FX and The Unknown
FX and The Unknown
The first half of 2020 brought us all into uncharted waters. The global economy went haywire as the COVID-19 pandemic wreaked havoc worldwide. Merchants now find themselves struggling to balance costs against consumer appetite as they strategize phased reopenings. And every dollar counts. So too, does every decision
For global merchants (and who isn’t “global” these days if they sell online?), fluctuating foreign exchange (FX) rates have become an important part of this cost conversation.
The FX Line Item and Diminishing Profit
Some merchants used to have a pricing model designed to absorb FX fluctuations – but even then, nothing could accommodate what’s happened this year. Other merchants rely on Visa and Mastercard to handle foreign exchange rates for them. If so, they may not have felt the fluctuations immediately, but they undoubtedly experienced a shock when their billing came in (and their customers likely felt this same shock, as well).
A good number of merchants are aware that something about their FX practices isn’t adding up as it should in their balance sheet and they need to make a change. But, it’s been in their pile of “things I don’t have time to do” for a long time, and finding time right now is harder than ever. Current events likely have them rethinking cost saving options – and this one is huge.
In numbers that grow daily, merchants left standing are paying close attention to fluctuating foreign exchange rate losses. Close attention. They have thin margins, made thinner by COVID, and when their partners and processors are raking in extra FX - merchants see this hit as an unnecessary line item, for sure.
So, whether a merchant is starting to dig out and assess the damage or attempting to continue moving forward, we have some guidance to help them strategize and make the best transaction processing choices as they progress.
Let’s get to that elephant in the room demanding attention already . . .
Battling Foreign Exchange Market Fluctuations
Although we’re on a path to growth and recovery now, the wild, daily shifts this pandemic caused in the foreign exchange market have left many merchants in the lurch. If they were holding any position, they lost lots of money, rapidly. The market has never been this volatile.
Merchants seeking to remain in business once this pandemic dust settles need to understand their options. Mitigating their FX risk in light of the apocalypse we just weathered is step one. And the best option right now (and the best option even before any of this happened, really) is, interestingly, contactless! Well, it is in a sense.
Much like consumers are taking a step back and reassessing how to keep their distance from germs, merchants much reassess how to keep their distance from these volatile and unpredictable FX times. And processing international transactions via the Merchant of Record model offers this precise distance – and protection.
What is this exactly?
MOR for Optimal FX
The Merchant of Record (MOR) model mitigates merchant risk. This is made possible because another entity (the MOR) acts on the merchant’s behalf to process these transactions. The MOR absorbs the market risk for merchants, by feeding them a market rate that’s tradeable on demand, and in real-time.
This allows merchants to get in, make their transaction, and get out before fluctuations hit. It’s basically a naked position that offers merchants a live and tradeable rate in real-time. And it offers consumers local payment options processed through local banks, so there are no hidden fees (on either end) to worry about. This is all taken care of by the MOR.
And there’s more!
Guaranteed Rates for Returns
International returns are challenging. The price a consumer paid is static, of course, but the value of those dollars is not. Imagine someone making a $7 purchase, but when they return it the exchange rate has fluctuated and you have to pay $8 to make them whole. This could work the other way, of course, with you only owing $6 – but the point remains: fluctuations in a typical month can cause a huge headache depending on which way the FX winds blow.
With a MOR, returns are no longer a concern – and this is huge. When you make sales in today’s global marketplace and need to process a return, there’s little chance an exchange rate will be exactly the same as it was when the purchase was made. This is a gamble that merchants accept. But if you’re processing returns in this current market, you’re likely feeling a little ill over it.
With Reach acting as a merchant’s MOR though, the return rate is guaranteed for 90 days. So, the rate that applied on the day of the purchase is the same rate applied 90 days later. That offers significant savings for any merchant, at any time. And right now, it’s a lifesaver.
Overall, it gives merchants Advil for a headache they didn’t know they had. Whereas before there was a low, steady hum of something not quite right in their financial lives, and it has recently morphed into a migraine – merchants are setting things right with a MOR.
But who should consider this as an option, exactly?
Any merchant with an optimized site. Let’s explain how that looks.
Real-time Optimization to Manage Risk
Merchants that are pricing products for the local shopper and offering items for sale in local currency, have optimized sites. An important distinction though – these merchants aren’t just guessing and throwing up every potential payment option under the sun. Their sites offer local shoppers relevant payment options for their needs. Targeted, localized options for these customers.
And as part of this offering, these merchants are paying local processing fees – and so are their shoppers. These merchants do not maintain a physical place in every location (it’s entirely cost-prohibitive to do so), and there are local banking channels these transactions must go through. And doing so comes with added risk – and added cost. The actual end rate is not the same as it would be if a shopper purchased from someone selling the same item locally, but that is likely not immediately apparent to the shopper.
It can be confusing because optimized merchants are not necessarily localized (resulting in fees) and localized merchants may not be optimized for global processing, so aren’t even considering these fees yet. But they should be. Having the best of both worlds – optimized and localized - makes sense for any business willing to ship a product worldwide.
Many merchants suffered significant financial losses due to FX fluctuations and that may scare some away from participating in the global market, but it’s unnecessarily limiting. Instead, they can plan ahead to counter future shifts in the global economy by adopting a MOR model as they regroup and move forward. And with Reach, it’s easy to do.
Connect with us today so that we can talk about your specific processing needs.