The ‘conversion trap’ is costing Australian small businesses an estimated $5.74 billion in foreign exchange fees each year, according to global payments platform Airwallex. As online retailers head into peak season, here’s how to avoid getting stung.

Retail has gone through a rough patch this year, but sales rose to their fastest pace in eight months in September – so there’s cause to be optimistic as we get through Black Friday, Cyber Monday and Christmas sales periods.

For eCommerce businesses looking to make up lost ground, it pays to be mindful of the extra costs you’re being slugged with along the way. With a growing number of Aussie companies selling online to international markets, the dream of making sales while you sleep is real – and so are the transaction and conversion fees.

“It’s only when you look under the hood and get to the fine print that you realise the additional processing and conversion fees,” Luke Latham, general manager of Airwallex explains to Kochie’s Business Builders.

Yes, fluctuating foreign exchange rates and additional bank fees add up, not to mention wait times of anywhere from five to 10 days before the funds actually hit your account. And on top of this, funds may be automatically converted to your home currency even when you don’t want them to. All of this puts an unnecessary squeeze on your margins and pressure on cash flow.

This is what’s called the ‘conversion trap’.

What is the ‘conversion trap’?

Firstly, there is no single blueprint for how a business operates its payments. However, in most cases, businesses that accept foreign currencies and send money to international suppliers are charged a transaction fee from their payments provider (like PayPal or Stripe) and a currency conversion fee from the bank.

“The conversion trap for most businesses can involve them paying fees on an individual transaction up to three times through the journey to settle an overseas transaction and use those funds for’ a subsequent overseas payment – in the worst case scenario,” explains Airwallex’s general manager Luke Latham. “This can add up to 10 per cent of the transaction value depending on the nature of the initial transaction.”

The first two steps of the ‘conversion trap’ happen when a customer has proceeded to checkout, paid you and the funds get settled into your account. KER-CHING. Let’s break it down:

STEP 1: THE PROCESSING FEE: Success! You’ve made a sale. There’s normally a payment service provider playing the middleman between your customer’s bank and your platform. “They will charge a processing fee for facilitating a transaction,” says Luke.

STEP 2: THE FOREIGN CURRENCY FEE: Your bank or another financial intermediary settles the transaction into your Australian bank account. Hello, currency conversion fee!

“So for instance, if you are operating an eCommerce business, you might be receiving a payment from a customer in USD, but you’re located in Australia and all of your banking is done in AUD,” Luke explains. “Unfortunately, there is generally an additional fee that the bank will charge for the foreign currency conversion.”

The third step won’t apply for all businesses, but it does for anyone who buys inventory from overseas. For example, a customer from the US buys from you (STEP 1), an Australian company (STEP 2), and you source products from Vietnam (enter STEP 3).

STEP 3: THE DOUBLE CONVERSION: “If you are a business that is operating across borders, chances are you are also spending in foreign currencies,” Luke explains. “If you think about the journey of that transaction and managing your cash flow end to end, you are going to be incurring the same set of fees and foreign currency conversion in order to transact in your supplier’s currency.”

On average, this conversion fee is usually five to seven per cent of the transaction value. But foreign exchange is volatile, so you never quite know the exact amount.

It’s not just the financial cost, but the time cost too. More than half (58 per cent) of Australian small and medium-sized businesses face delays in processing and making payments to vendors, suppliers, employees and contractors, according to a new survey from Airwallex and tech consultancy Edgar, Dunn & Company.

How to avoid the conversion trap

Like any problem in life, the first step is to acknowledge it. The next step is to solve it.

Airwallex’s survey found that one fifth of our Aussie small and medium businesses have moved away from the traditional business banking systems in favour of alternative on-demand financial software platforms. Airwallex is a leader in this field, with its platform providing more efficient settlement and savings on transaction and conversion fees.

Put simply, the bank will often charge you up to five per cent for a foreign exchange conversion when accepting or making a payment. Airwallex charges 0.5 per cent.

Instead of waiting five to 10 days for a payment to be settled, Airwallex’s customers wait one day. Luke says that’s also a big win for businesses keeping a close eye on their cash flow.

“A great customer of ours is luggage brand July, who has historically primarily operated a global eCommerce platform, and they have told us by using a platform like Airwallex that specialises in cross-border money movement and global financial infrastructure, they’ve been able to save up to 10 per cent on their international transactions,” Luke tells us. “That’s before accounting for a 50 per cent improvement in the efficiency of their financial operations too.”

 

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The Airwallex Global Account gives businesses the ability to hold, pay and accept in more than 60 markets and currencies at once. This results in less forced conversions, lower FX fees than PayPal or banks and seamless integrations with websites and online marketplaces like eBay, Amazon and Shopify.

“We can allow you to be set up to banks like a local in the marketplaces you want to access,” says Luke. “So you don’t need to turn up at a bank branch in the United States, go through all of the difficulty of setting yourself up with a local entity in order to be able to pay out and receive funds there without all of the fees.”

At a time when small businesses are feeling the crunch of the economic downturn, escaping the ‘conversion trap’ is worth investigating.

“I think it’s the right time to do it,” says Luke. “Not only is it about readiness to make the most of peak season, it’s about ensuring that peak season doesn’t also become peak costs season with these unknown expenses you’re incurring by trying to expand the reach of your business. There are great tools available to look at online.”

Find out more about Airwallex here.

This article is brought to you by Kochie’s Business Builders in partnership with Airwallex.