Whether it’s inflation volatility, market volatility or interest rate volatility, the uncertain macroeconomic landscape has had a huge impact on cross-border treasury management, forcing chief financial officers (CFOs) and treasurers to adopt strategies that will help hedge their businesses against the present mix of volatile markets.
According to Anand Natarajan, executive director, TMT and FinTech cash management lead, transaction banking at the U.K.-headquartered Standard Chartered Bank, rising interest rates, in particular, have led to significant shifts in investment strategy.
“A lot of treasurers are [now] focusing on investing in instruments which are less than two months old. They’re not keen to lock in money for longer term [debt] when there’s an increased likelihood of rate hikes,” Natarajan told PYMNTS in an interview.
On the risk management front, given that the dollar continues to strengthen against other currencies, it’s provided a safe haven for U.S. companies, and with that safety, firms are figuring out the best way to manage their positions across different currencies.
“Where possible [they try to] sweep [funds] into the U.S. dollar [as a way to] bring it into a market where regulations are less stringent in terms of the use of funds and increase the yield on the dollars that they have available,” Natarajan explained, as a comparison to emerging markets where regulators are oftentimes more nuanced and challenging to interpret.
From a transaction banking standpoint, firms are also trying to establish efficient liquidity structures to consolidate cash in as few locations and as few currencies as possible.
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But this is “easier said than done,” Natarajan explained further, particularly for eCommerce companies and marketplaces like Amazon that have a lot of exposure to merchants in emerging markets where managing foreign exchange (FX) liquidity and risk is more complex.
To remedy the situation, a major tool that is always helpful for treasurers is developing solutions to pay and receive in multiple currencies which will enable them to provide flexibility on both sides of the equation, he noted.
Minimizing Compliance Cost
When it comes to the highly regulated cross-border payments space, compliance is critical to success, not to mention the exorbitant fines firms risk for noncompliance.
But remaining compliant in the face of evolving rules and regulations can be challenging, as each country and financial institution working along the transaction chain has its own security and compliance protocols. This, according to some, makes compliance even more expensive than the cost of transferring money.
While Natarajan acknowledged this challenge, he said for companies and FinTech firms starting off in the payment space, the initial cost of setting up a system might “look somewhat prohibitive,” but then “it sort of pays for itself over time” as they build a system that is easily scalable across markets.
He explained ‘scalable’ as being nimble enough to adjust the parameters in terms of how transactions are screened, such as being able to verify names immediately when sanctions lists are updated or getting money from point A to point B using the least number of banks possible.
From a risk and cost standpoint, this process of minimizing efforts required to update systems whenever new compliance rules are implemented is how corporate treasurers can ensure that compliance and other back-end costs do not hamper delivering fast and inexpensive and cross-border payments, Natarajan said.
Embracing the Metaverse
From a banking perspective, Natarajan’s view is that the next level of payments innovation in cross-border B2B payments will come from developing a comprehensive ecosystem that enables financial institutions (FIs) to offer end-to-end banking services, not just to clients but to the entire ecosystem.
This means making it easy for a marketplace client to easily open a bank account, offer wallet services to their customers, or leverage the corporate relationships an FI has to access third-party financial services.
He also highlighted cross-border digital currencies (CBDCs) as “game-changing” for how FIs and companies settle transactions in real time and part of new innovations that will significantly change the payments landscape moving forward.
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Finally, Natarajan touched on the importance of betting on newer trends like virtual worlds, which saw Standard Chartered joining other major corporations to embrace the metaverse when it purchased virtual real estate earlier this year.
And although the metaverse is still unfolding, the opportunity to integrate with bigger players and develop seamless ecosystems that may be set outside of the banking channel, but are still managed by banks, is one not to be missed.
“It’s not to say that we know what we’re going be doing on an end-to-end scale with companies there, but just the idea that the metaverse could give rise to a whole different slew of [online] payment options for companies without having to go through the banking channels, I think that presents a very interesting challenge and opportunity for us as a bank,” he said.
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