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Tips for NGOs to Meet Their Foreign Exchange Goals

July 10, 2020

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Carsten Hils

Global Head - Payments Division

It is increasingly accepted as ‘industry standard’ in the aid and development sector to deliver local currency to field accounts and partner organizations in the developing world, as opposed to simply sending hard currency transfers via the correspondent banking system. This new approach has been extensively proven to reduce costs, enhance accountability and improve control over funds.

NGOs with international commitments require the ability to procure foreign currencies. This is an inherent by-product of their mandate to deliver aid in other countries. Transacting in foreign exchange markets can often be quite daunting, particularly when the funds are destined for nations in which currency transfer is the most challenging, such as South Sudan, Sierra Leone, or even Vanuatu. Knowing which provider to use can be complicated as there are increasing numbers of players in the market, all promising to save NGOs money. To simplify the provider selection process, here are a few tips for NGOs to consider in an effort to meet their foreign exchange goals:

  1. When considering adding a provider, ask them about their correspondent bank network and which banks they use to deliver specific currencies. This will give you a good idea of how much control they will have over the payment process, which is critical to avoid the pitfalls associated with sending hard currency to be converted in local markets. If a provider is simply feeding transactions into one of the global banks, the chances are that they won’t have much control over the settlement process once the funds leave their hands.
  2. Does the proposed provider have in-depth knowledge of the market to which the funds are being sent? They should be able to provide insight into the local market settlement mechanism, the Central Bank’s behaviour, the local banks, any settlement peculiarities, etc.  Without a sufficient understanding of the unique considerations of a specific nation, providers cannot offer the most efficient executions to NGO clients.
  3. Ensure that an all-inclusive rate is secured upfront and that the delivery amount is guaranteed. If the provider cannot guarantee that no additional fees will be deducted from your payments, how do you know if you have received a reasonable rate? If your payment is to fulfil an invoice or a contractual agreement to pay a specific amount, it’s important to know that the full amount will arrive onshore, otherwise, you risk paying too much or too little.
  4. Always try to obtain a comparison rate. Any provider that locks you into an exclusive arrangement is acting in their best interests, not yours. If a provider is offering an affordable service, they should not be worried about comparing their rates with a competitor’s.
  5. Demystify the process. Procuring currencies is fundamentally the same as acquiring mosquito nets, or Toyota trucks or Corn Flakes. Do not be afraid to haggle a bit, and do not let a provider attempt to bamboozle you with jargon. If they tell you that you can’t send local currency to a specific country and they ask you to send USD instead, do your research. Perhaps they can’t send local currency there, but another provider can.
  6. Check on the financial viability of a provider. If they want you to incur financial risk by agreeing to utilize their services, then you should be aware of exactly how much risk you are taking on. If they have a very small balance sheet, are you sure that they have enough capital to reimburse you should there be a problem?  Do not be misled by the myth of the segregated account; your funds are only secure while they are still held in that account. The moment that the funds leave that account to be transferred to the target country, you have direct credit risk on your provider.
  7. Ideally, you should avoid paying in advance – why should you have to take a credit risk on your provider if they aren’t willing to take one on you? A reputable provider should be able to offer a simultaneous settlement arrangement, meaning that they pay the local currency to the beneficiary account at the same time that you pay your funds to them. This is also a good test of their financial robustness. If they do not have sufficient funds to settle your transaction independently without using your funds, this might suggest that they would struggle to refund you should anything go wrong.

Lastly and most importantly, always remember that your funds are your assetsmaintain as much control over them as possible. You should make providers compete for your business and demand transparency, efficiency, and security.

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