A key part of treasurers' responsibilities is to manage bank relationships and negotiate the cost and terms for banks’ services, including services related to trading currencies.

But many treasurers are at a disadvantage because they lack transparent information about the true margin and underlying costs of their trades.  This means they can't negotiate based on independent insights that would allow them to reduce their fees while keeping a positive relationship with their bank.

A recent report found that banks are charging UK SMEs almost 2.5% of the value of FX transactions, totalling almost £4 billion in costs, with little or no transparency over how those fees are calculated. It’s no surprise that a quarter of businesses report experiencing poor value from their banks’ FX services

What’s more, many treasurers don’t realise that they can negotiate margin costs with their financial institution in the first place. Even if they do, they might not know how to go about this while maintaining a good working relationship with their bank.  Maintaining a positive bank relationship is important for companies as they often need other services from them, such as access to credit, loans and other services key to operating their companies.

All this is starting to change, however, thanks to new FX tools like Just’s FX Benchmark that allows you to: 

  • Understand the factors that influence your bank’s margin
  • Gain access to the real-time, accurate information that banks use
  • See the true margin that is often hidden
  • Use this information to negotiate lower FX margins

In this article, we’ll guide you through a step-by-step process to negotiating better FX margins while keeping a strong relationship with your bank. Here’s how it works. 

1. Get access to complete market data

Before you do anything, you need to know where you stand. And that means having access to accurate, real-time data on the FX market. This allows you to understand the factors that are impacting your margins. Without accurate data, there’s very little you can do to negotiate a better deal. 

While there are existing tools on the market that provide basic overviews of foreign exchange rates (like Yahoo Finance), the data services they offer don’t provide enough information for FX negotiation and aren’t tailored to the needs of corporate customers.  

The interbank market

First, it’s critical to access data on the interbank market. FX is different to other markets: prices are driven by large banks and institutional players in the market (FX dealers) negotiating with each other. These institutions then add a margin on top of their negotiated deals when they offer services to corporate customers.

This means that understanding the prices that the banks are negotiating with each other is critical to discovering the margin they are taking. Another factor is the ability to see dealer pricing specific to whether the bank was on the sell or buy side of the deal, instead of simply the mid-market rate, which is less appropriate for the situation.

Multiple instruments and contract lengths

Second, corporate customers often rely on a range of FX instruments to reduce their FX exposure. While many FX tools provide data for spot trades (typically this means funds available two days after the day the order is placed), many companies need different contract lengths. 

For example, a company may be expecting to incur a large expense or receive revenue in a foreign currency in eight months’ time and will need the funds to settle then. This timeframe, known as the "tenor" of the trade, can have a significant impact on the margins charged. Banks tend to price more risk into longer contracts, so it’s important that a company has access to rates and margin data for a full range of forward contract lengths — not just spot rates.

Armed with this information, you can understand the factors that influence your FX margins. This levels the playing field between you and your bank because you gain access to the same data they use when generating their FX quotes. 

2. Understand what you’re being charged

It’s not always clear how much money you are being charged by banks when they are buying and selling currencies on your behalf. When they provide details of FX transactions, banks don't detail the rates at which they accessed the currencies. Nor do they explain all the factors they considered in deciding how much margin to charge. This could include variables like the company's credit position and the bank’s risk assessment of the trade.

By drawing on interbank data, you can see what margin your bank is charging. Here’s how it works with FX Benchmark, the benchmarking platform offered by Just: 

  1. While you’re on the phone with your bank or using their online platform, enter your trade details into the app: the currencies you’re buying and selling, the amount you are trading, the tenor or value date of the trade (i.e., when you want the funds) — and the quote your bank has given you for the trade.
  2. FX Benchmark then uses real-time interbank data to show you the rates that banks use to make the trade and, based on the difference between that and the quote they’re providing, how much margin your bank is charging to facilitate the trade.

This helps you understand what you’re really being charged, regardless of which currencies you want to trade, and helps control your FX risk. You can negotiate a better deal effectively and keep the positive bank relationship you need for all of your liquidity and service needs.

3. Set the right negotiation mindset for success 

It's critical to start with the right mindset in order to maintain a good relationship with your bank while you negotiate. That relationship (or a new one you establish) is important.  After all, you need them for much more than just FX trades. Jeopardising that relationship can impact your access to and quality of loans, credit, insurance, and a range of financial products and services. 

All of this can make the prospect of corporate FX negotiation seem daunting, especially when your goal is to improve your end of the deal at the expense of a banking behemoth. 

