8 Must-Know Tips

to Boost SME FX
Strategy
Protect your profits, cut your FX costs
and hedge your FX risk

Written by
Antoni Rami & Marc Chaperon
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Protect your profits,

cut your FX costs and hedge
your FX risk
Executive summary 01. Benchmark your bank. The FX market

02. Review your FX provider periodically

03. Be vigilant about hidden fees

04. An account in your main currency

05. Ensure full understanding of currencies

06. Set up robust systems to eliminate human error

07. Optimise your hedging strategy

08. Simplify your FX product purchases

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Expanding overseas,
a great way to develop
a business

Expanding overseas is a great way to develop a

business, however it is important that small business
owners think clearly about the steps that they need to
take to ensure the move is as profitable and risk-free
as possible.

Busy researching the new marketplace and arranging

foreign suppliers and customers, it’s easy for small
business owners to forget the issues that may arise
when it comes to making and accepting
foreign payments.

With currency values constantly fluctuating and often

high costs involved, SMEs are at risk of potential cash
flow disruption, as they conduct business across
borders and in different currencies.

With the right FX management techniques, SMEs can

avoid significant financial losses and unnecessary costs.

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01.
Benchmark your bank
Compare the rates
you are offered
against the real
mid-market rates,
updated in real
time, so you know
exactly what you
would be charged
from each quote
8 Must-Know Tips to Boost SME FX Strategy · www.kantox.com
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Thanks to the advantages made possible by the latest technology, now you can
compare bank and broker rates online through benchmark services giving you
access to mid-market rates.
Don’t take 0% commission fee claims at face value. Nearly always in such cases,
the charges are simply transferred and hidden in the exchange rate offered.
Sign up for Kantox’s benchmark service free of charge, which displays the mid-
market (interbank) rate, updated in real time. The mid-market rate is the only real,
true exchange rate, with no tinkering by banks or brokers.
This way you can compare the rate offered by FX service providers and see exactly
how much they are charging in the exchange rate, and you will therefore be able to
make the most financially sensible decision for your company, cutting costs and
improving your bottom line.
Any provider, bank or broker which does not show you the live mid-market rate
is trying to hide their commission. Also watch out for anyone who tries to get you
to conduct operations on the phone, as it is much easier for them to manipulate
prices than by working online.
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02.
Review your FX provider periodically

Monitor and Periodic evaluation of all potential suppliers’ bids for your business is an excellent
compare providers method to ensure your costs are minimised.
periodically and
don’t blindly Clarify what is most important to your business in an FX provider before deciding
trust them with whom to conduct your transactions.

Different providers may be stronger in certain areas, from price, transparency,

number of currencies available, customer service, online platform, innovation and
efficiency of service.

If you have a large annual FX volume, you may wish to consider issuing a request
for proposal, inviting providers to bid for your custom. In such a scenario, the
bidders would compete with one another to win your business.

Finally, but no less importantly, we must bear in mind the burgeoning Fintech
sector (financial services in existence thanks to technological innovation). The
currency exchange offered by Kantox gives benefits to companies that are not
available to the traditional providers (banks and brokers).

Any provider, bank or broker which does not show you the live mid-market rate
is trying to hide their commission. Also watch out for anyone who tries to get you
to conduct operations on the phone, as it is much easier for them to manipulate
prices than by working online.

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03.
Be vigilant about hidden fees
Never take 0%
commission claims
seriously and find
out the spread you
are being charged
8 Must-Know Tips to Boost SME FX Strategy · www.kantox.com
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The costs for the service are not always transparent. To know what you are paying,
take into account the following factors:
1. Dumping
In foreign exchange many businesses are caught out by a practice called
“dumping”, where unbeatable initial rates are offered to attract customers.
Charges are then added into the exchange rate on future transactions in order to
boost the FX provider’s profit at the clients’ expense, without informing
the clients.
2.Selective Exchange Rate Adjustment
Market rates change all the time, virtually to the second. Why then, if the real rates
constantly change, do bank/broker quotes not change with them?
If the real rate changes, where your business stands to make a loss on the
updated exchange rate, the bank or broker will inform you.
However, if it changes to benefit your business, you are almost certainly kept in
the dark. This way, the improvement in the exchange rate is not felt by you, but by
the bank or broker.
3. Spread
The mid-market rate is never disclosed by banks and brokers. Historically only
the largest companies had access to this information, through the Bloomberg or
Reuters terminals, which are of course very expensive services.
As the information has historically been so difficult to obtain, banks and brokers
could amend the exchange rate without the customer knowing the difference
between the real exchange rate and that offered by the bank or broker. This
difference is called the spread, and the practice is still pervasive in traditional FX.
Now you can access live mid-market rates for free. This can then give you leverage
to negotiate your rates, or give you reason to change FX provider.
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04.
An account in your main currency
Opening a bank
account in your most
common trading
currency gives you
access to a number of
advantages, including
increased savings on a
number of costs
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The advantages of a bank account in your most common trading currency are
numerous. We will use US dollar (as the most common trading currency) to exemplify:
a) Without such a US dollar account, when a client pays you in US dollars, your
bank converts the dollars into your home currency at their own exchange rate,
which includes a spread. With a US dollar account, you would not lose out on the
spread that would be charged in converting your money.
b) If you bill in US dollars, you save more. If you bill in your home currency but your
customer pays with US dollar, not having a US dollar account would make them
less likely to want to buy from you, as they are subject to exchange rate volatility –
their bank has to convert their US dollars into your home currency.
c) You can request loans, letters of credit and lines of credit in US dollars.
d) As the US dollar is the global reserve currency, your FX strategy will be boosted
significantly through savings on cost and time.
When exchanging capital held in US dollars in your US dollar account to your home
currency and transferring to your home currency account, consider sending it to
Kantox and we will convert it into your home currency, thereby saving you up to
80% against what your bank would charge you for the same transaction.
If you trade most prominently with another currency, for instance, the euro, pound
sterling or Japanese yen, the same principles apply that we have mentioned
above.
$
USD remains by far
the most traded currency
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05.
Ensure full understanding of currencies

