UK small and medium-sized businesses (SMBs) lost £3.6billion in often hidden foreign exchange (FX) fees when selling goods and services overseas in 2022; new report finds.
Banks collected £3.6billion from UK SMBs in 2022 through FX fees incurred when transacting goods and services internationally; a new report from the London-based fintech Wise has found.
This figure remains in stark comparison to the further £600million banks collected from the remaining community of larger businesses during the same time.
Recognising this disparity, the report questions whether banks are doing enough to support UK SMBs’ dreams of going global, and suggests that the true cost of FX fees and exchange rate volatility be more apparent.
The fintech’s report also calls on the UK government to tighten existing regulations to make fees clearer and the market more competitive; giving SMBs the appropriate knowledge they need to choose between banks’ different FX services.
Weaknesses in existing regulation
The report states that existing regulation requiring banks to disclose their fees is currently falling short. As an example of this, it cites the cross-border payment regulation two (CBPR2).
Introduced in April 2020, the regulation to implement wider transparency of banks’ currency conversion costs. However, according to Wise, banks often ignore or circumvent the regulation by hiding fees in marked-up exchange rates.
Beyond trading with Europe, the report also considers the Payments Services Regulations (PSRs), which while currently under review, are clear in their aim to achieve greater transparency.
The report however questions the vagueness of the PSRs and how they can appropriately provide suitable protections for transparency across international banking services.
It also seeks to address the ‘corporate opt-out’ feature intertwined in the fabric of the PSRs, which allows banks to sideline dealing with certain business customers. The extent of this fine print weakens the legislation needed to accommodate the needs of SMBs.
Call to action
Reflecting on the identified weaknesses, Wise has used its latest report as an opportunity to call upon the Financial Conduct Authority (FCA) to review the existing regulations around FX services for SMBs.
The fintech is urging UK financial watchdog to implement the following:
- Enforce CBPR rules better and provide additional guidance to banks so that they respect the intention to ban hidden fee rules.
- Ensure that, as part of its PSR review, all payments overseas are subject to transparency, with banks forced to make fees clear.
- End the ‘corporate opt out’, which penalises SMBs for no good reason.
Little ambition for expansion
The disparities in FX charges imposed upon SMBs and larger businesses in 2022 indicate that going global is far more expensive than maintaining a global presence.
This, combined with rising inflation, is deterring UK SMBs from pursuing international markets as confirmed by a quarter of SMBs surveyed for the report.
The cost and lack of convenience in banks’ international services was the top deterrent for SMBs transacting abroad, above inflation, regulation, energy costs and supply chain disruption.
“Each week, there seems to be a new marketing campaign from a big bank claiming their love for SMBs. And yet – the best relationships are marked by honesty and trust,” comments Harsh Sinha, chief technology officer at Wise.
“It’s wrong that banks feel able to charge SMBs such high fees and worse than they believe these fees should be hidden. It’s time for banks to come clean about their fees,” Sinha continues.
“Expecting banks to change might be a romantic idea, but tighter regulation should not be. The government – at no cost to the taxpayer – could improve and enforce existing regulations to give SMBs the power to know how much they’re being charged, and where they can get a better deal.”
“Transparency would, at least, give SMBs the information they need to decide whether their bank is the right partner – or if they’re just not that into them,” he concludes.