Looking to catch that global market share while everyone is moving to buying online? Here’s some handy hacks to make sure your foreign exchange is working for, not against you.
The past five years have been good for Australian eCommerce businesses, experiencing growth that has outpaced traditional retailers. The COVID-19 outbreak only accelerated this, triggering many businesses to shift from bricks-and-mortar to online, maybe more than any other time in history. According to IBISWorld, eCommerce revenue is expected to rise by 6.3% in 2020-21, to $34.5 billion.
While the numbers are encouraging, 2020 was the first true test for new-to-market eCommerce retailers catering to international customers. Add to the challenge of doing business in multiple currencies, many businesses may have seen a big impact on their cash flow, as a result of the extreme AUD volatility. For example, for an Australian business paying suppliers in USD, that meant managing market rates as low as 0.57 in March’20 to highs of 0.78 in Jan’21; a AU$9,439 difference on a single US$20k transaction.
Good news is, whether you’re just starting out or a seasoned seller, there are a few currency hacks OFX see many clients using that could help you mitigate risks and better manage profit margins in 2021 and beyond.
Currency hacks: Plan, act and protect
Exchange rates represent a major risk for cross-border eCommerce. Any rise or fall in a currency can impact results. For exporters, it could mean receiving less money than originally intended. On the other hand, importers could pay more for goods than they planned to sell them for and suffer tighter margins when on-selling the product domestically. So, it makes sense for companies of any size to plan and consider all the options.
Here is our list of key considerations to help with expanding your business globally:
- Get a multi-currency account – Let’s say you’re expanding into the US market. Many eCommerce platforms will only pay you in US dollars if you have a domestic US account. Otherwise, you could find your US sales automatically converted to AUD. Thankfully, specialist plug and play solutions, like an OFX Global Currency Account, can integrate with these global marketplaces and payment gateways, so you can decide whether to convert your funds back to Aussie dollars or kept your revenue in US dollars, so you can make payments in US dollars (for example to suppliers), ultimately helping you save on unnecessary conversion fees.
- Use FX tools in your favour – OFX Forward Contracts, for example, allow you to fix exchange rates for up to 12 months. It can lessen the exposure if you have recurring payments, and can help you price your product correctly.
- Consider global opportunities and challenges when pricing your product – taking advantage of seasonality, for example, will stretch sales but being forced to use sea freight where pandemic restrictions are still in place can delay and make delivery more expensive. All these opportunities and risks need to be factored into your costs.
- Familiarise with different FX partners – From banks to foreign exchange experts like OFX, it’s important to understand the different service levels and costs to make sure you are making the right decision for your business.
Get familiar with the basics; Your guide to common FX terms:
- Spot rate – This is the exchange rate that is quoted for the sale of currency with a value date of two business days from the date of the quote
- Foreign exchange or Forex, FX – is the international market exchange – meaning buying one currency and selling another simultaneously
- Forward contract – is an agreement that allows you to fix an exchange rate for a future transfer to know what the exchange rate will be when the transaction occurs.
- Hedging – is a transaction that protects an asset against fluctuations in the FX rate.
- Volatility – is the measure of how a market’s prices change.
This will help you when chatting to currency experts about the right FX solution for your business.
Edward Wiley is head of strategic partnerships for eCommerce at OFX