Before committing
to transacting with a
currency ensure you are
completely informed of
how it could affect your
firm, in particular when
you are using exotic
currencies
Exotic currencies such as the Mexican peso and Russian ruble that are traded
freely are lower in liquidity and come with higher spreads.
It is best to stick to the major currencies, as they are less volatile, more liquid, and
come with no restrictions. If however, you have to conduct transactions with exotic
currencies, ensure you completely understand what is involved before committing
your operations.
Do a full investigation of government restrictions, liquidity levels and volatility
history. Additionally, factor in political stability and economic outlook.

For instance, the Argentine peso and Venezuelan bolivar are two exotic currencies
with far-reaching government restrictions in place, as the two countries grapple
with various political, economic and financial problems.

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06.
Prepare to eliminate human error
Concentrate on
setting up a system of
checks and balances
that focuses on the
increased accuracy of
information and data,
and on minimising
mistakes
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There will always be some degree of human error involved in financial
transactions. However, it can be greatly minimised if a company adopts a prudent
management strategy and works with highly secure third party organisations.
The following five errors are some of the most commonly made in foreign exchange
transactions:
1. Paying a currency into an account that is denominated in another currency.
2. Your business wastes considerable time and expenditure if you are quoting
different banks constantly.
3. Misquoted account details.
4. Wrong direction of currency pair.
5. If you are quoting different banks constantly your business is almost certainly
wasting considerable time and expenditure.
There is a huge financial impact associated with such needless mistakes which
are all too common in international transactions. It is this type of issue that really
brings home the true value of your FX service provider.
In order to reduce the frequency of costly mistakes, ensure there are checking
systems in place to double and triple-check that all data provided is correct and
true (spelling of names and addresses, correct account numbers, correct amounts
to be transferred).
Automated data systems increase efficiency and accuracy of data, though they can
not be relied upon 100% to never produce errors. A “four eyes” policy is effective,
ensuring two suitable employees check all information.
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07.
Optimise your hedging strategy

Nobody knows how Gambling on how the market will move with your company’s funds is a foolish
currencies will move choice. See the below image for examples of how a lack of hedging risk can lead
or if they will move to huge financial repercussions.
against you. The
lesson is to hedge The lesson is to hedge whenever possible, and hedge sensibly with the correct
with the correct and and most appropriate hedging products.
most appropriate FX Nobody knows how currencies will move, and if they move against you, it can cut
products your profits massively.

Company Group Time Period Negative Impact

Group of 800 multinationals 2013 Q2 USD 4 billion FX loss

63% fall in profits due to FX

loss (Rp 1.03 trillion ($84
XL Axiata 2013 million) in 2013 from Rp 2.77
trillion a year earlier)

US Fortune 2000 2012 /Q3 USD 22.7 billion FX loss

Procter and Gamble 2012 USD 3 billion FX loss

US Fortune 500 2010 USD 100 billion FX loss

TRY 774,9 milion loss (and

Turkish Airlines 2010 increased financial costs of
TRY 77.8 million)

South Africa Airways 2003 /04 FXM mismanagement plunged

the company into insolvency

More than 55% of SMEs did not

hedge against FX risk,
SMEs in the UK 2010 representing an estimated
potential risk of 20.4 billion
pounds

Right table showing some

instances of huge FX losses,
in large part as a result of a
failure to effectively hedge
against exchange rate volatility

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08.
Simplify your FX product purchases

Many SMEs are
pressured into buying
expensive FX products
they don’t need
When exchanging currencies many SMEs buy structured financial products with
numerous features that they simply do not need and do not fully understand, and
this increases cost and risk.
There is a massive over-expenditure on structured FX financial products, when
opting for a simpler product would be more efficient and much cheaper, providing
greater value to the company.

Complex FX products can often impress and woo you, but do you really understand
all their implications and are you really going to use all their features when all you
really need is to protect yourself against exchange rate volatility?

Moreover, are you aware of the difference that you would pay for the more
complex product? Lack of understanding of financial instruments is attributed as
one of the reasons for the Global Financial Crisis of 2007-09.

The UK Parliamentary Commission for Banking Standards report, “Changing

Banking for Good”, concluded that many small businesses “had no concept of the
instrument they were being pressured to buy”.

There is a widespread lack of full understanding with structured financial

products. It was this lack of understanding that led, for instance, to the subprime
mortgage crisis in the United States during the Global Financial Crisis and banks
still pressure businesses to buy them rather than simpler, cheaper instruments.

The devil is very much in the details when it comes to your financial products and
the message is clear: do not purchase them if you do not fully understand them.

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About
the authors

Antoni Rami Marc Chaperon

Co-Founder and Chief Operating Officer FX specialist and Country Manager at Kantox

Antoni is specialised in corporate Marc studied at the EDHEC

finance and was educated at Business School and University
ESADE, Barcelona, and at Singapore of Missouri Saint Louis and
Management University. specialised in corporate finance.

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