Navigating the Complexities of Foreign Exchange: An Interview with Gabriel Grisham of OFX
Gabriel Grisham, eCommerce Sales at OFX, focuses on optimizing cross border payments for brands, ecommerce merchants, and global marketplaces.
Interview by James Eron, Partner, Kung Fu Data.
JE: Typically companies expanding overseas have to set up offices, bank accounts, etc., or at least that's how it's typically been done. How's that changing today?
GG: Oh, it's changed quite a bit. I'd say 10 to 15 years ago, if you wanted to have a presence from the US in Europe or Canada, most likely you needed some local boots on the ground. Today with the expansion of marketplaces—Amazon and Ebay—a five to ten person operation can have global sales relatively quickly. Services like Amazon’s FBA program can take care of a lot of the logistics headaches that come with expanding overseas. The expansion of third party services, from marketing to taxes, provide an international opportunity to expand very quickly without requiring a lot of the effort and problem solving that was needed 10 – 15 years ago. When used correctly, brands can get exposure to lots of eyeballs around the world with very little upfront investment or additional manpower needed.
JE: Obviously there's a huge opportunity in ecommerce global expansion, but getting your money home, of course, is a big issue. How should companies think about getting their money home?
GG: I like to think of it as efficient logistics for money, and it’s not just getting your money home, but really having the flexibility to receive and make payments in multiple currencies anywhere and anytime.
When you are sourcing product from China, you can bring everything to the US and then send it out again to different distributions centers around the world. However, assuming you can get the QA piece taken care of in China, then you probably would just want to ship products from China directly to a European distribution center, instead of going first to the US and then to Europe.
I think about moving money in the same way. You want to minimize the need to exchange one currency for another as much as possible. For instance, if a brand is based in the US and selling on Amazon.co.uk, and they are using Amazon’s currency converter, essentially they are letting Amazon convert the pounds, or GBP, back into US dollars every two weeks like clockwork. Of course, Amazon charge a margin on this transfer which eats into profits.
But that's only one conversion. If you have pound payables like VAT, (the taxes that are due in the UK), a consultant, or a third party logistics provider; now you've got to take your dollars and convert some back into pounds to send back out again. That's not an efficient way to move the money. You'd much rather keep it in the UK. You'd rather keep it in pounds. Pay those costs that are pound based—and then bring home the remainder. This way you're not paying unnecessary foreign exchange costs, the costs associated with every transfer you make from one currency to another. Moving your money efficiently just like you try and move your packages can be a huge cost savings. However, many companies don’t have this kind of flexibility because they only have one bank account.
JE: Well, actually that leads into my next question because most people think about the cost of wire fees, but I've heard that the real cost is in conversion fees.
GG: Absolutely. As soon as you start getting upwards of a thousand dollars… $10,000, it's the FX costs, or the foreign exchange costs, that really start eating into your margins. Everyone knows about wire fees, both incoming and outgoing, which are usually around $45. Now when you're moving $500, yeah, that's a large percentage—that's almost 10 percent... when you're moving five thousand dollars, now it's one percent. When you're moving $500,000 and up, it's just a write off... $45, no big deal.
But what you don’t see, what the marketplaces do as well as banks, is they also charge a margin to convert money from one currency to another. So, when you're converting pounds into dollars, conversion fees are usually anywhere from 2 to 4 percent. Depending on the currency pair, sometimes it's higher than that... When you are sending money from your bank, the costs really depend on the banks involved, whether they have a direct relationship with the bank you are sending funds to, or they require a third party correspondent bank. In any case, you're looking at multiple fees and higher costs than necessary. Everybody wants a piece and it can get expensive really quickly as it’s not a flat fee, but rather a percentage of the amount being transferred.
The other thing about FX costs in particular is that you rarely see it as a line item. So you don’t really know it is there or how much it is unless you're really paying attention and you are actively calling up multiple banks to find the best buy/sell rate for a currency pair. There's the interbank rate [the rate banks buy and sell currency to each other for], and then there's the retail rate [the rate banks offer to customers]. Unless you know exactly what the interbank rate is when you are transferring money, you don’t know how much you are really being charged. Of course there are ways to find out, you can Google a currency pair to find out what the interbank rate is and then ask your bank, “what margin are you charging me?” But this is time consuming. The easier way to do it, really, is to speak with an FX provider.
