In today’s interconnected world, the number of people working internationally is increasing rapidly. Some of them are migrants, moving from country to country in search of work. Others are employees with a global remit, travelling from country to country promoting their company or organization’s business. But a growing proportion is freelancers, based in one country but using digital communications to sell goods or services in other countries. As small businesses, they make B2B payments across borders using a variety of international payment solutions.
Diversifying cross-border B2B payments for freelancers
Global payment solutions are diversifying fast, but at present banks still dominate. Many freelancers receive cross-border B2B payments via traditional wire 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 unfavorable exchange rates.
Freelancers whose clients pay by international wire transfer tend to shop around for the most favourable banking terms. Initiatives such as the UK’s CASS (“Current Account Switching Service” – in the UK, a checking account is known as a “current account”) make it easier for people to move their transaction accounts from bank to bank.1 The UK’s Competition Markets Authority has recommended that the UK’s big banks should 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 Initiatives like these should help international freelancers mitigate high bank charges arising from international payment 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 can significantly reduce costs and improve the speed of payments. However, they cannot eliminate FX or cash flow risk.
Managing FX and 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 wire 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 unfavorable to the freelancer and the bank may additionally impose a fee for the conversion.
Here’s an example. One UK freelancer who was invoicing a US client in US dollars was advised by her bank to ask the client to pay in sterling 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 over the cost and timeframe for international 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 B2B 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 international payment 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.