This article is by Trevor Brown, Payroll Partnerships at World First USA, Inc.

By now you’ve probably seen this trend: With many companies finding in-house payroll departments to be too costly, it’s becoming more popular to outsource to vendors like Ceridian, SD WorxADP, Blue Marble Payroll, or Neeyamo that offer low overhead costs along with accurate and reliable global payroll services.

But here’s a cost-saving strategy you may not have seen coming. When it comes to sending payroll to overseas employees and contractors, many global payroll, finance, and HR departments are switching from the traditional high-cost banking model to a more efficient and often lower cost international payment provider model.

And it’s a change that’s saving companies tens of thousands of dollars in transfer fees and conversion costs each year. Here’s how.

The old way: using banks for global payroll distribution

Traditionally, in-country banks are funded with the host currency and they distribute the payments locally or send them from the home country’s bank. Then they distribute the funds through their partner network to the beneficiaries’ bank accounts.

The problem? Bank charges for international transfers can be very costly. First there are the visible, upfront fees – including wire fees and receiving fees. But even costlier are the less-transparent conversion charges, or “spread” charges which can vary widely depending on the bank.

Here’s how spread costs work. Currencies are traded every second around the world, which determines the current market rate, better known as the interbank rate (you can think of this as the “wholesale price” of a currency). Banks are able to buy currencies at this wholesale price, add on a marginal spread for themselves, and resell them to businesses and consumers for a profit.

For example, let’s say you do business in the US and owe your UK employees £100,000 in payroll this month. If the interbank rate is $1.30 per £1, it will cost the bank $130,000 to get sterling at the “wholesale price.” If the bank added a 3% spread charge and sold the currency to you for $1.34 per £1, then it would cost you $134,000 to make the money transfer – or $4,000 more than what the bank paid for it. And that’s not even including the upfront fees charged for most transactions. These are all costs that can really add up over time.

The better way: using international payments companies to make global payroll

But the status quo is changing. More and more companies are using international payments companies — which use technology that integrates seamlessly with payroll outsourcers – to send payroll overseas faster, with more control, and often times at lower cost than what banks offer.

Because international payments companies typically have lower cost structures than a bank, they may offer more competitive exchange rates (i.e. lower spread margins) and charge very little (sometimes $0) in upfront fees.

Returning to our earlier example, let’s say you use an international payments company to pay your UK employees £100,000 and the interbank rate is $1.30 per £1. Just like the bank, it might cost the specialist firm $130,000 for the trade at the wholesale price. But if they added a small 1.5% spread, an international payments company might only charge you $131,950 for the trade.

That’s half the cost, or a full $2,000 less than what the bank might have charged you to make payroll in this example, or $14,000 a year in savings. If you needed to make a £1 million payroll, it would be $140,000 per year in savings in this case. You can see the appeal.

Should you be taking advantage of this new technology?

Automating your global payroll payments with an international payments company could give you a lower exchange rate and may save you significant time and money. But is it right for you?

Ask yourself these questions:

  • Do I have a centralized payroll and finance department with employees abroad?
  • Do I have a need for “in-country” banks?
  • Do I have rising costs associated with funding my global pay runs?

If any of your answers are yes, World First USA, Inc. can do a quick analysis to see if we can save you money on your global payroll costs. Please contact us today to learn more!