In the world of soccer, London’s Chelsea Football Club, for example, saved nearly €1m by signing a player when the markets were in its favour, while Midlands rival Aston Villa lost about €200,000 by getting its timing wrong. The stakes are just as high for US companies to pay attention to currency markets and their international payment processes.
As a quick overview, Continental Europe and Japan have been mired in deflationary stagnation since last year. This has resulted in tight credit, low investment and weak consumer spending. In contrast, robust consumer spending in the US and UK and a large shot of quantitative easing (QE) has allowed those economies to rapidly expand and fully recover the losses incurred during the 2007-09 financial crisis.
This divergence has had a major effect on American companies operating internationally, with the resurgent US dollar (USD) substantially reducing overseas earnings while decreasing the cost of foreign procurement. Given the USD’s 18% gain against all major currencies since last July, the impact on budgets can be substantial.
A Three-step Approach
Against this backdrop, it is critical for companies have a process in place to utilise market movements to capitalise on international payments and ensure competitive rates. A simple three-step payments programme can put in place best practices, without disturbing existing banking relationships or creating an additional burden on the treasury team.
This approach allows companies of all sizes to reduce risks and costs associated with making payments internationally:
- The “one price rule” does not apply to exchange rates, which, unlike publicly traded stock prices, can vary significantly between different financial institutions (FIs). Make sure to have a second offer or reference quote from an independent FI to compare to the rate from your primary bank. Comparing rates from different institutions will help you to get the most competitive quote for each particular payment.
- Take advantage of no-cost forward contracts. With a forward contract, you can lock in a rate for a specified amount of funds for a future date – usually up to one year in advance – with no upfront fee and minimal burden on the existing line of credit. This can also be done in bulk; buying a block of currency and drawing down on the forward on a need basis. Forward contracts allow treasury and accounting to reliably manage the cost of future international payments and avoid potential budgetary headaches, as once the rate is locked-in you know it cannot be affected by market moves against you.
- Streamline payments by utilising advanced payments technology. Most treasury platforms are difficult to navigate, and cannot be customised to reflect the workflow of unique organisations.
However, there are international payments specialists who have developed user-friendly platforms specifically designed for bank-to-bank transfers in foreign currencies, which complement existing banking systems. Such a system will allow treasury to create a customised and automated workflow that includes security hierarchy to increase efficiency and save time. These systems also record transaction records and detailed history of each payment, enabling treasury to easily conduct investigations and reconciliations.
The Bottom Line
Currency movements can have a real impact on companies’ budgets. By implementing these three simple steps, companies can mitigate foreign currency risk and streamline their international payment process.
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