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Managing the Risks of Overseas Transactions

You own an international business. You love it because you’re not constrained by national boundaries. There’s just one problem. You don’t know enough about international exchange rates to manage transactions yourself, and you don’t have the software in-house to make it work. You need to hire an outside payment processor. Before you do, you need to make sure that the company you hire runs efficiently, and has systems in place to actually do business overseas.


Efficient Payment Systems

Your payment processor should have simple and efficient systems in place to handle transactions and the volume of business that you’ll give it. Not all processors can handle this task. If you’re choosing a web-based service-provider, the company should have robust invoicing features and tracking for all clients and suppliers.

If you need POS terminals, the company should provide these for you and ensure that the back-end reporting is available on a daily basis. Real-time would be ideal, but by the end of the business day would also be great. Again, look for systems which are server-based and allow you (or your staff) to monitor transactions without having to contact customer support.

Reduced Transaction Times

Your suppliers want to be paid on time. A short transaction time guarantees that. Settlement of funds should be handled within one week of the transaction, though one business day would be ideal (and exceptional for international transactions). Your processor should be able to guarantee payment to your suppliers within a specific time frame. If they can’t, or it’s unclear how long transactions actually take, choose another company to handle your transactions.

Read also: Foreign Exchange and International Financial Markets

An Understanding of Foreign Exchange

Not all banks are good at handling foreign transactions and dealing with fluctuating exchange rates. The bank you do business with should be able to handle translation risk, transaction risk, sovereign risk, exchange risk, and economic risks inherent in international trade.

Translation risk refers to accounting-based risk that stems from the translation of financial statements from one currency to another. Transaction risk is the gain or loss experienced due to fluctuations in foreign currencies. For example, if your home currency is the U.S. dollar, and you’re doing business in Europe, the euro will fluctuate daily against the dollar.

If it strengthens against the dollar, you stand to lose money on a simple business transaction. Obviously this is bad if your profit margins are thin (i.e. you run a commodity-based business).

Banks manage a variety of these risks through various investments. For example, the bank should have forward contracts, call and put options, and range forward options to hedge against fluctuations in foreign currencies. Normally, you won’t need to concern yourself with he bank’s investments, but you should understand how the bank will manage the risks.

This becomes especially important when you have outstanding invoices that need to be paid. You want to know that the bank either buys at a target exchange rate 24 hours a day, or that it is successful in securing rates in advance of invoice payment to protect your profits.


The bank, and processor, you choose depends largely on your industry. Some industries are inherently riskier for banks to underwrite than others. You may find your ideal financial institution can’t do business with you if you’re in the adult industry, gaming, or gambling industry due to the increased risk of doing transactions.

Keep looking. Many international banks have a longer, more tedious, underwriting process but specialize in adverse risk industries.

Dennis Tarver is a business payments consultant. He enjoys writing and sharing his experience with his readers on various business blogs. For more information about international payments, visit the link.

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