A growing number of U.S. merchants, both large and small, are using online marketplaces to sell their wares worldwide. Payment companies that specialize in currency exchange have taken note and are actively trying to win their business by significantly undercutting the competition in price.
In the past, when a U.S. merchant wanted to sell globally, it could take years to get the proper structure set up to do business in another country. Now small businesses can be up and running within six to eight weeks, says Mike Ward, chief revenue office of World First, a London-based company that specializes in international currencies and money transfers.
This means small merchants can tackle multiple countries at once with much less headache than in the past—and at a fraction of the cost for currency exchange. “Marketplaces over the last decade have dramatically changed globalization. The next five to 10 years will be even more game-changing,” he says.
Merchants who sell through an online marketplace have a few traditional options for converting local currencies back to U.S. dollars. For example, they could open a bank account in each of the countries where they do business, but this often requires them to establish a legal business entity in each location—a costly and time-consuming endeavor. Marketplaces can also facilitate currency exchange for merchants, but they charge a premium for their services. Another option is to go through a payment processor like PayPal or have the merchant’s local bank facilitate exchanges, but those options, too, can be costly.
That’s where companies that specialize in foreign exchange are trying to make their mark. They’re attempting to sign on merchants at a lower cost, thereby allowing retailers to keep more of the profits they make from their online marketplace sales.
“I’m not sure that everybody’s aware that this option exists,” says Victor Yameen, president of Ruze Shoes, a privately held e-commerce business in Montclair, Calif. His company sells name brand footwear to international customers via the Amazon, eBay and Trade Me marketplaces and in mid-2016 began working with the international money transfer company OFX as a way to save money on foreign exchange transactions. If Ruze Shoes had not gone this route, Yameen estimates that his company would be paying 50 percent more for foreign-exchange transactions.
OFX charges 1.5% or less above the interbank rate for currency exchange, says David Nicholls, head of payment solutions at the San Francisco-based company. By contrast, marketplaces like Amazon charge between 3% and 4% above the interbank rate, he says.
As online marketplace selling continues to gain prominence, Rob Bolle, regional manager for AFEX’s west coast division, predicts there will be more opportunity for companies like his to work with cost-conscious small and medium-sized businesses.
“Foreign exchange partners find themselves in an ideal position to help small and medium-sized businesses in particular by offering them a cost-effective solution with access to currency accounts, in addition to providing valuable currency risk management and guidance,” he says.
Nicholls of OFX says he sees room for more competition from other currency exchange companies, but notes that it’s not an easy business to crack. For instance, payment companies that compete in this space need to develop local banking relationships in the countries they work in. There are also hefty licensing and regulatory requirements, and scale is also an important factor in being able to offer competitive rates.
“There is definitely an opportunity for payments companies seeking to service this growing market, but with high barriers to entry,” he says.