FX International Payments
By Frances Coppola
Global payments solutions are diversifying fast, but at present banks still dominate. Many freelancers receive cross-border global payments via traditional money transfers and correspondent banking networks. Payments can be slow, often taking several days to arrive, and expensive: some banks charge fees for receiving an international payment. Others charge fees for FX conversion, or impose unfavourable exchange rates.
Freelancers whose clients pay by international money transfer tend to shop around for the most favourable banking terms. Initiatives such as the U.K.’s CASS (Current Account Switching Service) make it easier for people to move their transaction accounts from bank to bank.1 The U.K.’s Competition Markets Authority has recommended that big banks create an online app that would enable transaction account users to see in one place the fees and charges offered by different banks. In parallel with this, there would also be further development of CASS, so that customers could switch accounts directly from the app.2 Some Australian consumer advocates have looked to CASS as a model for improving account switching here.3 All around the world, initiatives like these should help international freelancers mitigate high bank charges arising from global payments solutions.
Some clients may be willing to use alternative international payment solution providers such as money transfer businesses and fintech companies to pay their freelancers. Using an alternative provider has the potential to reduce costs and improve the speed of global payments. However, they cannot eliminate FX or cash flow risk.
Foreign exchange is a key risk for freelancers. Sometimes freelancers can invoice in their own currency, but more often they invoice in the client’s currency. If they are paid by money transfer in the client’s currency, their bank will typically handle the foreign currency conversion at a rate of its choosing. This rate may be unfavourable to the freelancer and the bank may additionally impose a fee for the conversion.
Here’s an example. One Australian freelancer who was invoicing a U.S. client in USD was advised by her bank to ask the client to pay in AUD in order to avoid the bank’s fee. However, this would expose the client to FX risk and fees, which they could pass on to the freelancer in the form of lower pay.
If an international freelancer is working in multiple currencies and can manage their own currency conversions, they may be able to offset incoming and outgoing flows and take advantage of natural hedging opportunities. But the reality for most freelancers is that their income is affected by FX rate movements. Movements are not necessarily adverse: a fall in the client’s currency exchange rate will mean the freelancer effectively gets a pay raise. But they do increase the uncertainty inherent in the freelance lifestyle.
Many international freelancers have fixed outgoings in their own currency but uncertain income in foreign currency. They suffer the cash flow stresses inherent in freelance work, which tends to be “feast or famine”. Freelancers need clear information from both clients and banks about the cost and timeframe for global payments as they typically pay considerable attention to negotiating firm payment terms with clients, and insisting that banks disclose settlement times, FX rates and fees.
International freelancers incur additional risk, since disruption to cross-border global payments or sudden adverse FX rate movements can seriously impact their ability to meet their obligations. Many freelancers keep financial reserves as a buffer against cash flow interruptions and adverse FX rate movements.
International freelancing inevitably involves uncertainty, and can also mean high intermediary fees and charges. Freelancers often buffer themselves against adverse FX movements and cash flow risks by keeping reserves, and may use a range of global payments solutions to keep down costs. But as the global payments arena diversifies, bringing down settlement times and giving freelancers better control of their FX rates and costs, international freelancing may become a more secure and less expensive way of earning a living.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. ”Current Account Switching Service”, Payments UK; http://www.paymentsuk.org.uk/projects/current-account-switch-service
2. “Retail banking market investigation”, Gov.UK; https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk
3. “Simpler account switching would help keep our banks honest for everyone”, The Sydney Morning Herald; http://www.smh.com.au/comment/simpler-account-switching-would-help-keep-our-banks-honest-20161003-gru6lu.html