Unhedged Foreign Currency Costs for SMEs

Paytron’s research, data & survey results have shown that an SME with international expenses of USD $50,000 per month could have saved AUD $60,000 per year over the last 3 financial years if they used the right tools and services.

Paytron’s innovative RateLockTM technology provides the necessary tools and services to achieve these outcomes. By stripping away the complexity and challenges of hedging a company’s Foreign Exchange (“FX”) exposure, executing through Paytron will enable a company to save an additional 90% on the FX conversion fees. (when compared to the big four banks).

Let’s consider an example where an Australian based company either imports goods or services from international suppliers and need to pay for these goods or services in USD. Let's assume that a payment of USD 50,000 (Column C) is made at each month end for the full financial year. The USD 50,000 contractual commitment to the supplier stays the same regardless of the AUD/USD exchange rate. This means that the AUD amount the business has to fund will constantly change and creates a great deal of uncertainty and potential losses when expenses incurred are in excess of those budgeted for. Especially when the bulk of these increases costs cannot be passed back to the company’s customers.

To get a feel for how much the exchange rate fluctuates we have plotted the AUD/USD month end exchange rate for the last 3 financial years below.

The financial impact of these fluctuations is depicted in Column F. To be conservative, we selected FY2019 (i.e July 2018 to Jun 2019). We purposely avoided using FY2020 as it was an obviously favourable example of very large currency moves, and wanted to show something more “moderate”.

If the company had used Paytron at the end of the first month of the 2019 financial year, they could have fixed their total AUD equivalent payment obligations (Column E) for the year, saving their business AUD $ 30,841 (Total in Column F) in 1 year alone.

Disclosure on Forward points. RateLock is an evolved form of FX Forward. FEC (Forward Exchange Contracts) are driven by the Spot rate & interest rates differentials. The reader that is already familiar with FECs will question what the FX forward points cost are. As of 12 October 2020, the forward rates were actually in favour of our example (i.e. if you locked in the 1y forward rate today, your AUD/USD rate was 6 points more favourable than the spot rate. We chose to keep things simple and take a more conservative route by excluding these points, as the example is clear enough that large savings are possible with our technology.

The example above assumes future FX Forward rate are more or less equal to the Spot rate and provide a negligible difference. For full disclosure, we published the FX Forward curve at the bottom of this post.

In the above example it is pretty clear that it makes sense to have hedged the FX and that the company would have saved AUD $ 30,841. Due to the overall average weakening of the AUD relative to USD, the company as an importer of goods or services would normally have incurred a loss in the increased cost of import. However with Paytron RateLockTM in place, the hedge would have resulted in a profit to offset the loss, effectively resulting in the company paying for the goods and services at the RateLockTM exchange rate.

The next logical question to ask would be: “What if the AUD strengthened relative to the USD?”. In that scenario, the company would have profited from the lower import cost, which would have been offset by a loss on the hedge. Again resulting in the company effectively importing the goods or services at the RateLockTM exchange rate. In summary, regardless of which direction the FX rate goes, the company will pay for their goods and services at the RateLockTM exchange rate.

Over and above the certainty that TM gives you when executing with Paytron, we will also do it at a rate which is likely to be 90% cheaper than when executing with the big 4 banks. For our given example, this translates into an additional saving of AUD $33,922 for the financial year.

When we tally up all the potential savings, executing through Paytron for the given example would have saved the company in excess of $60,000 for their financial year. Thats 7% of their total import costs! So if you want to budget with certainty and save on your execution costs, give Paytron a try.

Data we used in the example above:

AUD/USD Forward curve (22/10/2020) Source: barchart.com