cross‑border dollar disbursements aren’t as simple or straightforward as they

look. The foreign exchange (FX) component of paying recipients whose costs

are priced in a foreign currency isn’t eliminated: it’s just outsourced to your

beneficiary—or their bank. At some point, your recipient still has to convert

your dollars back into their local currency.

When you pay foreign beneficiaries in dollars, you expose them to

currency risk. To counteract this risk, foreign firms often build a buffer

into their invoices, insulating their profits in case of dollar depreciation,

and offsetting any conversion or receiving fees charged by their bank.

convenience=costsIf you’re paying in dollars,

the extra costs can be invisible

Takeaway:

Paying in dollars can have its advantages, but it’s not without risk.

44%28%8%

$£ €The majority of international business payments are priced and settled in dollars.

Local currency payments: an effective alternative

When foreign business partners insulate their dollar‑denominated invoices as

a way of pro‑actively managing their currency risk, they’re swapping their own

potential currency‑related loss, for an actual cost‑related loss to your business.

To reduce risks for your recipients and unnecessary costs for your business,

why not pay foreign business partners in local currency?

Paying in local currency may alleviate additional costs, make payments more

transparent and streamline the delivery of funds while eliminating fees and

delays along the way.

!Your recipient will eventually translate your dollar payments back into

local currency, and any additional charges associated with doing so

might be passed on to you in the form of higher costs.

Remember:

local=efficientFunds are transmitted directly,

without additional intermediaries

Takeaway:

Paying in local currency removes risk and reduces costs by eliminating intermediaries. This means greater transparency, efficiency, and cost‑effectiveness all around.

START

Get quote from FX provider

for the foreign currency amount

Pay the invoice in your

local currency

Pay the invoice in foreign

currency amount

Your international supplier sends you an invoice

ie. does it have domestic and

foreign costs to pick from?

Does your invoice have a foreign

currency amount?

Is the invoice dual billed?

Is the converted amount lower

than the domestic equivalent?

Ask to be billed in your

supplier’s local currency

Yes Yes No

No

YesNo

Reduce costs and protect profits

$ ¥ £ €

$ ¥ £ €

Lock in that exchange rate

with your FX provider

Paying your international suppliers in local currency isn’t as complicated as it sounds.

The key is to compare whether it is more cost effective for you to pay in your own currency, or your foreign supplier’s local currency. Follow this simple process to help protect your profits.

FX

*

?

FX

FX

Risk management basics: keep your profits afloat

When you send or receive payments in foreign currencies, exchange rate

movements have the power to impact your costs and profits. Currency Risk

Management is how your business prepares for and protects itself against

these movements.

If unmitigated, adverse currency movements can negatively impact your

bottom line. Most businesses write‑off the loss, taking a cut to their profits.

Others pass the additional cost on to their clients, compromising their

competitiveness—and the relationship itself.

If neither of these solutions sounds satisfactory, it’s because they’re not.

There are more reliable ways of protecting your profits, costs, and relationships.

One of the most effective is the use of financial products designed to

hedge risk.

A Forward Contract allows you to purchase currency at today’s market rate for

delivery at a future date. This means that no matter where the rate moves in

the interim, your foreign costs are insulated.

The benefits of currency risk management are accessible to

your business regardless of whether you use an accrual, cash or

modified cash accounting method.

Even when you’re not waiting for funds to arrive from your client

before paying your beneficiary, you can still be exposed to exchange

rate movements from the time you pay your foreign business

partner to when your client pays you.

Locking in exchange rates with Forwards or Options Contracts

ensures the amount you pay won’t impact your profit margins

downthe track.

But what if currencies move in my favor?

One of the realities of responsible risk management is that protecting

your costs can occasionally mean missing opportunities to realize

greater profits.

But it also means the security of knowing no matter where the

market goes, your profits are protected, and you’re not gambling with

your bottom line.

What’s more, you don’t have to write off the difference between what

you’ve paid your supplier and your return on sales, so accounting is

straightforward, and your audit trail is clear.

!If you aren’t protecting your margins between billing by suppliers and

payment from clients (or vice versa) you’re effectively acting like a

bank for your customers. You’re taking on their risk and hoping the

exchange rate doesn’t move out of your favor.

Think of it this way: Takeaway:

Currency risk management means that even if the currencies move in your favor, you haven’t sustained a loss, and your profits are protected.

Risk management applies to any accounting method

Risk management solutions cheat sheet

Local Currency:

Your international business partner’s home currency. Paying in local

currency, rather than dollars reduces costs for your recipient, may mean

better pricing and fewer fees for your business.

Risk Management:

A term used to describe how a business prepares for, and protects itself, against

potential exchange rate movements which could adversely impact costs and profits.

Forward Contract:

A financial tool that allows you to purchase a set amount of foreign currency, at a

set exchange rate, for delivery at a specific date in the future. This helps eliminate

exposure to rate fluctuation in the interim.

Options Contract:

Lock in an exchange rate to insure your business against negative shifts in currency

movements, whilst maintaining the flexibility to benefit from any positive market shifts.

Holding Balance:

Some foreign exchange providers have the capacity to hold foreign

currencies on your behalf so that you can receive or send international

payments without taking on exposure. Effectively you convert funds to,

or from, dollars every time you make an international transaction.

Put local currency payments into practice

Now that you’re ready to protect your profits with local currency payments, here’s an overview of what to seek out when sourcing an international payment solution for your business.

1. Local payment options

Pay foreign business partners in local currency easily and efficiently with a

variety of disbursement options. It’s important to reduce manual processes,

and keep reporting simple and straightforward. Think about:

wire, direct credit and draft payments capabilities

access to foreign currencies and local clearing

beneficiary storage and payables automation

2. Risk and cash management strategies

Lower fees and better rates help you achieve cost‑savings day‑to‑day;

but effective risk and cash management services allow you to protect

your profitability over the longer term. Consider these strategies:

forward contracts

market orders or rate bids

foreign currency holding balances

3. Integration and automation systems

Reducing data entry and manual processes

doesn’t just make life easier for your office staff.

It also helps you avoid payment errors and delays,

keeping beneficiaries happy. Some systems that

could be implemented:

accounting system integration

customized reporting capabilities

payment tracking and notifications

Above all, look for a solution backed

by professional, personalized

client support from payment specialists.

© 2016 Western Union Holdings Inc. All rights reserved.

Western Union Business Solutions is a division of The Western Union Company. Services in the US are provided by Custom House USA, LLC (NMLS ID: 906985) and Western Union Business Solutions (USA), LLC (NMLS ID: 907333) (collectively referred to as “WUBS” or “Western Union Business Solutions”). For a complete listing of US state licensing, visit http://business.westernunion.com/about/notices/. For additional information about Custom House USA, LLC and Western Union Business Solutions USA, LLC visit http://business.westernunion.com/About/Compliance-Legal.

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Customers may be required to meet certain eligibility requirements in order to enter into foreign exchange transactions with WUBS. Claims regarding the products discussed and other information set out herein are general in nature and do not take into account your specific objectives, financial situation, or needs. This brochure does not constitute financial advice or a financial recommendation. You should use your independent judgment and consult with your own independent advisors in evaluating whether to enter into a transaction with WUBS. WUBS bases recommendations only on general industry knowledge and the client profile you have provided, and WUBS is not undertaking to assess the suitability of any recommendation for your particular hedging needs. WUBS has based the opinions expressed herein on information generally available to the public. WUBS makes no warranty concerning the accuracy of this information and specifically disclaims any liability whatsoever for any loss arising from hedging decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon. IP-160702

Turn international payments into an advantage

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