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Currency exchange: pay across borders

dollar2peso"The Payoff" is for you wherever you are in the e-commerce supply chain. While the first installment of this weekly column emphasized what happens when a consumer walks into a bricks-and-mortar outlet, that's far from the only time payment needs to be convenient, efficient, and secure. This week, let's look at a piece of what happens when retailers pay their suppliers.

More specifically, how does it work when a retailer and supplier are on different sides of an international border? It's an increasingly important question: on a global basis, international trade growth averaged 6.2 per cent annually for 1950-2007, according to the World Trade Organization. However important international supply has been for you, it's nearly certain to grow significantly just in the next few years: the "International Monetary Fund forecasts that 87 percent of world economic growth during the next five years is ... to occur outside of the the United States", according to President&CEO magazine.

An international supply chain entails plenty of challenges, including contractual conformance, customs delays, language barriers in negotiation, and more. "The Payoff"'s focus, of course, is just on settlement of accounts.

Costs of international payment

Traditionally, businesses rely on commercial banks to clear international payments. Banks structure such transactions in terms of two major costs: currency exchange and transfer fees. Together, these often total 5% for small- and medium-sized business, and it's very common for the costs to be accounted opaquely. "Spot prices"--effectively, the wholesale market for currency exchange--are generally limited to transactions of $1 million and higher.

Those percentage points--pure cost to you--are an attractive target to banks' competitors. Many of the new e-commerce players, including PayPal and Google Wallet, explicitly target cross-border transactions in one way or another, including business-to-business clearances.

At the same time, there's plenty of activity among specialty start-ups which target exclusively the market for cross-border transactions. Much of this takes place in Europe and elsewhere overseas, where international trade is a bigger slice of national economies than in the relatively self-sufficient US. Just last week, for example, London-based TransferWise secured a modest seed funding round to construct its vision of "crowdfunded currency exchange". It aims to slash transaction costs well below 1%, and, in all cases, to increase transparency to customers. While it's impossible to know now which particular provider will win out in this competition, and sometimes even hard to determine which have legitimate business prospects, currency exchange looks ripe for the kind of digital "disruption" publishing, stock market brokerage, and other domains have experienced the last couple of decades.

You know how thin your margins are; what would saving a percentage point or two mean to you? "The Payoff" isn't certain whether the traditional banks will still be on top in cross-border transactions in five years, or will have been largely replaced by younger, digitally-oriented innovators. We are sure, though, that the competition between them will make for plenty of opportunities for you and your trading partners to trim costs.

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