Americans were more generous last year than the year before, giving nearly $300 billion to charity in 2011, according to a new report from the Center on Philanthropy at Indiana University.
But not all those donations are going where they’re intended. A recent study from Stamp Out Poverty — an aid advocacy group — estimates that charities in Britain lose almost $50 million a year thanks to problems with exchanging currency. Things are no doubt worse in the United States, whose charitable market is six times bigger.
Charities aren’t the only organizations victimized by uncompetitive exchange rates or misleading fees levied by local financial institutions. Businesses that operate internationally can similarly face millions in unnecessary costs.
Neither group has to. Nonprofit and for-profit groups alike should leverage the power of competition to save money when they exchange currencies abroad.
Many organizations do not know how much money they’re currently wasting on currency transactions. One foreign-aid outfit, for instance, was sending $2 million a month to a country in Africa and simply relying on a local bank to change the money into the local currency. But by not soliciting bids for more competitive exchange rates, the charity lost about $200,000 every month.
Thanks to recent research published by Stamp Out Poverty, many British charities have realized just how much money can go missing thanks to unfavorable rates and how, by making a few simple changes, they can benefit from actively seeking competitive exchange rates.
Stamp Out Poverty found time and again that once banks realized that they were involved in competitive bidding processes, they started competing much more aggressively. In some extreme cases, this meant that organizations received rates up to 5 percent better almost overnight.
Take Oxfam, one of the oldest and largest charities in the world, as an example. By centralizing its foreign exchange efforts rather than converting to local currencies on the ground, the $500 million British arm of the charity saved as much as 0.5 percent per trade. That’s equivalent to nearly $2.4 million per year.
Charities drive hard bargains with potential suppliers, forcing them to compete for precious funds. Nana Yaa Boakye-Adjei, a researcher who worked for Stamp Out Poverty, believes they should do the same in the foreign exchange realm: “Acquiring currency should not be viewed as different to the purchase of any other high-value item made by an organization.”
That is as true for businesses operating internationally as it is for the nonprofit sector.
As much as $4 trillion in currency is exchanged every single day. But nobody really knows how much money businesses lose thanks to inefficient currency transactions.
That’s largely because the losses are invisible. They don’t appear on companies’ profit and loss statements, nor are they typically included as administrative costs. Most enterprises simply accept the transaction fees and exchange rates of local banks as costs of doing business.
That’s a grave error. A few decades ago, cross-border payments were relatively small, and so companies could afford not to pay attention to them. Globalization has rendered such complacency foolish. Increasingly, even small businesses have gone multinational and are dependent on operations in places such as Asia and Central and South America. Further, the technology and expertise needed to competitively tender favorable exchange rates from across the globe — and quickly — is now widely available.
Money lost to inefficient foreign exchange does not assist in job creation nor does is it returned to shareholders as dividends. These “missing millions” drag on economic growth worldwide.
Here’s just one example. A U.S. company funded its subsidiary’s payroll payments in Brazil in U.S. dollars. By comparing the exchange rate that the company received from its bank in Brazil with the exchange rate available on the international markets, the company realized it had overpaid for the foreign exchange by 4 percent. On a monthly payroll of $5 million, that’s a significant amount.
Businesses are investing heavily abroad — particularly in the developing world. But poor approaches to foreign currency exchange are undermining the impact of their investments before they have the chance to pay off.
That need not be the case. To avoid such an outcome, leaders in both the for-profit and nonprofit arenas must take advantage of the benefits of competition in the market for foreign exchange.
Carsten Hils is director of INTL Global Currencies Ltd.
