Managing FX payments in accounts payable is incredibly important for businesses when paying overseas suppliers and vendors in their local currency or another specified currency. Managing currency and forex manually is a time-consuming and risky process that’s not sustainable as a fast-growing company scales.
Understand the common challenges that businesses face when handling forex (FX) payments for international transactions, which apply to cross-border payments. Learn about top FX payment solutions.
What is an FX Payment?
A foreign exchange (FX) payment is an international, cross-border payment requiring currency conversion between two currencies to exchange money between a sender and recipient. A business pays its foreign suppliers with FX payments. The forex (FX) payment is converted using foreign currency exchange or payments platform or bank that usually charges a fee.
How do FX Payments Work?
FX payments, which are cross-border payments requiring currency exchange, can be made through various payment methods. These cross-border payment methods include wire transfers, global ACH, PayPal, prepaid debit cards or credit cards, and checks.
As an example of how FX payments work, consider how to send a wire transfer. A wire transfer is an electronic funds transfer (EFT) between the sender’s and recipient’s bank accounts. A wire transfer represents a traditional, high-fee method for making foreign exchange payments to different countries and can be used domestically instead.
The wire transfer can either be made directly bank-to-bank or use a wire transfer service’s electronic network messaging system like SWIFT, with member financial institutions, to complete the money payment transaction.
The sending bank or wire transfer service may charge as much as $50 for an international wire transfer. Each bank and wire transfer service provider sets its unique pricing. International wire transfer fees may be charged by the sending bank, intermediary banks, and the receiving bank, adding to the wire transfer transaction fees. The costs may be determined by which receiving (and sending) country, the amount of the wire transfer, and other relevant factors.
Steps for making an FX (foreign exchange) payment by international wire transfer are:
- Your business initiates a wire transfer transaction through your bank either online or in a physical branch location with:
- Sender’s business name, contact name, and contact information
- Sender’s routing and bank account/transit information
- Recipient’s business name and contact information
- Recipient’s bank routing number, bank account number, and other transit number information
- The bank applies its daily foreign currency exchange rate fee with a markup in pricing to your forex transaction
- The recipient is contacted by the receiving bank or wire transfer service when the wire transfer is completed
- The recipient is also charged wire transfer fees
International wire transfers can’t be reversed once the wire transfer transaction is completed. Know your recipient before sending money and be sure that the banking details are correct for the wire transfer.
Sending wire transfers is a relatively opaque process once the wire transfer is sent. Neither the sender nor the recipient receives detailed in-process status reports before the wire transfer is complete.
The Growing Importance of FX Payments
According to BCC Publishing, in a research report summary for “Cross-border Payments: Global Market Trends and Forecast (2022-2027), issued in January 2023:
“The cross-border payments market is projected to grow from $176.5 billion in 2021 to $238.8 billion in 2027, at a compound annual growth rate (CAGR) of 5.3% during the forecast period.”
Within this total cross-border payments market, complex B2B payments by businesses to their international suppliers represent a growing opportunity to gain efficiency through the automation of currency and foreign exchange (FX) management.
Suppliers and vendors like receiving FX payments in their local currency. Giving payee suppliers a choice of currency to receive when paid improves your company’s supplier relationships.
How can your business simplify foreign exchange (FX) payments?
Download our white paper, “How to Eliminate Currency & Forex Challenges in Payables” to learn how your growing business can improve global FX payments.
Use Multi-FX and FX Hedging product features with AP automation software to hedge FX transactions and effectively manage cross-border payments that your business makes to its international suppliers and vendors.
Today’s Biggest Challenges with Forex Payments
The biggest challenges with forex payments include:
- Inefficient operations
- Bank relationships
- Conversion fees
- Risk management
- Lack of visibility
The CFO or treasurer may be responsible for forex operations in a company. The time required to manually arrange forex payments distracts from their big-picture, strategic and decision-support responsibilities. As the company grows, cross-border payment volume increases and FX takes a larger bite out of their available time.
Traditional global payments with currency exchange require businesses to establish accounts with multiple foreign banks in different regions. This complicates transactions, with the possibility of time lags and miscommunications. It may also result in an additional level of fees besides currency conversion fees for both the payer and payee.
