In today’s economic environment, the pain points for corporate treasurers are broadly what they have always been – but noticeably accentuated. Treasurers are continually searching for ways of growing revenues without excessively increasing costs or, in times such as these, while aggressively cutting costs. Additionally, there is a renewed focus on risk management, whether that is the stability of specific counterparties or of the supply chain as a whole.
So, how do corporates grow their top line when they are facing increased pressure to slash costs?
The devil is in the detail. Many areas, such as cutting head count and development spend or closing offices, etc, will have the knock-on effect of restricting future growth. However, delving deep into the back office, it is possible to gain significant savings by having greater control and price transparency over high-volume, low-value cross-currency payments.
Many large companies, particularly multinationals, have left these types of payments entirely in the hands of local overseas finance departments, or to operational teams such as accounts payable (A/P), payroll, or other mainly administrative departments. As a result, many head treasurers and senior finance managers cannot give a complete answer when questioned on how they manage this area. They do not have oversight of the cost because it is not considered to be a traditional profit and loss (P&L) cost. For example, a sterling-denominated company that buys goods overseas will see its costs as a sterling debit. But when processing payments to overseas suppliers, there is also the invisible foreign exchange (FX) cost that many companies don’t realise they have.
The ‘Invisible Black Hole’
When processing cross-currency payments, most companies operate an internal value threshold, above which a cross-currency payment is viewed as a ‘trade’ and individually handled by a treasury team. This is typically priced through a FX platform and treasury will shop around key financial players for a reasonable price on high-value payments.
But lower-value items, for example those below €100,000, often fall into a ‘black hole’ in terms of price transparency. Frequently senior finance managers in large firms admit to being in the dark in terms of the total value of such items, how they are being processed or what sort of FX pricing mechanism is being applied. Yet, these lower-value items can add up into hundreds of millions, or even billions, of euros in aggregate value, and therefore even a small improvement in price can yield significant material savings.
It is surprising that many large organisations don’t perceive the expense they could remove from their bottom line in a relatively painless fashion. These transactions are so numerous that many senior financial managers may not even consider the idea that they could control them, mainly because it is impossible to do manually. A corporate treasury cannot have a trader dealing individually with a multitude of items for as little as US$10-100, nor can it have someone calling the FX desk for such small amounts.
The challenge therefore is to automate the process so that a single item of US$5, for example, could be given a live market price and then converted into whichever currency is needed for settlement. Once this process is automated, then it also can be controlled, without the cost or manual intervention. Automation enables treasury to treat these numerous low-value items in the same way as a high-value FX trade.
If every item received a live treatment, then the bank doesn’t need to put a spread into its daily rate, which was historically used for these low-value items. Previously that was the only way a bank could cost-effectively process these items – it would make a fixing at 10am and another at 4pm, and everything that came in between those times would go through at those prices. But in order to do that, a bank had to build in a spread to cover the intraday FX fluctuations, which is then passed on to the client as a cost.
Another benefit of automation is that the process is less time-consuming and manual for corporate clients. Furthermore, by reducing manual intervention, there are fewer errors, and fewer errors mean fewer investigations.
Visibility and Control
Treasurers can gain two essential ingredients – visibility and control – over payment flows by using new technology. Today, a global cash management platform that can operate on a centralised or de-centralised basis is a must-have, and now reporting capabilities are just as comprehensive as the cash management functionality itself. State-of-the-art platforms are web-based and very easy to use.
FX pricing transparency provides clients with complete visibility and control across many different currencies. Banks can play a role in helping finance managers take the cost out of their P&L by providing:
1. An understanding of the FX rates being applied
This will require setting aside time to gather high level data, as well as historical transaction examples. By examining this data, it is possible to identify where better rates could lead to significant cost reductions.
Banks can now use live market rates to process every FX payment, whatever the size, so there is no need to build a spread into a rate fixing to cover intra-day rate fluctuations. This means tighter FX rates, which in turn amounts to lower costs. These savings can be substantial – the old adage that it is often far easier to change a thousand things by 1% than one thing by a 1000% is particularly true in this case.
