Integrated cross-border operations: leveraging the FX opportunity

Managing foreign exchange (FX) risk is a priority for every international treasury function, helped by a range of solutions which have emerged in recent years to increase risk transparency and enhance operational efficiency.

Banks have invested heavily in FX innovation at both a strategic and operational level and FX payments are a key element of the resulting products and services that support a variety of business cases and industries. By leveraging innovative FX solutions, treasurers can also facilitate new commercial activities and create competitive advantage, whilst managing risk and cost.

Early stages of the FX innovation journey

FX management has been an area in which innovation has flourished over the past decade, although it has largely been targeted at automating and increasing transparency of FX transactions between treasurers and their banks. This includes the evolution of bilateral dealing platforms offered by banks and also independent, multibank trading platforms. By leveraging these platforms, treasurers can seek competitive quotes on a wide variety of currency pairs and product lines from multiple counterparties, transact online and transfer deal and quote information to the treasury management system (TMS).

These solutions offer significant opportunities in managing risks and costs by enabling treasurers to seek the best quotes, demonstrate price discovery and achieve high levels of straight-through processing (STP) by integrating these platforms with their TMS. This integration often operates ‘two-way’ so that treasurers can aggregate exposures from across the business and then deal net positions in the market.

Not only do these automated dealing platforms offer considerable value for buy side market participants, such as corporate treasuries – there are also benefits for their banks. More resources can be invested in expertise and solutions to support clients’ wider FX requirements, as opposed to quoting on regular transactions. The investment in more value added services is becoming increasingly apparent, with innovative solutions now available that offer the precision, transparency and automation that treasurers demand across the full spectrum of their FX requirements.

The cost and risk of foreign currency payments

Among the issues that affects companies of all sizes – and where the highest volume of transactions is typically involved – is foreign currency payments. These are generally payments, or collections, in a currency that differs from the account into which they are paid or received, which therefore need to be converted into the account currency.

In many cases, it is neither feasible nor worthwhile for a company to hold accounts in every currency in which it pays suppliers or employees. For example staff hotel bills; cross-border royalties; and even pension payments to retirees living abroad might seem small in value when taken individually, but collectively can represent a considerable sum. This results in significant FX risk, and time and cost to process multiple cross-border payments. Similarly, from a collections perspective, it is not always possible to dictate the currency in which a company receives cash; leading to conversion costs and potential loss of value date.

When faced with the challenge of cross-border payments and collections, treasurers need to avoid erosion of value; achieve visibility of FX rates used to convert the payment or collection amount; enable clear identification of incoming flows; and potentially enable automated reconciliation.

While companies of all sizes, from the largest multinationals through to microbusinesses, may share the same objectives, there are clear differences in the resources and technology in place to address them. The challenge for the bank, therefore, is to deliver solutions that are scalable and appropriate to different customer segments and use cases, without fragmenting our value proposition.

In HSBC’s case, the bank works with clients to understand their FX requirements from a cash management; risk management; transactional FX; and customer solutions perspective; then construct solutions to meet these specific needs. It does so by leveraging its central FX pricing engine, FlexRate, which provides the ability to integrate time guaranteed FX rates an enables customers to process collections or payments, and more. The bank, in turn, is able to update rates at the required frequency for the relevant use case, with full transparency and control over the spread so clients have confidence in the resilience and scalability of its solutions.

Figure 1: FlexRate’s single engine and targeted solutions:

FlexRate’s single engine and targeted solutions

Other solutions

Multinationals and companies operating in multiple markets around the world face particular foreign currency payment and collection challenges. HSBC’s own response, the Global Disbursements solution, enables clients to make cross-border payments in more than 130 local currencies from a single operating account. This provides greater control over FX conversion on flows, as well as strengthening the company’s bargaining power with suppliers.

For smaller companies, HSBCnet Get Rate is a service that allows HSBCnet users to view and instantly book FX rates for priority payments and account transfers. Treasurers and finance managers gain a real-time view of the FX rate, the amount to be paid in the foreign currency and the exact amount to be debited from the operating account.

Commercial opportunities

The demand for solutions for foreign currency payments and collections is not restricted to a company’s cash and treasury operations, but also affects its wider customer strategy. Innovation that extends to supporting commercial opportunities can, for example, enable treasurers to provide local currency pricing to clients.

As electronic commerce (e-commerce) models continue to flourish, companies have an advantage if they can provide local currency pricing in overseas markets. Data from digital commerce researcher Multichannel Merchant’s MCM Outlook 2014 Survey shows that just 27% of e-commerce merchants are set up to sell goods and services in foreign markets. The ability to pay and receive foreign currencies seamlessly, but without adding risk or cost, is therefore becoming a strategic enabler and potentially a competitive advantage.

Given that different industries, and companies within an industry have different commercial models, specific requirements can differ significantly. As an example, it may make sense for an airline to update FX rates on the booking site so online users can purchase tickets in their local currency at the rate valid at that time. For duty free purchases on a long haul flight, however, rates may need to be held for 12 hours or more.

Not only is it important to have the right solution in place from a risk management perspective, but managing FX conversion precisely is a means of maintaining competitive pricing and therefore increasing revenue and market share. For example, products such as FlexRate are designed to integrate FX conversion directly into each transaction, enabling companies to improve the customer experience by providing local currency pricing at the point of purchase.

All companies that already operate internationally – or plan to do so – particularly those with business models comprising an e-commerce element, should be considering their foreign currency risks and opportunities. This applies to companies operating in both the business to consumer (B2C) and business to business (B2B) space. Consumers already expect a high quality user experience and tools that enable them to pay in their home currency using convenient payment methods can be a valuable contributor to this experience.

However, business customers and suppliers increasingly expect to benefit from comparable tools in their professional lives as in their personal lives, so there is growing pressure on companies to increase payment and collection efficiency and convenience. Similarly, momentum is building in the development of ‘self-service’ tools for both consumers and businesses to provide transparency and a higher quality experience, while also reducing costs. One such self service capability is to decide in which currency to pay, providing convenience and potentially both reducing risk for the supplier while creating competitive advantage.

A partner in innovation

While there has been considerable growth in the range and depth of FX solutions, regulatory and cultural differences across markets can create complexity, particularly for global solutions. At the same time, increased regulatory scrutiny also adds to the demand for solutions that offer transparency and auditability of processes and decisions.

By sharing local domain knowledge – including regulatory requirements, advice on industry best practices and expertise in deploying innovative technology, the bank represents a valuable partner in clients’ e-commerce initiatives as well as cash and FX risk management. Through enhanced automation, risk management and versatility in payments and collections, treasurers can provide greater value to the organisation whilst also managing resources, risks and costs more efficiently.

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