Paying overseas contractors in multiple currencies without losing money on FX

For a large number of businesses operating in the UAE, dealing with overseas suppliers is a part of their everyday operations. When it's time to clear those invoices, you will notice that the amount leaving your account, based on the bank's quoted exchange rate, is never the same as what the supplier actually receives.

This is because there are several smaller costs attached to the transaction. While these costs may be insignificant individually, together they do add up to a lot for every invoice. If you manage spend for real estate groups, these supplier payments abroad usually make the biggest dent in your procurement budget.  

This guide explains where those costs come from, how to calculate the true cost of international payments, and which parts of the process you can actually control to bring them down.

What a cross-border payment actually involves

On the surface, every cross-border payment appears like a direct transfer of funds from your bank to the supplier's. When you look under the surface, the process is a lot more complex and usually goes like this:

Your business account → Your bank → One or more correspondent banks → Supplier's bank → Supplier's business account.

At every step, each institution will take its cut either through a processing fee or via the exchange rate if a currency exchange happens in between. In the UAE, the rules and regulations surrounding these payments are regulated by the Central Bank of the UAE. Internationally, it is done through the SWIFT framework.

What are the cost components of a cross-border payment?

Cross-border payments generally consist of four separate cost components:

The FX margin

The FX margin is the difference between the interbank exchange rate and the exchange rate your payment provider offers you.

For example, if the market exchange rate is 1 EUR = AED 4.30 and your provider offers 1 EUR = AED 4.38, the difference, i.e., AED .08, is the FX margin.

It's easy to miss on small payments because it's built into the rate itself, but it can turn into the largest cost component on large payments.

The World Bank's Remittance Prices Worldwide data puts the current global average cost of sending money at around 6.36% of the amount sent, with FX margins on average accounting for between one-third and half of the total cost.

Transfer fees

Your bank almost always charges you a fee for sending an overseas payment.  This is usually the only cost that gets quoted upfront, and while these charges are easy to compare, they rarely tell the full story.

Correspondent bank charges

Commonly called correspondent or lifting fees, it's the fee each intermediary bank charges to process your overseas payment. These deductions are not always known before the payment is sent, and depending on the charge option used, it may come out of the amount your supplier receives or be billed to you directly.

The receiving bank's fee

Some beneficiary banks also deduct an inward processing fee before crediting the supplier's account. It is usually deducted from the amount received rather than billed separately. If you have experienced instances where your supplier has received less than the invoice amount even though you instructed your bank to pay the full value, it's due to this.

The easiest way to understand these costs is by looking at numbers from a sample overseas payment of AED 200,000 to a supplier in Europe that will receive the payment in Euros.

As the breakdown shows, the FX margin accounts for the majority of the added cost, while the fee is marginal and often the number that is advertised.

Based on this scenario, a bank that charges a visible AED 150 fee but prices its rate 2.5% wide of mid-market is considerably more expensive than one charging an AED 500 fee on a rate within 0.3% of mid-market.

That is why comparing providers purely on their advertised transfer fee can be misleading. Alaan's FX calculator can help you compare different exchange rate scenarios before committing to a payment.

Whose pocket do these charges come out of?

The good news is that when making international transfers over the SWIFT network, you also decide how transaction charges are shared between you and your supplier via something known as SWIFT charge options. There are three to choose from:

Whichever option you choose, make sure your finance team records the payment charges correctly during account reconciliation.

What can you do to pay less on cross-border payments?

Here are some pointers to help you pay less on cross-border payments:

Pay more attention to the FX rate than the fees

Ask your provider for the actual exchange rate they will apply and compare that against the prevailing market rate. Even a small improvement here can save you considerably more than negotiating a lower transfer fee.

Ask for the rate in writing before approving the payment

When making high-value supplier payments, ask for a live FX quotation before authorising the transfer rather than relying on indicative pricing.

Pay suppliers in their local currency

If possible, consider paying suppliers in their own currency. It removes any discrepancies due to the FX rate and improves transparency and, by extension, trust.

Consolidate payments where possible

Consolidating multiple small international payments into one can help you avoid the repeated transfer fees and intermediary bank charges that will be applied to each transaction.

You can also consider dedicated cross-border payment platforms like Alaan's Superpay that provide a rate closer to the mid-market rate than a traditional bank. If you're open to  evaluating options such options, our guide to cross-border payment solutions give you a detailed comparison between the various options.

How to manage your exposure when making cross-border payments?

If your business makes frequent payments to certain suppliers regularly in the same currency, you will know that fluctuations in the exchange rate can significantly affect projected costs.

One way to reduce this uncertainty is through a forward contract. They allow you to lock in an exchange rate today for a future payment date. They are most useful when budgeting for large procurements.

If foreign currency exposure forms a regular part of your procurement process, it is worth developing a broader strategy for budgeting for FX risk rather than evaluating each payment individually.

Summing it up

Cross-border payments consist of a lot of components that, when carefully managed, can help you bring down how much you lose in each transaction. If you are a business that regularly makes overseas payments, reviewing and negotiating said components should become an integral part of each payment.

Simultaneously, leverage platforms like Alaan to help streamline the process further.

Book a demo with Alaan to learn more.

FAQs

What is the best way to pay an overseas supplier?

The best way to pay an overseas supplier is to compare both the exchange rate and the transfer fee and pick the right SWIFT charge option to ensure your supplier gets the amount they expect.

How long do international payments take?

The duration of international payments can vary based on several factors like the destination country or the number of intermediary banks in between, and the amount of time the receiving bank takes to process the payment. Generally, most SWIFT payments are completed within one to five business days.

Why did my supplier receive less than the invoice amount?

A supplier can receive less than the sent amount due to one of two reasons: the receiving bank deducted processing charges, or because the payment was sent using the BEN or SHA.

How can I reduce FX costs on overseas supplier payments?

You can reduce FX costs on overseas supplier payments by comparing exchange rates and transfer fees, consolidating and making payments in the local currency where possible and, finally, by asking for live FX pricing before approving large payments.

‍