When planning to penetrate a new market with a product that is doing well for your business, it usually involves looking overseas. Exploring the global market is usually a key strategy in developing and scaling up a successful company and certainly a global brand. It is likely that there are plenty of other economies that are yet to be exposed to the product, or there may simply be less competition. The key advantage is the mere increase in the size of the market; potential buyers could go up by a factor of a thousand depending on where you’re based.
In the past, the barriers to this ambitious business strategy were obvious. Selling a product overseas was very expensive in regards to shipping (before globalised courier firms) and it was a gamble to spend marketing money in a new market without knowing if you would see a net positive return. Today those risks don’t exist as much. You can put your product up for sale on Amazon or eBay to a wider market for no cost and no risk – and it takes all of 5 minutes. All you have to do is calculate postage prices/times to see if it’s viable. However, there are still some more subtle barriers to overcome.
When selling overseas, customers of course prefer to pay in their domestic currency. In fact, they have to. It isn’t going to be worth the trouble of them converting their currency privately and then purchasing the product – they would just turn to a company that does it for them. The best example of this is when paying on Amazon where they take control of the currency conversion. Only, this cost is beared on the seller because, of course, Amazon have collection accounts all over the world. Amazon’s exchange has a 4% markup when you collect the money from a foreign sale, which is costing sellers thousands each year.
You may feel like you’re side-stepping this when selling on your own website, but this isn’t necessarily true. When accepting Visa payments for example, the bank will still be taking a margin on the exchange. This is more unpredictable (possibly between 2% and 5%) and most people aren’t even aware of the exact number without some digging, because banks like to hide currency markups and fees in the small print.
This can really stifle the profitability of a business no matter how big or small the company is. Particularly low cost, high volume selling (non-premium products) sole traders will suffer the most as the margins are usually already very fine. In some instances, 4% in fees can be like having to pay twice in postage costs and slice your reasonable 8% net profit margin in half. Afterall, exchange fees are applied to revenues, not profits.
The solution to this is to open a collection account abroad with a remittance company (usually, the fintech startups are the best). Companies such as TransferWise, MoneyCorp, Currencies Direct and Payoneer are currently offering small businesses to open specialised collection accounts. These accounts will collect money in the buyers’ domestic currency (so you can avoid the 4% Amazon currency exchange process) where you can exchange and transfer the money to your domestic account. Usually, fees are between 0% and 1% and exchange markups are between 0% and 1%. In the example of TransferWise, they exchange your money at the real mid-market rate (0% markup) and apply a 0.5% transfer fee.
In the event of a Canadian business, for example, selling $150,000 worth of goods in revenue per year to Europeans – you would be charged $6000 per year. $6000 could easily be the difference between making a living wage or having to have a part-time job on top of the business. Bank transfers to Canada from such collection accounts on the other hand could provide you with another $5000 of annual earnings, all with very little extra effort.
Relying on central and traditional companies to transfer your money is naive, yet something that needs to be recognised for what it is – exploitative and sharing traits of a monopoly. Large banks and marketplaces exchange enough money each day to not be at a currency risk and so 4% is an unjustifiable hedge.
When turning to a new fintech remittance company, be prepared to pack and leave as soon as they begin to increase their prices. Revolut and TransferWise have shown that you can profitably run a currency exchange business using the mid-market (real!) rate, so it’s time to set that as the benchmark and not accept anything less.