For a large number of small to medium businesses here in Hong Kong, cross-border or international commerce is a large part of their day-to-day operations. This includes both selling and buying from international counterparties. What this means for businesses, is that they will constantly face issues with FX, remittance, transfers and dealing with foreign payment costs that are not always be clear. So it becomes important to understand what the options are when it comes to sending money overseas for business purposes.
Cross Border Payment Options for SMEs for Hong Kong
Key concerns from SMEs are:
- High-margin foreign exchange (FX) rates: Many banks and money transfer operators (MTOs) add margins of 2%-11% and hidden fees to their FX rates
- Slow transfers: After submitting all the documents, the recipient has to wait for three to five business days to receive the money.
- Complicated procedure: Currently, many paper-based documents need to be submitted by banks for cross-border remittance.
Some of these complications have deterred purchasing from overseas, even though there may be better supplier/vendor options out there, and therefore limiting competitive advantages. Removing these frictions will serve as a benefit for all SMEs.
Today we will examine specifically sending payments out of Hong Kong, both traditional options as well as newer technologies.
This is the most traditional option for businesses today. Simply summarized, it is equivalent of a domestic bank transfer, but to an overseas account. You would initiate the transfer via online banking through your bank account, or in person at a branch. Funds are debited immediately from your account, and would take anywhere between 1-5 business days to arrive in your recipient's account. The information is relayed through the SWIFT network, so you’ll need the SWIFT code for the bank you’re sending to (unlike the simple 3 digit bank code for Hong Kong).
The FX rate and fees will be determined by your bank. So there is no shopping around for the best rate here. There will be a TT fee, which is usually a flat fee, from both the bank you’re sending from, as well as the bank you’re sending to. As an illustrative example, sending USD via telegraphic transfer will incur around ~200HKD in fees from HSBC, and another ~200HKD from the other bank. Either you accept or find another way to transfer. This is an expensive option for a lot of small businesses, but more and more are moving away because of better options.
Online Remittance Services
Increasingly, there are number of other online services out there that perform FX and remittance digitally, usually at lower costs than the traditional bank route. Some of the bigger names include Transferwise, Airwallex, WorldFirst, WorldRemit etc.. The list is getting longer every day. These FX tech companies have been around long enough to refine their credibility as well service offerings to allow you to make payments all around the world.
From a functionality perspective, it’s not too different from a traditional TT from your bank account. There is an extra step of you sending the funds first to the service provider’s account, and then the service provider will remit the funds out to the end recipient. While this may seem cumbersome, you are only making a domestic payment, and the FX and remittance will all be handled by the provider.
Usually this means a lower fee (at least on the fixed cost side), and you have choices on which service provider provides the best FX rates. Some may specialize in certain currencies options. For example sending HKD to USD may be cheaper with Platform A, but sending HKD to GBP will be cheaper with Platform B. Choose and compare the best for your payment.
Better yet, some of these providers also offer the ability to keeping a fund balance with them. At first glance it may not make sense to keep money parked in a virtual balance, but they will offer you better FX rates in return.
International Trade Financing
Exactly what the term sounds like, trade finance allows you to make payments for trade goods using financing from a third-party. The third party will pay in advance to your international supplier, and when you are able to gather sufficient cash to complete the repayment, you will then settle the amount advanced.
However, this is not always the easiest option; Globally over half of trade finance requests by SMEs are rejected, according to the World Trade Organization. Traditionally, trade finance providers tend to look at the balance sheet and financials of the borrower. SMEs are typically at a disadvantage compared with big companies.
This type of cross-border payment solution takes time to build, requiring a relationship with a trade finance provider, who knows your business well enough to be comfortable providing short-term credit.
Credit cards are becoming more and more widely accepted by suppliers and vendors overseas, as they now want to provide more options to their buyers to pay quicker and more easily. When it is accepted, the payment process is quite simple because of the digital nature of card payments online, and also allows the payer to benefit from 30-58 days of deferred cash payment, using credit. But there is still the aspect of FX though, because the credit card issuers will usually charge a 2% FX mark-up from standard market rates.
However, there are ways to circumvent the higher FX fees. One option is look for certain type of credit cards that charge no extra foreign transaction fees. These are more common the US and UK, offered by banks like Chase but will eventually also become more popular here in HK. Another option is to combine using your credit card with online remittance services mentioned earlier. By sending local currency to a service provider via a credit card and then they will provide the FX and international payment. If you are looking for an option to make payments directly through your credit card, Reap’s platform would also be able to help you do that in one step.