2. Visibility of fees
Many banks still charge high fees for cross-currency payments to reflect the manual processing requirements, high level of queries, etc. Many clients don’t realise that a number of the processes remain manual – they see a web-based banking platform where they input their data. But in the background, most banks are running around with bits of paper and making phone calls. The result of manual processing is higher fees.
Therefore a bank’s platform needs to be highly automated, with straight-through processing (STP) approaching 99%, in order to be able to charge lower fees. STP is a buzz word in the world of payments, for example banks talk about it as a measure of their efficiency, accuracy and quality. But STP in cross-currency payments is notoriously poor – some cross-border payments only reach about 70% STP; a more straightforward euro payment might still be only about 90% STP. This is not acceptable because each non-STP payment costs the corporate in terms of exceptions and investigations.
3. Significant time savings
Corporates need a high level of automation and comprehensive currency coverage, in order to have a one-stop shop for all their cross-currency needs. With an automated payments platform, a bank can provide detailed guides for the special formatting requirements of more exotic currencies. In addition, a bank can be proactive and advise its clients about exchange controls, which further reduces the chance of payments being held up or going astray, which in turn reduces time spent on investigations. As no foreign currency accounts are needed, reconciliation time is reduced and revaluation of losses is removed.
These three areas – FX costs, fees and time savings – add up to a compelling reason for companies to spend time looking at this often overlooked part of their business.
In a conventional model, many treasurers open a number of currency accounts with a bank. As a result, a treasurer ends up running positions, and has to revalue and also re-reconcile, plus they must pay to maintain a number of different currency accounts.
With newly available technology, a corporate doesn’t need an account because the bank is effectively leveraging its own nostros or correspondent bank relationships, and therefore the client doesn’t need to hold an account in Zambian kwacha or Saudi riyals. It can ask a bank to settle the Saudi riyals, for example, and then the bank charges the corporate’s domestic currency account in whichever currency, i.e. dollars, euro, sterling, etc.
The aim is simplification, together with transparency and control. The biggest challenge is persuading corporate clients to take the time to look at this usually below-the-radar area.
FX4Cash Platform – Two Case Studies
In 2008, Deutsche Bank launched FX4Cash, a platform designed to give clients a range of end-to-end payment solutions for their cross-currency needs. Instead of treating the FX as a post-payment factor – with the relevant information being supplied to the client after the payment is made in order for them to make the necessary reconciliation – FX4Cash allows them to see the rates being applied at the start of the business day, or during the day at the exact time they are being applied. This should allow corporates to better manage their cross-currency transactions in order to ameliorate their liquidity position.
Case study A: International Airline
A major international airline recently mandated Deutsche Bank to handle its global cash management needs and has identified an opportunity to gain control and visibility over their FX payments that are initiated from their numerous offices around the world. Previously the airline would manage major FX transactions via its central treasury team, but allowed local offices around the world to use local banks to effect payments back to the parent. By using FX4Cash, the local office still makes the payments but uses Deutsche Bank to process the FX and the payment at centrally-negotiated fees and rates.
Through a single agreement, all cross-currency payment flows from around the world can now be fully controlled. Daily reporting is also available to show receipts from all locations, the original currency value, the value of the converted funds and the exchange rates applied. The payments still originate from the local bank’s account and the converted funds are credited to an existing central company account, which meant there was no need to change or open any new bank accounts.
Case study B: European Shipping Company
A European shipping company needed to make cross-border payments in both major and exotic currencies and manage their inter-company transfers and FX balances. But the company did not want to open numerous currency accounts, nor did it want multiple systems. By using the FX4Cash automated payment execution function, low-value cross-border payments are converted automatically by the solution using live market rates. Inter-company positions are bought and sold in major currencies through the FX trading function and settled the same day to enable daily conversion of all long FX positions to the home currency. Because FX4Cash has been embedded into Deutsche Bank’s core e-banking platform, no new systems needed to be installed and the module was simply enabled for the client.
To learn more about Deutsche Bank, please visit the company’s gtnews microsite.
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