Hedging by SMEs expected to rise as strong dollar bites

The number of SME importers looking to fix forward rates is expected to increase, as small- and medium-sized businesses look to better protect themselves from turbulence in the Australian dollar.

Paul Dowling, principal analyst at banking research and advisory firm East & Partners, says SME demand for foreign exchange is huge, and likely to become more commonplace.

Dowling says the level of hedging is growing at 5% for SME importers, with growth in particular over the past six months.

“Roughly 40% of all SMEs are either importers or exporters, so they have ongoing FX requirements,” Dowling told SmartCompany.

“SMEs are becoming a little bit more sophisticated in how they’re conducting their FX business, and the banks and niche providers are very keen on adding value to that.”

Dowling adds that SMEs are shunning their home bank – typically a big bank – for their FX needs, with niche providers such as Travelex and Western Union claiming about 30% market share.

And these providers are growing market share, he says, by offering smooth platforms and attractive rates.

“Partly it appears to be that the banks are not particularly good at cross-selling,” he says.

“It’s also partly tied up with customers wanting to keep their main bank honest, and FX transactions are a pretty simple way of doing that.”

Dowling says while some of the niche providers can be more expensive than the big banks, particularly for exotic currencies, their pitch to time-poor SMEs of good service and good rates seems to be working.