Handling forex payments immediately takes on a top priority, further distracting from strategic goal achievement.
Spot-rate conversion fees are not competitive fees. The high costs can reduce profits when forex transaction volume is high.
Foreign exchange risk management includes currency fluctuations and the volatility of exchange rates.
For example, your company’s functional currency may be U.S. dollars (USD). Your international suppliers may require or desire payments in other currencies, according to contract or invoice terms or customary practices helping to improve supplier relations. The currency pairs for a foreign currency transaction may be USD and EUR, or USD and another local currency in a foreign location.
Should your company hedge FX international payments with forward contracts to lock in foreign exchange rates? With FX hedging, you’ll make the accounts payable and your foreign currency payments amount to international suppliers fixed with locked-in FX rates instead of dependent on currencies still fluctuating until the payment date.
Manually hedging cross-currency payables transactions takes time and requires training.
Another risk is not complying with global regulations when making payments.
Lack of Visibility
FX transactions may not provide clear visibility into fees and other aspects of the transaction.
Optimizing FX Payment Processes with AP Automation
Your business will optimize its FX payment processes with Tipalti AP automation combined with optional Tipalti Multi-FX and Tipalti FX Hedging products. As your business grows from a small business to a midsize or enterprise company, it becomes more complex, requiring add-on automated FX and hedging functionality.
These Tipalti finance automation products handle the entire invoice-to-pay cycle of invoice processing and automate FX transactions. AP automation software reduces end-to-end payables time by 80% and reduces errors by 66%. AP automation begins with a self-service supplier portal. Accurate supplier contact and payment information are only entered once into the system. This information is used for all of your FX payments, with no need to re-enter the information each time an FX transaction (or domestic payment transaction) is initiated.
AP automation software provides automated real-time payment reconciliation. Large payment batches (of up to thousands of invoices) using multiple payment methods to various countries can be reconciled simultaneously. Automated reconciliation will help your business speed up its accounting close by 25%.
Instead of needing to set up and use regional banks, with AP automation and a unified global remittance system, you’ll have one virtual account for making global payments that works for all subsidiaries, and available payment methods, in a choice of 120 currencies in 196 countries. Tipalti AP automation and global payments sends your supplier and partner remittances through a small number of major global banks or payment platforms like PayPal.
AP automation with advanced optional FX features reduces your business exposure to foreign currency fluctuations and gives you greater visibility into costs and transaction payment status. You can choose from less expensive payment methods than wire transfers.
If you decide to use wire transfers, you’ll have more fraud screening protection to ascertain that the vendor is real with a valid tax ID number, actually provided goods or services through the invoice matching step, and is trustworthy. You’ll be able to shift your focus to more important projects, increasing your contribution to business results.
AP automation and global payments software with FX features provide real-time foreign exchange fees for your company’s FX payments instead of marked-up and locked-in daily exchange rates.
AP automation software screens for OFAC sanctions and other blacklists and checks for applicable regulations in a recipient’s country when making international payments in different currencies and countries.
With AP automation software integrated with your ERP system, you’ll get better visibility into domestic and international accounts payable balances by each entity and with consolidated views.
Testimonials regarding FX payments from two Tipalti payables automation customers follow:
With payables automation, we no longer have to buy foreign currency on spot to execute our global payouts. Keeping everything in one system has been a great relief to eliminate the forex conversion burden.Jason Wechsler | VP Revenue Accounting and Finance Automation, Pubmatic
With payables automation, we’ve been able to reduce merchant processing and forex repatriation fees significantly—resulting in $1,000,000 in FX savings.Frank Pepe | VP of Finance, Controller & Treasurer, Younique
Is FX Payment Automation Right for Your Business?
Does your business pay its foreign suppliers regularly and have a substantial volume of cross-border transactions? If yes, then automated FX solutions to manage forex payments may be right for your business. You’ll easily and transparently make cost-effective types of electronic money transfers to international business suppliers and overseas independent contractors while reducing fraud risks.
Tipalti will guide you through this decision with a series of questions that your business can answer. To learn more about automating foreign exchange payments, download “How to Eliminate Currency & Forex Challenges in Payables.”