On top of this, every business is different. Companies with very large trade volumes or "flow" tend to have more leverage than companies that trade lower volumes. Also, the strength of a company's credit position and balance sheet matter, as banks use credit committees to determine what they think of your credit position and, by extension, your value as a customer. The higher you’re valued, the more sway you’ll have in negotiations. 

With all this in mind, you must set a plan for how you’re going to discuss margins with your bank. This should on the one hand take into account the factors the bank considers and, on the other, make use of independent data you need to navigate the conversation fairly while ensuring you get the deal you deserve. You aren't asking your bank to forgo a margin; you’re seeking to ensure that your margins are fair and not excessive. 

4. Come prepared

When negotiating with your bank, you have to do the groundwork and come prepared. 

Understand the data

With a solid understanding of the bank's margins from independent third-party margin analysis provided by platforms like Just, you can understand how much room you have for negotiation.  

And it’s important not just to understand the data, but also to understand the language of negotiation.

Break through the jargon

Financial institutions use a lot of jargon. This often has the effect of creating enough doubt, uncertainty and confusion that companies and their treasurers don't feel comfortable negotiating. For example, talk of PIPs, the meaning of which can vary by currency pair, could have you doing mathematical gymnastics on the spot to understand what a fair margin might be.

The need for this analysis gives the bank an edge in conversations. It’s something they do every day, giving them a natural advantage. But if you can break through their jargon, you have a much stronger hand to secure better terms.

This is why it’s helpful to have an FX tool like FX Benchmark that does the mathematical gymnastics for you and helps you analyse and compare margins without getting distracted by confusing bank jargon.

FX Benchmark uses PPM (part per million) rather than PIPs to describe the size of the margin the bank has charged.  PPM shows the amount that a company pays as a margin for every million of the currency traded. It's basic maths that everyone can understand, and it applies to all traded currencies in the same way. As a result, regardless of the currency pair you’re trading, the measuring stick is the same. This enables you to easily understand and compare margins not just for a specific currency trade, but across trades for many different currencies.  

Many banks now recognise that clients prefer this approach and now discuss margins with clients using PPM as a metric.

Decide when you want to negotiate

There are 2 occasions a company can negotiate. One is before trading or "pre-trade".  This is when you utilise a product like Just's FX Benchmark that allows you to assess the quotes your bank gives you before trading, and then you can decide whether to trade, wait or negotiate.

The other occasion is after you trade, or "post-trade", where you view an analysis of what your bank has done by utilising a product like Just's FX Analytics tool. You can then use that data to agree a longer term deal with your bank that will govern all your future trades.

5. Be honest and open about benchmarking

When negotiating with your bank, approach it in an open and honest way. That means working with independent, fair data in a cooperative spirit to find a resolution that suits both parties. After all, you’re not asking the bank to give up a margin. You’re just asking that the margin be a fair one. 

Openness and honesty around the data you’ve accessed and the margins you’re looking for is important to securing a better deal on amicable terms. Let your bank know that you are using a tool like Just FX Benchmark or Just FX Analytics to assess your trade margins.  Indeed, many banks are now so familiar with this independent analysis that they will concede that they need to justify your costs and give you a fair price once they know you’re using these tools.

Further, FX Analytics not only provides insights into your margins, but it helps you compare your margins to what your bank is giving other customers, and what other banks in the market are providing.  

One effective way to use this data in a transparent and open way is to simply ask your provider why your margins are what they are.  You can ask the simple question - "Why am I being charged more than your other clients?"  This allows the bank the opportunity to present its case and companies to challenge that case without creating friction in the relationship.

Just FX’s Benchmark levels the playing field

By gaining visibility over the market data that banks use and the margins on your FX trades, you have the information you need to negotiate fairer deals with your bank. 

FX Benchmark is your gateway to this data, enabling you to enter into a corporate FX negotiation with your bank on a level playing field. While negotiating with banks can seem daunting, our customers have had great success in securing fairer FX margins. Using FX Benchmark, a renewable energy company managed to lower its annual trade costs by 64%, while a global retailer reduced its annual costs by 58%. 

Altogether, Just has benchmarked over $140+ billion in trades, helping clients to save more than $30 million in FX costs. To join them in securing a better deal with your bank, try FX Benchmark today.

1. Bank Charges on International Payments — an Analysis of the UK SME Market.

2. Optimising FX and Cross-Optimising FX and cross-border paymentsBorder Payments