B2B Payments

SMBs' FX Woes Thrown Back In The Spotlight By Amex Allegations

Allegations that American Express secretly hiked foreign exchange rates for small business customers is thrusting the challenges and points of friction that entrepreneurs face with cross-border payments back into the spotlight.

The Wall Street Journal reported Monday (July 30) that unnamed sources claim American Express had been luring SMB customers in by offering them low currency conversion rates, then quietly hiking those rates, all in an effort among American Express employees to increase their commission.

The allegations have revived the debate over financial service providers’ use of commission as an incentive to boost sales, which was recently brought to light by the ongoing Wells Fargo scandals.

Yet, the claims have also shone light on the challenges of foreign exchange (FX) management that small businesses face.

For instance, the claims against American Express aren’t the first time high currency conversion costs have made headlines.

A 2016 report from cross-border payments company Covercy found that small businesses in the U.K. are forced to pay exceptionally high FX fees. Analysts calculated that businesses that make 20 cross-border transactions of $13,000 a month pay more than $2,700 a month in fees. Businesses that average 20 cross-border payments of just $1,300 each pay more than $1,400 a month in fees.

More than 69 percent of U.K. businesses, the report said, pay “completely unnecessary” fees related to their cross-border payments, though the report did not clarify what constituted an unnecessary fee.

An earlier report by consultancy firm Accourt also concluded that financial service providers are hiding FX fees from small business customers across Europe. In all, SMBs are paying $5.8 billion in hidden cross-border payment fees, researchers found, pointing to big banks’ lack of transparency in their fee structures.

“When comparing costs among banks, there is no straightforward way of deciding which one is the most expensive,” the report stated, adding that the lack of transparency made it difficult for researchers to calculate exactly how much small businesses are paying in fees for currency conversion and cross-border payments.

Last January, researchers at Bibby Financial Services (BFS) published a report that found that small businesses are struggling to manage FX risks. The firm’s report, “SMEs and International Trade,” found that 67 percent of small businesses with FX requirements report having been negatively affected by currency volatility in the last year. That negative impact amounts to an estimated $91,500 in financial costs to small firms.

“By far the greatest challenge facing SMEs importing and exporting is currency volatility,” BFS’s managing director for foreign exchange Michael McGowan said in a statement. He cited FX fluctuations sparked by the Brexit vote as a particularly large culprit for small firms.

Exacerbating these challenges for small businesses is that a significant portion of entrepreneurs fail to adequately assess their current FX arrangements.

East & Partners’ analysis found that small businesses lack adequate FX risk mitigation strategies, and lack the necessary “knowledge, experience and product understanding” to manage their exposure to currency volatility. Less than half of businesses surveyed across geographic regions are using options and forwards to mitigate FX risk, for example, suggesting that small businesses’ FX risks go beyond expensive exchange rates.

Only 23 percent of SMBs surveyed by BFS looked at their current agreements to see if they could proactively address future FX volatility.

“No matter how big or small they may be, managing currency risk in today’s economic environment is vital,” said McGowan.“The businesses that will be successful in the long-term are those that are planning ahead and thinking strategically about how they can protect profit margins. We have seen examples where businesses have been able to avoid losing hundreds of thousands of pounds by locking-in future contracts.”

Small businesses’ failure to look into their FX agreements may allow financial service providers to change FX rates without users noticing.

Following the allegations, American Express said it is conducting an external review of sales tactics. According to CNBC, a memo sent to employees said it is taking the allegations “very seriously” and that the review would “determine whether all of [its] standards are being met,”

“If we find that we fell short of the mark, we will fix the problems and take appropriate actions to make sure it doesn’t recur,” the memo stated.



The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.