What Exactly is FX and Why is it Important to Know How it Works?
February 15, 2022
3
minutes
Discover what FX is and how it can affect your international payments (and what you need to know before making your next overseas transaction).
The majority of businesses now trade internationally, and that’s a non-negotiable fact of the 21st century. If you’re regularly dealing with folks from Spain to Saudi Arabia and everywhere in between, chances are you’ll already be well aware of the ins and outs of transferring funds internationally, converting currency, and the fees and markups FX desks make along the way.
Not sure exactly how FX works, how it’s different for businesses and consumers, and key things you need to know when buying and selling internationally? Fear not: you’re in the right place. Read on to find out what FX is, how it impacts your business transactions, and what to look out for when making international payments.
When you send and receive funds internationally, you engage with foreign exchange, or forex or even just FX for short. It’s useful to know about the wider world of FX, including how the market operates, to get a high-level understanding of how it works. So first up, what exactly is FX?
The foreign exchange market is the largest financial market in the world. It’s a global decentralized market exchanging currencies that trades an astonishing $6.6 trillion every day! The market includes:
Currencies are always traded in pairs, for example, EUR/USD. You can see live FX rates for the most popular currency pairs here on ig.com. The price shows the value of one currency relative to the other and refers to how much the currency is worth. Trading FX has similar mechanics to other financial markets, such as stock markets. The FX market is very profitable and this is one of the main reasons why financial institutions and individual traders use it.
Now you know what FX is, how does it impact you when you make international transactions and what do you need to know about fees and charges?
When you send money abroad from your personal account, for example sending money using Revolut, the transaction will probably be fee-free and you’ll get the exchange rate set by your banking provider. Personal transactions are typically less complicated when transferring small amounts of funds. However, businesses dealing with large amounts of money are usually hit harder by fees.
If your business is making international transactions, you’ll typically be charged between 2-4% with an additional non-sterling transaction fee. When you use high street banks for FX, like Barclays for example, they charge £25 as an initiation fee and 3% of the amount you transfer. Of course, the fees vary depending on who you’re using.
You can also make international payments on platforms such as PayPal and Wise where you’ll likely pay less in fees compared to brick and mortar banks. You can also use Rebank to pay international suppliers, transfer money from one company to another, and receive money in another country to pay employees.
💸 Saving money on foreign transfer fees (compare our pricing)
🔍 Calculate fees with our handy currency converter tool
⏰ Regularly check all your cash flows through our simple layouts
When you trade overseas and send and receive international payments, FX and exchange rates play a role. As exchange rates vary, the amount you pay for products and services as well as how much you receive from sales of goods and services will change. With this in mind, here are a few tips for buying and selling overseas.
When you buy and import products and services from other countries, like the US for example, the exchange rate will likely change between the time you make an agreement and the time you make your first payment. Because of this, the actual amount you pay may increase or decrease, so if this is a potential issue for you, we recommend putting forward contracts with a fixed exchange rate for a set period of time to help reduce the risk for both you and the seller.
If your business sells products and services overseas, fluctuating FX rates will have a direct impact on your bottom line. Its impact will vary depending on how you issue your invoices. If you issue invoices in a foreign currency, you’re exposed to the risk of being paid less due to the FX rate change between when you issue the invoice and when you receive payment. Raising invoices in your local currency is a useful way to reduce this impact, as the overseas buyer will have to make the currency exchange to make payment. You can also agree on terms for FX fees and charges so you’re not hit with all the costs.
Many banks claim to have little or no fees for international transactions, but often they make money by giving you an uncompetitive exchange rate. This is why it’s important to know the different fees involved in FX transactions. There are often hidden fees you don’t know about before making an international transaction, such as when you make a payment using the SWIFT network. These types of fees aren’t detailed or are vague at best when you make your payment, and sometimes you won’t even find out what they are until after you’ve completed the transaction.
To help clear up the confusion around FX and the mystery over fees we’ve designed a handy currency converter tool that shows you the best live market rate, the exact fees you’ll pay, and how much the recipient will receive. You can use our tool to compare market rates with the rates and fees your provider charges and shop around for the best deals.
Make the most out of your FX transactions by downloading our free plugin here.
