Forex payment processing includes money transactions in different currencies. You can imagine how difficult and challenging it can be. Already Forex businesses are high-risk. It is why; forex payment processing invites many risks. Whether you are Forex merchant or a payment processing service provider, knowing these risks is necessary. In this blog, you will understand the challenges of payment processing in the forex industry. Also, know about the troubleshooting ways.
Market risk is inevitable – Yes, due to currency fluctuations, the forex market is extremely risky. This risk can cause a company lose huge money during international trade. When two companies connect through a contract and if fluctuation happens, one of the parties will bear loss. It is why, the payment processors for forex businesses have to make suitable strategies. Considering the issues involved, the merchants needs to work collectively with their processors for effective methods.
Varied types of market risks are involved in forex market risks –
• Transaction risk – When a business buys products from a supplier from other country in supplier’s currency, the risk is involved. If the price of supplier’s currency increases, the buyer business has to pay a higher amount. On the contrary, if the buyer’s currency improves in price, the buyer can easily pay complete money by spending less.
• Translation risk – It is related to the value of liabilities, assets and income of a company. A Forex payment platform needs to take care of this factor while making the payment strategy. A realistic example can be – A company with subsidiaries in other countries may face loss. The reason is if the subsidiary company denominates in other currency, the parent company will bear loss. It happens when the parent company translates the financial statements of a subsidiary company in the currency of the parent’s company.
• Economic risks – It happens when a company’s market value get affected due to currency fluctuations. Such situations are unpredictable. This risk is bigger for the companies with multiple overseas subsidiaries. The merchant can trust only on an established offshore payment gateway and payment processor.
Counterparty risk – This type of risk arises if the other party commits transaction defaulting. It is why, it is also called as default risk. Any possibility on this aspect gives birth to the counterparty risk. This can include the brokers, banks etc. in the forex business. This risk type can exist in investment, credit and trading transactions.
Facts about counterparty risk you should know –
• Counterparty risk can be easily controlled with the help of a counterparty risk management strategy. It involves monitoring through complex computation methods. It has multiple factors, thus, computation is a vital tool. It is also vital that the merchant choose a High Risk Payment Gateway that understands these calculations.
• The risk is prevalently present in every type of risk. It is considered that all the parties getting into a contract should accept the possibility of this risk. Any party can default in the contract related promises. You can call it a highly vulnerable condition for all the parties involved.
• When a party fails to fulfill the terms of the contract a risk premium is offered to the other party. The aim is to compensate the risk of the latter one that is working honestly on the contract terms and conditions. The credit score of a company is an important factor in this risk type. It helps measure the creditworthiness of a company.