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The True Cost of Overseas Banking

The True Cost of Overseas Banking article image

atmThe final article in our True Cost of Exporting series deals with the cost of overseas banking, to help you manage your transactions to minimise those fees and charges, and make sure you’re not paying too much on your foreign finance facilities.Banking seems like such an everyday facility that exporters forget that doing it the wrong way can be costly. Whether it's opening a bank account in the destination country or finding finance from foreign sources, there are a number of costs exporters should consider-and many they can avoid or minimise.

Overseas accounts

If you are already with a provider, obtaining an overseas account is usually a matter of completing paperwork and letting the institution do the rest. Most Australian banks don't have branches overseas, so they will generally go through in-country partners to set up an account for you. Global banks, such as HSBC, can process country accounts through their own network. At this stage, the main cost to you is time and effort. "Some of the indirect costs are exporters needing to have two banking processes, and there could ultimately be multiple providers in that," says Jason McClintock, senior manager in FX trading at American Express Foreign Exchange International Payments. "There's a cost internally to keep those accounts functioning within general ledger systems and accounting systems in the back end of any exporter." Foreign accounts tend to attract transactional fees similar in structure to Australian accounts. Fees and charges will vary according to a few factors. "From a client perspective, it depends on their volume as to what they get charged, and the size of their balances. If you were to use a third party bank it's typically more expensive because of that third party aspect," explains Wendy Booth, head of global payments and cash management at HSBC Australia. "From the bank perspective it depends on the country, For instance, the UK is notoriously expensive for telegraphic transfers. The US don't pay interest on accounts because of local regulations, so they'll charge fees, and their fees are a little bit more competitive." The good news is exporters may be able to negotiate fees with their provider. "Depending on the size of the corporate, everything's negotiable with the transaction fees," she says. Factors that would influence negotiation include volumes, size of deposits, and the extent and length of the relationship, Booth notes.

Foreign finance

Attaining finance from a foreign market involves a similar process as attaining finance in Australia. However, whether or not you're eligible for finance will depend on the country you're in. "In the more developed countries it's a more refined process and more available to the lower end of the market, but in lesser developed countries it's not as easy," explains Andrew Skinner, head of trade and supply chain at HSBC Australia. An indirect cost is maintaining a presence in the market. Typically you need to have assets in the country before you can apply for finance in that market; you may also need a financial track record to be considered for finance. "That track record may be offshore so if in your new market you have no track record, it's not going to be easy to get access to large facilities unless you have strong security, for example," he says. "There are also some markets in which you can't give security, or it's of negligible value. The better the security, the cheaper the finance will be. People whinge about security but if it gives you a better cost of funds, then that's a more sensible way to get it." He adds that if your facility goes beyond the standard loan you may need independent legal advice, which has a cost attached to it. As for the cost of the finance itself, Skinner says Australia is quite competitive, so you may be better off getting finance here, especially as you'll already be familiar with the regulatory environment. The volatility of the other country's currency may also be discouraging. But there are still advantages to attaining finance in another country: if you have costs in that country, then "you may be able to provide a natural hedge for your product to remove some of the currency issues," says Skinner. Also, "some countries have a lower cost of interest."

Operational costs

If you’ve set up in the country, there will be more, and probably cheaper, banking facilities available to you than if you were just operating from Australia. However, there are operational costs you need to consider in running that asset, and this means tax and legal obligations. "Typically [residency] affects the tax and legal aspects, whether you can earn interest. In Australia, non-residents who don't put in a tax file number get charged at the highest tax rate," says Booth by way of example. McClintock agrees; regulations affect foreign currency accounts. "Is there additional reporting required by operating that account? If the account is domiciled in the foreign country it can change those obligations considerably." Any interest earned could also make managing those accounts more complex if you’re dealing, and receiving interest, in multiple currencies. Exporters also need to know whether they can repatriate funds, and the regulations around that process. Booth says it depends on the country and the business’ residency. "You cannot get renminbi out of China because of local regulations. When we sit down with our clients we need to understand how it is they're going to structure their business and the implications of putting money into each of those countries," she says. At the end of the day she recommends exporters partner with a bank that knows offshore to make banking easier and more efficient: "Really sit down and talk through the movements. Let them understand your supply relationships. Do that early."

Counting currency

Having an understanding of your foreign exchange movements can help you minimise your banking costs, so it pays to take a closer look. McClintock says beyond rates and margins, a foreign exchange account would incur the usual account-keeping fees from your provider. Fees vary depending on the type of currency activity. "If customers are receiving in US dollars and making a US dollar payments there could be a different fee levied for that service because there's no exchange involved," he explains. The number and type of currencies you're dealing in would also affect the cost of your account. "If it's just one US dollar bank account, that might be a different case to where the exporter needs 10 different foreign currency accounts," says McClintock. "The other thing is, what currencies do you need to hold those accounts in? If we're talking about the major currencies, there's going to be better pricing available than operating an account in a more exotic currency." He adds that there could be conditions to keeping the account, for example minimum account balances or certain activity levels or thresholds, which exporters need to consider. While these fees and charges are generally unavoidable, you may be able to negotiate. The key here is to understand your business' payment patterns, then shop around for a suitable provider. "There are different features attached to various foreign currency products in the marketplace so it's about negotiation for value for money," says McClintock. "Volume generally drives the price dynamic." In most cases, it's more cost effective for payments to undergo as few currency exchanges as possible. McClintock advises exporters to build natural hedges by earning and making payments in the same currency. Timing is a further consideration for businesses; the time it takes to convert money for use elsewhere could incur tiny, but incremental, costs, so it's something you need to know to manage your money. "Ultimately you're completing one transaction to make another, to fund another part of your business," says McClintock. "Work with your provider to develop a strategy and implement that strategy to get the most efficiency out of your foreign exchange positions." Additionally, McClintock says it's important for exporters to develop a foreign exchange policy that will identify the currencies in which you'll be managing receivables. Obviously being paid in Australian dollars is ideal, but otherwise "stay in the majors because you'll get benefit of volume in the marketplace and better liquidity in product offerings and margins generally," he suggests. "Not forgetting to keep an eye on the exchange rate as well."

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