Q&A – how to get the most out of your international transactions13th November 2017
We caught up with Wayne Ashall, Senior Consultant, to discuss his most recent client project: an FX conversion project for a large multinational merchant operating online.
So, for those readers who might not know, can you briefly explain what FX is?
Absolutely. FX, or foreign exchange, is the conversion of money from one currency to another. So, in retail terms, FX is useful for merchants with significant amounts of international spend who sell/authorise transactions in multiple foreign currencies but don’t want to, or can’t, settle in each of those currencies.
Can you tell us a little about the merchant you were working with on this project?
We partnered with a large eCommerce organisation (Client A) that operates beyond their domestic market and offers their products and services to international audiences. This is a complex undertaking as merchants often have to manage multiple domestic supplier relationships throughout the supply chain, and deal with local nuances in each geography they operate in.
Where CMSPI came in was in helping Client A manage and optimise the payments supply chain, including the cost of accepting payments globally, with a fundamental area being FX arrangements.
What were some of the complexities of the project?
Probably the most difficult part of any FX project is reconciling the large amount of authorisation currencies out there (there are c. 200 accepted on the Visa/Mastercard platform) with the far fewer settlement currencies that are accepted by Visa and Mastercard (there are only 17 available at the moment). That means that merchants can choose to accept currencies from up to 200 locations across the globe, but can only settle these in 17 approved currencies. Most merchants wouldn’t want quite so many different currency accounts, so merchants often chose to use FX and convert their money into a few key currencies.
These restrictions, coupled with the fact that not all acquirers support those 17 currencies, means that merchants find it difficult to have true visibility of their arrangements and an accurate understanding of their supplier’s capabilities.
Can you name the 17 main currencies currently available on the international platform?
We’ll see! Euros, U.S. dollar, Australian dollar, Canadian dollar, Great British pound, Swiss franc, Danish krone, Norwegian Krone, Polish zloty, Swedish krone, Hong Kong dollar, Japanese yen, New Zealand dollar, Singapore dollar, Brazilian real and the South African Rand.
And the Czech Koruna! It’s also worth mentioning here that the Chinese renminbi isn’t on the list despite China being a huge card market. This is because Visa and Mastercard have previously been unable to operate in China due to regulation restrictions. This is due to change in the coming years though so it’s a reminder to merchants to regularly reassess their arrangements to take advantage of any industry changes.
We regularly save our clients six-figures annually and have experience dealing with large international merchants.Wayne Ashall, Senior Consultant
How does the actual conversion of currencies work? Can you explain in a bit more detail?
That’s a great question because where the conversion takes place actually has a big impact on merchants. There are really three main possibilities. The first is that no conversion takes place and the merchant receives the exact amount as the authorised value in the same currency. The second option is that the conversion is done by the schemes (Visa and Mastercard) and the FX rate is set by the acquirer. This is the most common method. The third method is one we don’t see too often, where the acquirer does the conversion.
What role did CMSPI play in this project?
There are generally two main areas where we can help merchants in an FX project and these were the two main issues we helped Client A with. These are understanding and negotiating the markup placed on merchants by the acquirer, and optimising the total value the client received, inclusive of the varying currency exchange sources used by the providers.
Can you tell us a bit more about the markup aspect of the project?
So, the markup, which is incurred by the merchant, is typically applied by the acquirer after the conversion to help the acquirer cover the costs of the risk involved in FX, as well as to cover the costs of actually providing the service. These can vary significantly up to around 4% but can vary hugely depending on the arrangements you have in place with your suppliers. There are generally tiers of markups which increase dependent on risk, volumes, geographies etc. These are difficult to understand, and this is something we helped Client A get more visibility and clarity on.
Markups can also at times be misleading – as we found with Client A. Some suppliers may offer a low markup, which at first glance seemed like an optimised arrangement, however, we found that these were using an unfavorable exchange rate when you factored in the client’s prevalent currencies. So, in reality, it wasn’t a good deal for Client A.
And the exchange rates?
We also helped Client A have greater transparency of the exchange rates which the schemes were using to settle their transactions. The sources can vary a lot by acquirer and while they might seem like small differences, across the kind of international spend that Client A deals with, we actually saw a six-figure variance. Understanding what sources your supply chain is using to make these currency conversions, mapping this against your prevalent currencies, and finally negotiating this along with the supplier mark-up, can have a massive impact on a merchant’s bottom-line.
What advice would you have for a merchant struggling with their FX arrangements?
We can help! We’ve saved merchants six-figures on these kinds of projects and have experience dealing with complex, international arrangements. Keep these four main questions in mind when reviewing your arrangements – Do you have transparency of your conversion rates? What sources are your acquirers using and are these in your best interests? What markup has been applied and is this reflective of the cost and risk incurred by your acquirer? Can your suppliers service the currencies you need to operate in?