FX International Payments
By Jim Vrondas
For most aid agencies, however, the reality is more difficult. The process of raising donation dollars can be expensive, complicated and highly competitive. There is however, an alternative to traditional fund raising methods for aid agencies that is gaining some traction.
In a global economic environment yielding very low return on investment, commercial micro-lending to the poor has caught the eye of private equity investors around the world. Since commercial banks are traditionally more interested in funding large investments where the revenue opportunities are greater and the risk of default lower, they tend to avoid this type of lending. This has introduced Microfinance Institutions (MFIs) to a previously unrealised source of funding from private equity.
The practice of offering collateral-free loans to low-income people at high interest rates is often criticised, yet it has gained greater acceptance since Bangladeshi economist Mohammad Yunus was awarded the Nobel Peace Prize for his work in this area. It is the ability to fund a wide variety of projects like farming or hand-made clothing in third world communities via international payment methods that holds the most promise. Popularity is growing to the point that ResponsAbility Investments AG, an asset manager specialising in emerging economies, is forecasting the microfinance market to increase to around $14 billion USD by 2019^.
Once funded, the money needs to flow to the recipients, and in the case of MFIs, back again. Occasionally hundreds or even thousands of small international payments may be required at the same time, and if an NGO doesn’t have the right procedures in place, this can be quite a costly exercise. In addition to incurring high fees, the time consuming and expensive process of manually inputting a large number of international payments can be riddled with error. In response to this, many organisations are making bulk international payments using a file upload facility that allows payment details to be exported from a CRM or accounting software package in just a few clicks. Some payment providers have the ability to integrate with another platform via an automatic sync, providing secure online international payment solutions for bulk payments.
Saving money on processing time, exchange rates and fees can substantially lower administration costs, allowing a higher percentage of donation dollars to reach the hands of those that need it most. The added benefit here is that the charity can increase its attractiveness to donors.
One obstacle for private equity funded MFIs is that they expect to be paid back in their own currency (e.g. U.S Dollars, Euro or Japanese Yen), but are concerned about weak local currencies in developing nations depreciating against the world’s leading currencies. The usual FX risk management tools such as Forward Contracts and Options are not readily available in these emerging currencies. To compensate for high levels of currency and default risk, interest rates for these types of un-collateralised low value loans can be in excess of 20%.
Despite the costs and currency risks, if aid agencies and NGOs can find a way to tap into private equity investment in a similar fashion to the way MFIs have and use international payment methods to provide NGO aid, then perhaps the dream of eradicating third world poverty can be realised.
With around 20 years experience in the financial markets industry Jim is acknowledged as a thought leader in Foreign Exchange and International Payments. Often sought for comment by print and online media including the ABC, Sky Business, Bloomberg, 2GB Radio and Business Spectator.