FX providers specialize in international money transfers and generally offer far better exchange rates at margins much narrower than 2%. This way you don’t need to actively manage money transfers nearly as much as you do with your banks… and it’s also a much better alternative than using a marketplace which automatically transfer funds on a regular schedule without any flexibility.
JE: Now, obviously, two to four percent plus other fees and charges, for retailers, it can add up quite quickly.
GG: Not only can it add up quickly, it can also fluctuate dramatically. Say you are a US based business, and you're selling in Europe. You've got euros that are coming in, and the value of that revenue is going to increase or decrease depending on how the value of the euro fluctuates against the dollar. In a given year, it's not uncommon for one currency to vary up to 10 percent against the dollar.
JE: How do companies manage their currency risk, then?
GG: Well, there are a few things you can do. One of the more common tools is using a forward contract. With a forward contract you essentially lock in whatever that day’s rate is for a certain amount of money that you can use in the future. So, you can take today's rate, whatever it is, US dollar to pound, call it 1.4:1 [one pound gets you $1.40], and you can lock that in for up to 12 months.
With this contract in place it doesn’t matter whether the value of the pound goes up or down, you're going to get the same amount of dollars for your pounds that you're going to get today… You're going to get that next week and you're going to get that six months from now. As long as the amount of the contract hasn’t been used up of course.
I generally recommend brands and companies of any size that are operating in more than one currency, receivables or payables, protect against currency exposure and downside risk. Of course, there is potential upside to taking an “it is what it is” approach and just taking the spot rate on every transfer. You win if the currency appreciates, but you lose when it goes down. Maybe things go your way and you make 10 percent more than forecast because the currency value went up. But the problem is when it goes down and you're going to make 10 percent less than forecast. The classic example of this, of course, is Brexit, when the value of the pound dropped 10% almost overnight against the dollar which really hurt a lot of retailers in the US that had exposed pound balances sitting somewhere.
At the end of the day, it's really just about the risk appetite that you have. Are you willing to give up potential additional profits to ensure you make a profit? If you're making 10 percent margins but leaving those revenues exposed, your margins can easily drop to five, zero, or even go into the red if you're not focusing on the currency side of the profit equation. You can increase your prices to compensate for the drop in value, but if you've got any 60, 90 day payables or receivables in a different currency, that’s exposure where you probably want to mitigate the risk. Especially with larger sums, if you know what you are going to get today in a currency conversion and you can lock in that profit margin, I’d argue that’s generally a good idea rather than leaving it up to the whims of the market.
JE: Tell me about OFX. How can you guys help retailers, brands, or companies that you work with?
GG: A bit of background on OFX: we've been in business for about 20 years, we’re publicly traded, and we move over $20 billion a year in currency for individuals and businesses. We partner with some of the biggest banks in the world to provide our money transfer service and, because we move so much money, we're able to buy currency at really close to interbank rates. Our system executes transactions very efficiently where nobody has to touch a computer. Any transfer with us is very automated and any customer of ours can book a transfer almost any day and at any time online or they can talk to someone on the phone. If you want to book a 10,000 pound to USD transaction in the middle of the night, we can do that.
The way we actually move money is also very efficient. Since we are the counterparty on the transaction, funds usually stay in the same currency, they just change accounts. When you do a deal with us, say you are repatriating pounds back to the US, the money would go from your pound account in the UK to our big pool of money in the UK. And then we deliver dollars locally from our US bank account to your US bank account. So, rather than using the SWIFT network and banks, the deal is done with us. It's a much cleaner process. It's faster, it's better, it's also cheaper.
