Make supplier payments to China with less friction and less cost

Irish imports from China totalled US$11.55 Billion during 2023, according to the United Nations COMTRADE database on international trade.

Identifying the most economic and efficient way to pay Chinese suppliers for goods is crucial for businesses.

Paying suppliers in China: What are the key challenges?
According to research from a survey of 250 Irish SMEs reported in the Irish Times, www.irishtimes.com/business/2022/11/24/seven-out-of-10-smes-fear-closure-next-year-due-to-rising-costs-research/, almost all
respondents cited frustrations when using banks’ international banking services – almost a third (32%) complained of the complexity and speed of these services, and more than a quarter (27%) said fees are either too high or too confusing.

Let us take a closer look at some of the top challenges when making foreign currency payments to China

1. Currency exchange rate risk/fees.

• Exchange rate risk: Payments to Chinese suppliers are often made in Chinese renminbi (RMB) or US Dollars (USD), and the value of the Euro can fluctuate, impacting the total cost.
• Foreign exchange fees: Uncompetitive rates and high international payment fees offered by traditional banks when exchanging euros to dollars can increase transaction costs and eat into profit margins.

According to a paper from the European Central Bank, banks across Europe earn hundreds of millions of euros a year from charging small corporate customers for foreign exchange services. www.irishtimes.com/business/financial-services/banks-accused-of-systematic-gouging-of-small-customers-on-fx-1.3928064
The report also reveals that rates for hedging solutions to protect against swings in the exchange rate can be 25 times higher for smaller corporate clients.

2. Lack of dedicated support from payment provider

Given the complexity around issues like regulation and payment formatting for transactions to China, importers need a dedicated line of communication with their payment provider to query and resolve any issues, especially around time sensitive payments.

However, traditional banks often reserve dedicated support for larger clients, leaving smaller businesses without an assigned account manager, so it can be difficult for smaller businesses to speak to the right person when help with cross-border payments is urgently required.

3. Lack of choice in payment currency

Chinese suppliers usually invoice in either US dollars (USD) or Euros (EUR), but the price in these currencies will usually be higher than the renminbi equivalent. This is because the supplier will often look to protect themselves against the cost of transferring dollars or euros back to renminbi and premiums can be significant.

In effect, Irish importers are effectively covering the cost of potential currency market volatility leading to higher costs. Paying in renminbi may reduce costs but many traditional banks do not offer payments in these currencies.

There is a better way to pay Chinese suppliers
In many cases, companies accept these unnecessary costs and frictions as simply a factor of doing business with suppliers in China, not realising that there is potentially a better approach. Another way that Irish companies could potentially save money is to simply ask their Chinese supplier for a price in both Chinese renminbi and US dollars. The company can then check the euro/ renminbi rate and the euro /dollar rate to see which is
more cost-effective. Often, they will find that the euro/renminbi is significantly cheaper.

How do I compare euro / Chinese renminbi and euro / US dollar rates?

Headquartered in Killorglin, Co Kerry, Fexco International Payments provides innovative and cost-effective foreign currency payment solutions to importers and exporters. They will be able to help you compare pricing in dollars and Chinese renminbi and work with you to figure out the most cost-effective method of payment. Their success is built on customer service, and you will be allocated an account manager, so you will always have a direct line to someone who will be able to help.

JOHN BARRY
Payments and FX Consultant, Fexco

If you would like to discuss any of the above in more detail, please contact John Barry, [email protected] (066) 9799041

This Business Support article featured in the September/October 2024 issue of The Hardware Journal