by Karen Galles
According to the International Trade Administration, Americans are traveling internationally more than ever, with trips to all areas of the world increasing. As naturally follows, travel companies are taking advantage of this trend, with more companies offering international bookings to new destinations. But for travel companies who are just starting out in the international market, there are risks to consider when working with international suppliers and making payments that require currency exchange.
The world’s currencies fluctuate daily – even minute by minute – and often in unpredictable ways. For travel companies, this can often by a good thing. When the US Dollar (USD) is strong against a currency, such as the Euro (EUR) or the British Pound (GBP), travelers are enticed by a better exchange rate and book more travel to those areas. Of course, this benefits the travel company as well, as they are also receiving a better deal on hotels, tour guides, and other services.
The catch is that timing is everything. A number of things can influence currency fluctuations, including political events such as the Brexit vote in the UK last year. The day after the vote, the GBP plummeted, leaving travel agents and customers looking at prices much higher than they had originally planned for and agreed to.
Another concern is the payment of fees associated with doing business in different currencies. When currencies are exchanged, there is a fee for the conversion. If payments are made by card, there are cross-currency or cross-border fees. These costs are assessed for each transaction and typically add around 3% to the cost of the transaction. This may seem minimal, but if a company does extensive business with international suppliers, the fees add up quickly and can be significant.
There are a number of ways that companies can pay international suppliers, though the choice should be made strategically. Perhaps the simplest option is to negotiate the rate and pay suppliers in USD. While easy for the accounting department, there are drawbacks to this approach. The travel company may incur fees for a cross-border transaction and the supplier may also be charged a fee for receiving the payment. Since payments are converted into the home currency at the rate set by the supplier’s bank, the rate may not be optimal. In addition, since the supplier is essentially managing the foreign exchange risk, they likely are setting their prices higher to account for this risk.
An attractive option is to use VCNs, which more travel companies are starting to adopt as a way of managing foreign exchange issues. VCNs make international payments easy because a US company can easily make a payment in the supplier’s local currency. With Virtual Payments from WEX, payments can be made in 210 countries and 150 currencies. The supplier is paid in their own currency, which allows travel companies to negotiate the best rates. The company can then settle the payment with WEX in USD, avoiding FX rate mark ups and cross-currency fees. The supplier also avoids fees, as well as the hassle of exchanging currency and managing the risk of currency fluctuations.
VCNs can also be used to avoid the risk of currency fluctuations. WEX offers a billing option that is available in 21 of the most common currencies. The travel company pays the supplier by VCN in the supplier’s currency, and then settles with WEX in the same currency.
Virtual card numbers also have other benefits for travel companies with international business. Easy to use for both the travel company and supplier, VCNs work with existing technology such as POS terminals. Payments can be made immediately, reducing any lag time that can increase the risk of currency fluctuations. And VCNs are more secure than other payment methods such as traditional credit cards since they are only used once and a range of customizable controls can be employed to tie a VCN to a particular transaction. Learn more about WEX Virtual Payments.
Doing business internationally will always pose some risk, as currencies fluctuate daily. But with the right foreign exchange strategy businesses can minimize their risk while taking advantage of the booming international travel market (see International Travel a Booming Market for US Travel Companies). VCNs can be an integral part of that strategy and offer a number of options that can help travel companies avoid fees as well as manage foreign exchange risk.