For some Australian businesses, COVID-19 survival has come down to a strategy of expanding into online international markets.
New data from money transfer provider OFX shows that amid the pandemic, a surging number of Aussie retailers switched gears to target global consumers, either via their own website or through eCommerce platforms like Amazon, eBay and Shopify.
Between March and April when coronavirus panic hit a peak, average transaction volumes among OFX’s Australian online seller clients rose by 26% compared to the same period last year. Meanwhile, unique dealings increased by 22%.
In other words, many more Aussie eCommerce businesses began selling their products overseas. But why?
A “wake-up call” for businesses
OFX’s Asia Pacific alliance manager, Edward Wiley says the COVID-19 shutdowns were a “wake-up call” for Aussie businesses that already had plans to go global.
He says a couple of factors sparked their realisation that relying on local sales wouldn’t be enough anymore.
Firstly, it was New Zealand’s decision to pause all distribution of non-essential eCommerce goods across the country during Stage 4 of lockdown.
“Businesses that only operated in New Zealand and weren’t selling internationally pretty much shut down overnight,” Wiley says.
As such, some retailers grew afraid that a similar situation would occur in Australia too.
Secondly, with the Australian Dollar (AUD) tumbling to a record low of 55 US cents back in March, “a lot of [Aussie] businesses abruptly started to realise that the AUD was quite volatile when it came to these times,” says Wiley.
“So one huge factor that drove them towards the US market was to create a natural hedge there.”
If a business has a natural hedge in the US, both its earnings and expenses are in US Dollars (USD), so it’s protected from currency exposure and volatility, such as the AUD fluctuations observed during global events like COVID-19.
How natural hedges work
By expanding into the online US market and making sales there, an Aussie business can then make payments to overseas suppliers (say, in China) with its USD profit.
But for this to work, the business must have a US-based bank account or currency account.
As Wiley explains, that’s because payment gateways like PayPal and marketplaces like Amazon will only pay you in USD if you have a domestic US account.
Otherwise, they'll automatically convert any US sales you’ve made back to AUD using their own exchange rates, and then transfer those dollars into your Australian bank account on a regular basis.
Wiley says in the latter case, you don’t have “any flexibility”. You can neither choose to keep your USD as USD, nor can you pick when to transfer your income from USD to AUD.
In other words, you aren't given any opportunities to shop or wait around for more favourable exchange rates.
“You could lose up to 4% on the conversion from US Dollars back to Australian Dollars, and then you’ll have to convert that AUD back into USD to pay your supplier which could be up to another 4% if you go to one of the big four banks," says Wiley.
“That’s 8% out of your bottom line.”
Fortunately, international money transfer (IMT) specialists like OFX and WorldFirst provide a solution to this: they offer businesses the option to open multiple local currency accounts.
These IMT accounts allow your business to send or receive money in many different currencies. But unlike the multi-currency accounts issued by banks, they are held in the countries where you’re operating (say, the US) rather than just in Australia.
Moving money across borders with an IMT specialist may also be cheaper than using a big bank.
Mozo calculations indicate that for an AU$10,000 transfer to USD, you could save US$262 just by hopping onto the average online IMT specialist exchange rate rather than the average big four bank rate.*
Ups and downs in forward contract usage
Another common IMT feature to safeguard against currency volatility is a forward contract. This is where you lock in a current exchange rate for a future transaction to protect yourself from any potential falls.
But the latest OFX data reveals that despite the currency market being in a real state of flux since COVID-19, forward contract usage among Aussie online sellers actually fell by 35% between March and April this year compared to the last.
According to Wiley, this indicates online Aussie retailers are taking advantage of IMT accounts rather than safety nets like forward contracts, to tackle poor exchange rates when trading overseas.
“It goes to show that our eCommerce clients are using our accounts correctly,” he says.
“Since they already have those natural hedges in place, they don’t have to use forward contracts or lock in hedges.”
However, it’s a totally different story with businesses that rely on the AUD to buy or sell goods.
Among Aussie importers and exporters, OFX recorded a staggering 155% increase in forward contract usage over the same period.
“When there’s volatility in the Australian Dollar, they’re 100% impacted by what the AUD is going to do,” says Wiley.
“So they have no choice but to lock in an exchange rate if they believe [the AUD value] is going to decrease further.”
Are you a business expanding into the global eCommerce space?
If you’re looking to pay suppliers or receive revenue in more than one currency, make your first stop our business international money transfers comparison table. There, you’ll be able to weigh up various IMT specialist options and compare today’s exchange rates.
*Mozo calculations as of 8.30am, 27 May 2020.