The foreign exchange (FX) market is pivotal in facilitating international trade and investment. Traditional banking methods, though reliable, often fall short in terms of speed, cost, and accessibility, paving the way for alternative payment methods that leverage advanced technology to optimise FX transactions.
With a daily trading volume exceeding USD 7.5 trillion, the FX market is the largest and most liquid financial market globally. Operating 24 hours a day, five days a week, it enables currency exchange among banks, financial institutions, corporations, governments, and individual traders, while serving as a platform for speculative trading, where participants aim to profit from fluctuations in exchange rates. In addition, it gives businesses the flexibility to choose when to hold or convert funds based on market conditions. This approach also enhances cost optimisation and control.
FX directly impacts transactions by influencing the amount received due to exchange rate fluctuations, affecting costs and timing. From a customer perspective, whether in B2B or B2C environments, the primary concerns are ensuring that transactions are conducted with legitimate sellers and understanding additional fees. When the buyer and seller operate in different currencies, the need for currency conversion introduces potential volatility and FX fees, which must be managed by one or both parties – the same logic applies between a platform and its sub-merchants.
International exchange rates can be very fluctuating, making it challenging to predict the payment’s value in the currency of the recipient at the time of the transaction, and it can shift unfavourably. Moreover, international payments are usually more expensive than domestic ones, and banks and financial institutions may charge additional fees that will impact the final amount settled to merchants. Additionally, these fees are generally quite opaque, so all parties involved in the transaction are unaware of how much they will actually end up paying for this operation. Without clear visibility into the entire transaction process, businesses may face challenges in accurately monitoring and managing their cross-border payment activities.
For frequent transactions in specific currencies, some may choose to open an account in that currency, benefiting from favourable pricing conditions. However, this solution is less practical for occasional or low-value transactions, where additional costs might not be anticipated or not worth the effort. In such cases, the decision of who bears the risk of currency volatility and FX conversion fees becomes critical, with several solutions available:
Merchant currency – the merchant may choose to maintain transactions in its local currency, passing the risk and cost of FX conversion to the buyer. While straightforward for the merchant, this approach can negatively impact customer experience, particularly for those without multi-currency accounts or favourable FX conditions. Moreover, transaction fees can still be high for cross-border operations.
Dynamic currency conversion (DCC) – available for both online and physical transactions, DCC offers buyers the choice to pay in either the merchant’s currency or their own. If the buyer opts for their currency, a commission is disclosed before confirming the transaction. The merchant may receive a portion of this commission, becoming a new source of financial revenue, which offsets part of the high costs associated with international transactions. On top of that, offering DCC may reduce chargebacks, which are often triggered by customers not recognising foreign transactions on their statements. Paying in local currency may also have a positive impact on acceptance rates.
Multi-currency pricing (MCP) – merchants can offer MCP, allowing buyers to pay in their own currency. This enhances customer experience – but transfers the FX risk and fee burden to the seller. A potential mitigation strategy is for the seller to open a multi-currency account or a local entity (when this is worth the investment), enabling it to sell and receive payments in the same currency (also called ‘like-for-like settlement’). In certain cases, merchants can also monetise this service and receive a kickback from the FX provider.
Payouts – the same logic applies to platforms when sending payouts to their sub-merchants, where the platform can turn FX into a value-added service by proposing payouts in local currency, and therefore improving its value proposition while generating additional revenues out of it.
Key takeaways
In conclusion, the intersection of payments and FX is pivotal in today’s global economy, as businesses increasingly engage in cross-border transactions. The complexities introduced by FX, such as currency volatility and transparency issues, present significant challenges in managing transaction costs and ensuring smooth operations.
Solutions like DCC and MCP offer innovative ways to address these challenges, allowing merchants to enhance customer experience, reduce chargebacks, and potentially generate additional revenue. However, the effectiveness of these solutions depends on careful implementation and understanding of the associated risks. Leveraging these strategies can help businesses navigate the intricacies of international payments and optimise their operations. This is typically what should be assessed as part of your payment strategy and the resulting target payment architecture.
This editorial piece was first published in The Paypers' Global Ecommerce Report 2025, which provides a complete overview of key trends and strategies to help businesses worldwide succeed. Download your free copy today to explore in-depth insights on global ecommerce trends, the latest innovations in payment solutions, and strategies to stay ahead in a competitive market.
Leading the European payment practice at Redbridge, Gabriel has been providing strategic advice to international and multichannel merchants in their payment transformation and optimisation journeys since 2020. He previously worked for four years as Chief Operating Officer at a France-based Electronic Money Institution (EMI) specialised in alternative payment methods.
Redbridge Debt and Treasury Advisory is a leading financial management partner to corporations around the globe. It is committed to providing each client with all the information required to make the best decisions and optimise their financial performance. Redbridge’s teams are located in Houston, New York, Paris, Geneva, and London.
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