How NGOs can save millions on better FX procurement

European nongovernmental organizations and charities need to be more proactive at managing their foreign exchange risk and cut transaction costs in order to stretch their budgets further and become more sustainable. That’s according to Beverley Traynor, head of business development for charities at London-based financial services provider Ebury. To do this, Traynor said nonprofits need to change their culture and hire more managers with a finance background who stay abreast of advances in financial services and tools. In 2009, a Stamp Out Poverty report titled “Missing Millions” claimed U.K. charities were losing between 20 million and 50 million pounds ($32 million and $80 million) each year by relying on banks for their foreign exchange, or FX, needs. Misleading transfer fees and uncompetitive rates were to blame, according to the report. Five years on, it is still a major problem across Europe, but Traynor said it is one that can now be easily fixed. On-the-ground exchange offers unfavorable rates Many European charities and NGOs focus their work on emerging markets or areas of conflict through on-the-ground operations or direct aid. These countries’ currencies can be difficult for organizations to buy at home via their regular banks and even some brokers. They also tend to be very volatile, with unpredictable moves in exchange rates against the pounds sterling or euros that such charities are typically funded in. Because of difficulty sourcing some currencies, too many charities wait until they are in their country of operation before exchanging money, often at very unfavorable rates, said Traynor, who until recently was senior business development manager for the Charities Aid Foundation, a body that helps nonprofits manage their finances. Those that are able to access the required currency at home often rely on their banks to make the transaction, without investigating how the bank’s charge is broken down in terms of transaction fees and spread, or what exchange rate was used, Traynor said. Brokers cost less than banks Other charities that have already made savings by shifting their FX business to a broker think their work is done and stick with the first one they choose, instead of regularly reviewing rates and fees at competitors. But Traynor sees massive growth potential in providing FX services to charities and NGOs and expects that “at one point it will be the majority of our FX business — it will be over half.” Ebury currently works with around 200 U.K. and European charities as part of a total client base of about 3,000. Using a specialist broker for FX transactions will typically cost charities between 2 and 4 percent less than using a bank, she estimated. Traynor explained that Ebury recently did a cost comparison for a charity that transfers around 1.5 million pounds a year to projects in the Philippines, India, Malawi and Uganda and calculated it could save the nonprofit around 10,000 pounds annually in foreign exchange costs. “Their minds were blown by the savings they hadn’t realized,” she said. The problem often stems from apathy or ignorance, said Traynor. Although bigger charities have benefited from an influx of finance directors with private sector experience — and many small and relatively new charities are very savvy at shopping around for the best rates and fees — others are staffed entirely by officials who have been in their position for decades and have no financial background or knowledge of how FX services have evolved. “I met someone last week and asked ‘How do you procure [FX]?’” Traynor said. “He said ‘We don’t really — I just walk across to my branch at [U.K. high-street bank] NatWest.’ I asked him how much they charge him. He said ‘Honestly, I haven’t got a clue.’” Forward contracts provide stability Many charities also continue to rely on spot markets to exchange currencies — buying and selling for whatever the prevailing rate is month by month. This exposes them to the risk of volatility, meaning it is hard to predict how much local currency their funding budget will buy them each month to cover their on-the-ground costs like rents, bills and salaries. By using forward markets — buying currency in advance at a pre-agreed exchange rate — charities can reduce that risk, plan their budget allocation more effectively and ultimately be more sustainable, Traynor said. Ebury recently started working with an education program in India that used to rely on monthly spot trades in-country from pounds sterling to rupee. Now, it is not only getting a better exchange rate by buying rupees in the U.K., but was able to use the forward contract for next year, locking in exchange rates at a time when 1 pound bought more than 101 Indian rupees. As of Oct. 6, the rate had already fallen to just a little more than 98 rupees to the pound, making it an immediate saving. With forward contracts, there is of course the risk that the currency will move the other way, and that a charity is locked into a rate that buys less target currency per unit of budget than it would be able to achieve in spot markets. Charities also pay slightly more for a forward contract than a spot trade — a bit like the premium payable to an insurance company for stripping out risk. Specialist FX broking services may be no panacea for the currency volatility and costs that charities and NGOs working abroad face. They do, however, allow them to manage their budgets with more stability, transparency and, ultimately, sustainability. Check out more practical business and development advice online, and subscribe to Money Matters to receive the latest contract award and shortlist announcements, and procurement and fundraising news.