Treasurers Beware: FX Risk Is Not What It Used To Be

Globalization and easing barriers to international expansion aren’t simply changing the way corporates manage foreign exchange exposure. For many firms, these trends are forcing the introduction of an FX strategy on a company for the very first time, and when corporate treasurers aren’t prepared, they can run into complications beyond the cost of currency exchange.

Indeed, FX costs and fees are often the first concern for businesses, especially smaller firms, that are growing across borders and encountering unfamiliar risks of FX volatility exposure.

A recent controversy at American Express highlighted that risk for SMBs. Last year, reports in The Wall Street Journal, citing unnamed sources, revealed allegations that American Express had quietly increased currency conversion fee rates for their small business customers, shedding light on the often opaque practice among financial service providers when charging FX fees. In 2016, researchers at Coversy revealed the majority of U.K. small businesses pay “completely unnecessary” fees to their banks when making global payments, while separate analysis from Accourt similarly pointed to banks’ practice of obscuring their methods for calculating and charging FX fees, resulting in $5.8 billion paid to finserv providers in hidden cross-border payment fees in Europe.

While international growth may seem an opportunity too good to pass up for a small business, Laurent Descout, CEO and founder of corporate cash management FinTech Neo, says hard-hitting fees exacerbate the often damaging threat of currency and exchange rate volatility, leading some firms to give up on global aspirations.

“On one hand, many corporates just decide not to engage in some international operations given such a risk,” he told PYMNTS in an interview, adding that he has often seen FX management struggles becoming a total barrier to going international. “This is especially true for SMEs who cannot run the risk of losing 30 percent of revenue on a currency depreciation.”

At the same time, however, cross-border trade disputes, sudden changes to international supply chains, and geopolitical disruptions like Brexit have increased businesses’ awareness of the importance of an FX management strategy, Descout added.

Necessary Planning

While organizations now realizing that ignoring FX management is no longer an option, they continue to face unexpected challenges beyond the financial impact of bank fees and conversion rates.

Among the largest is the inability for corporate treasurers to obtain visibility into their current FX positions, hedging strategies and transaction histories. Having the ability to answer “who did what, when?” is critical, said Descout, adding that integration and automation across back-office platforms is key to FX management solutions, too.

Traditionally, however, multi-currency accounts are often opened within silos, unable to integrate and communicate with each other, or other cash management systems. While FinTech has evolved to tackle the integration problem, Descout said today’s offerings remain too narrow to address the multifaceted and unique needs of corporates and small firms. Treasurers continue to input and manage FX data manually, resulting in a higher error rate and wasted time, he added.

What all of these challenges mean is that even when an organization decides to implement a foreign exchange management strategy, unexpected problems can still arise.

A treasurer may not adopt the correct technology or platforms to address their firm’s particular FX needs, for example, or an organization may adopt technology without the expertise of an advisor.

Failure to plan adequately for cross-border funds transfers between subsidiaries or to suppliers, for instance, may result in money converted at a different exchange rate than was initially accounted for, creating “erratic” profit and loss (P&L) variations that could have been avoided with a proper hedging strategy, explained Descout. Failure to prepare for the “idle cash” while funds move from point A to point B (and everywhere in between) creates inefficiencies.

Beyond Fees

The unexpected or high fees of cross-border payments may encourage a company to look beyond their traditional bank for FX services, but organizations will soon learn that FX strategy is about more than avoiding extra costs.

Treasurers must account for their unique needs — and unique problems their companies will encounter — when expanding abroad, from the impact of slow money movement to the importance of FX data integration. While global growth is now easier than ever, the FX risks of internationalization are growing more complex, while services available from traditional providers haven’t entirely caught up to the demands of today’s global market.

According to Descout, FX management is only becoming more strategic, with opportunities for technology to enhance data analytics and risk management functionality. But in order for financial professionals to take advantage of the opportunity in FX management, they must first understand that the risks and challenges they face are likely not the same as yesteryear.

“While some years ago, managing FX was roughly about protecting yourself against the ups and downs of a limited number of currencies,” said Descout, “now it is about how to collect in foreign currencies from multiple card acquirers, how to price eCommerce marketplaces properly, how to automate reporting, how to optimize positions. The scope became very large.”