On top of this money transfer capability, we have another product, the Global Currency Account, where we set up local currency accounts for companies. It’s a great product, especially for online sellers that are have revenues all over the world. Rather than have only one bank account in one currency, with the Global Currency Account you can have lots of accounts across six currencies in a matter of weeks. This way, rather than have a marketplace send your revenues back to you in your home country and charge a pretty wide margin you can say “No, here's a bank account in the UK that I have set up. Deliver my pounds locally to this pound account, deliver my Australian dollars locally in this Australian dollar account, deliver my euros locally in Germany,” you get the idea. And then as our client, you can choose what to do with those revenues. You can bring them back to your primary bank account, you can pay your local taxes, or anything else. Maybe you need to pay a marketing agency in Germany. Of course, we can help you convert USD to euros to make the payment, but if you have a euro balance that’s even better to pay from. With this account you can move your money much more efficiently, get really competitive FX rates, and avoid unnecessarily paying FX costs when possible.
Of course, we also offer the ability to set forward contracts to protect against foreign currency exposure, as well as the ability to set limit orders and other alerts to monitor currencies for you so you can focus on your business and not worry about currency fluctuations.
JE: Okay, and any final advice for brand managers as they go on their route to global expansion?
GG: I think that the first key for a brand manager or anybody that's looking to go international is to not look at the international market as just one huge box you've got to check all together. I would recommend looking at one market at a time. If you're in the US, take Canada as your first market, then move on to the next like the UK. Focus on finding out where your product is going to sell and win there. Once you have success, then move on to the next market one by one.
And then the other thing is, I would highly recommend looking to keep as much of the sales process in-house and control as much of the sales pipeline as possible. Lots of brands continue to sell wholesale internationally, but with technology today, the third party consultants, logistics providers, marketers that are out there, rather than sell wholesale out into these regions, leverage marketplaces and technology to sell retail. We can help on the banking side, and there are lots of third party logistics platforms to help with moving your products, but the key is you control the brand. You control the price point. You control your message. And best of all you keep that direct relationship with your customer, wherever they are.
This is really the most valuable piece, the customer relationship, because then that gives you information about who exactly is buying what, how did they find you, what marketing campaigns are most effective, etc. When you have that data, you can then apply it to different jurisdictions and continue to grow. Rather than just say, “Well, this distributor moves product for me in this country, and that distributor moves product for me that country,” control it yourself. I think that the ability to keep things in-house today, while it's not easy by any means, is much more profitable in the long run.
About Gabriel Grisham
Gabriel is leading OFX’s push into the Online Seller and eCommerce sector. His primary focus is on brands and marketplace sellers that are sourcing products internationally and selling in the US and/or on overseas marketplaces.
About OFX: OFX is one of the world’s largest international payments businesses globally. Having transferred over $100 Billion since its inception, OFX provides international payment services to online sellers, individuals, and business customers. First launched in 1998 and publicly listed on the Australian Securities Exchange, OFX is headquartered in Australia with offices in the US, UK, Canada, Hong Kong and New Zealand.
About the Author
James Eron has over 20 years of consulting and industry experience in China, Japan, and the US. As a Partner at Kung Fu Data, James is a China market entry expert bringing quality brands into China and executing strategic turnarounds for brands struggling in the world's most competitive eCommerce market. His work makes extensive use of China eCommerce data to identify and capture market opportunities. Clients include a wide range of B2C brands from apparel, cosmetics, and luxury to pet food and consumables.
James is a frequent writer on China eCommerce topics and is regularly invited to speak at events surrounding China’s e-commerce sector. He is also global ambassador for the Global Retail Insights Network (GRIN), a community of creative, inspired retail minds helping shape the future of global commerce.
About Kung Fu Data
With offices in Beijing, Shanghai, Hong Kong, and San Francisco, Kung Fu Data is an independent data firm and market maker possessing a rare combination of authentic understanding of the West and China in-depth local know-how. Since 2010, we have used proprietary data and optimization technology to help foreign brands enter and thrive in China’s largest e-marketplaces. Our sole mission is to bring brand owners a level of strategy and data transparency they never thought possible.
Interested in learning more? Visit www.kungfudata.com for inside information on eCommerce in China.