Introduction
Businesses making international payments often focus on the amount they need to send without looking closely at the foreign exchange costs involved. However, the cost of converting one currency into another can include different components.
Two terms businesses should understand are FX fees and FX spreads. Although they can both increase the cost of an international payment, they work differently. Understanding the distinction can help businesses compare payment providers and identify potential savings.
What Is an FX Fee?
An FX fee is a charge applied to a foreign exchange transaction or international payment. It may appear as a separate, clearly stated cost. Depending on the provider and transaction, fees can be structured in different ways.
For example, a provider might charge:
1. A fixed transaction fee:
A set amount applied to an international payment.
2. A percentage-based fee:
A charge calculated according to the transaction value.
3. A transfer fee:
A separate charge associated with sending funds internationally.
Because fees can vary between providers, businesses should check exactly what is included before comparing payment services.
What Is an FX Spread?
An FX spread is the difference between the exchange rate a provider receives in the market and the exchange rate offered to the customer.
For example, if the underlying market rate indicates that one unit of currency is worth a certain amount of another currency, a provider may offer a slightly less favourable rate. The difference represents part of the provider’s FX margin.
Unlike a separate transaction fee, an FX spread may not appear as an obvious line item on an invoice. Instead, the cost is incorporated into the exchange rate.
Why the Difference Matters
A business may see a payment provider advertising low or even zero transfer fees and assume the transaction is inexpensive. However, there may still be an FX spread incorporated into the exchange rate.
This is why businesses should consider the total cost of conversion, rather than focusing on one advertised fee. A provider with a low transaction fee but a wider FX spread could potentially cost more than a provider with a higher visible fee and a more competitive exchange rate.
A Simple Example
Imagine a business needs to convert AUD into USD to pay an overseas supplier.
Provider A charges a $10 transaction fee but offers a relatively competitive exchange rate.
Provider B advertises no transaction fee but uses a less favourable exchange rate.
The second option may initially appear cheaper. However, if the exchange-rate difference costs the business more than $10, Provider B could actually be more expensive. The exact impact depends on the transaction size and the rates available at the time.
How Businesses Can Compare FX Costs
When evaluating international payment providers, businesses should look at several factors.
1. Exchange rate:
Compare the rate offered against an appropriate market reference.
2. Visible fees:
Check whether transaction or transfer charges apply.
3. FX spread:
Understand how much margin may be included in the exchange rate.
4. Payment size:
Larger transactions can make relatively small rate differences significant.
5. Frequency:
Businesses making regular international payments should consider cumulative costs.
Conclusion
For businesses making international payments, comparing the complete cost of currency conversion is more useful than focusing on advertised fees alone. Understanding both components can help businesses make better-informed payment decisions and identify opportunities to improve FX efficiency.
