A sizeable percentage of companies’ FX exposures arise from the fact that they’re paying and receiving funds to or from overseas, a trend that is only set to grow. The Bank of England, for example, estimates that the value of cross-border payments will rise to $250tr. by 2027 [1] – driven in no small part by the boom in e-commerce (see the section below). Under the surface of this growth, however, multinational corporates are contending with currency volatility that is affecting the bottom line, with one report finding the global impact of recent FX fluctuations to be more than $64bn in Q3 2022 [2].

Lucy Grimstead, Head of UK Corporate and Private Funds FX Sales, comments: “Visible FX exposures – relating to the core underlying business – are often well understood and actively managed. However, less visible exposures, such as international payment-related flows and indirect FX, typically attract less focus while often amounting to potentially significant levels of unmanaged risk.”

This issue of inattention to FX associated with cross-border payments can arise if companies don’t look at their payments in domestic and international terms but rather see them purely as Accounts Receivable (AR) / Accounts Payable (AP) and which of their customers and suppliers they need to be paying in more general terms. This kind of approach can be fairly common where legacy, highly manual processes are in place around FX payments. 

Another scenario which may see FX left out of the workflow, says Amanda Lovewell, Head of Transaction Services Account Management, NatWest, comes when corporate treasurers are looking to automate payments and connect to their systems to achieve straight-through processing (STP). “In this instance, rather than coming to the bank first, corporates are making those payments from their in-house systems and getting those to come straight through to the banks via an API. Efficiency and reduced fees are potential upsides of doing this, but it could mean they’re not always considering the FX elements of where those payments are debiting or where they’re coming in from.”

Yet tracking the FX element of a payment is crucial, particularly in today’s market environment of increased volatility. One area this has particularly impacted treasurers has been forecasting.

“Recent years have challenged the predictability in underlying business performance and the reliability of supply chains to the limit, and so forecasting with confidence has become harder,” reflects Grimstead. “As a result, we’ve seen that influence not only the interest in better transactional FX solutions but also hedging behaviours and treasury policy around FX risk management more broadly.” 

The importance of being nimble became evident last year, as did having a flexible policy that is able to adapt where necessary, says Grimstead. “This could be regarding hedge tenors or ratios, or even product selection, but treasurers need a policy that provides control discretion. A corporate might wait for those volatile moments to warrant reviewing and enhancing policy, but that’s exactly the time they should invest their energy elsewhere. It’s essential to invest that time early on in the process of building the policy.” 

The current market climate is also forcing corporates to shine a light on some of their less visible FX exposures as they strive to improve operating efficiency and reduce costs. “Technology and data advances have simplified our ability to assess and manage these more hidden exposures,” adds Grimstead. “That is absolutely something treasurers should be embracing.”

Naturally, these advances in technology and the expanding digital toolkit available to treasurers will play an increasing role in assessing and managing FX risk. Through the introduction of technology – including automation, APIs and AI-driven tools – corporates can interrogate and actively deal with unmanaged or under-managed exposures and could benefit from those streamlined processes and improved efficiencies elsewhere. 

‘By better managing exposures through technology, treasurers can create the capacity and confidence to focus on more strategic risk management, such as policy revisions, the inclusion of optionality, and the ability to monitor and manage currency risks and exposures continually,” notes Grimstead. “I would encourage every treasurer to invest in understanding the advancements and applications to their business and be open to that evolution, whether it is products in the more classical sense or technology as a whole.”

Of course, it is not just the treasury department generating FX exposures. These can come from across the organisation, including procurement and sales. So, to truly get to grips with all FX exposures, treasurers need to drive the agenda with all other relevant stakeholders in the business.

Nick Pedersen, Global Head of Digital, NatWest, explains: “When we implement one of our automated services with a corporate, it’s rare that we operate only with treasury. More often than not, treasury is the introducer or the ‘go to’ for different parts of an organisation – product management, enterprise sales teams, accounts payable, logistics, supply chain – a diverse group of people. An effective treasury team educates and leads internal teams through the technology change but then operates as something of a go-between to all of the providers, ensuring everyone is onboard and singing from the same hymn sheet.”

One area where technology is making a significant and positive difference is the transparency of FX flows. As already noted, the increased efficiency of embedding AR/AP processes into banking can sometimes obscure sources of transactional FX and the rates that treasurers might have to pay for. Determining how those rates are calculated and how they impact an organisation’s inbound and outbound flows in terms of value is vital, but can be tough. This is where technology comes into its own.

“In its most basic form, treasurers have to understand all the FX flows relating to the business and, as a result, the currency accounts that may be needed,” says Lovewell. “In theory, having accounts for each currency enables treasurers to receive and pay in the currencies they’re trading in across their business directly and takes out that FX risk altogether. But in practice, this can create its own issues, notably in relation to increased complexity and a greater administrative burden. Treasurers often want as few bank accounts as possible, particularly physical accounts to have governance around.”

Virtual accounts are an increasingly popular solution in this regard, providing cross-currency capabilities without needing a physical account. What’s more, FX APIs – delivering rates direct from the bank straight into treasury systems and embedding them in workflows (see box 2) – can combine with virtual accounts to offer the ability to split a payment and its associated FX relatively simply. Treasurers considering this approach should be able to implement the process in a nimble and cost-efficient manner, as Grimstead explains.

“Working with a client last year, I found it fascinating that investment in technology used to mean a high cost of entry and time spent for both parties involved. This client was fully up and running on virtual accounts and bisecting their payments and FX risks within around 48 hours.” 

Elaborating on the trend for treasurers to embed the rate they can get on FX from their bank into the payment journey across all the relevant partners in the business, Pedersen notes: “This is where payments and FX collide.” He continues: “It does vary depending on the payment type. For cross-border wires and bank transfers, it would be pretty rare for the provider not to be able to identify and split out the FX rate associated with that payment and offer it on volumetric or commercial terms that make sense for the customer. Card payments, or receipt of card payments, is a different scenario altogether, however.” 

The FX spreads charged on card payments traditionally are not particularly transparent, which is also sometimes the case with alternative payment methods or non-card consumer-based payment accepted methods. But the technology exists to help treasurers gain better transparency. 

“It’s up to us as an industry and to treasurers to keep pressing for greater transparency,” adds Pedersen. “SWIFT gpi as an industry implementation was a great tool to help that along because, if we cycle back five or 10 years, cross-border bank transfer payments didn’t have the same associated transparency and competitiveness in FX as they do today. It’s a journey. The newer or more niche the payment type, the more important it is to get under the hood and look at where the FX is actually happening. And I would encourage treasurers to be part of this dialogue with their banks and industry bodies.”

Grimstead takes this message of participation one step further and encourages treasurers to be curious and invest time in understanding how all the technologies could make a difference in their business. “Understand how tech innovations could help streamline processes, support cost reductions, and enable the wider treasury team to get their arms around even more of the FX risk. In doing so, corporates will free up more capacity to think strategically about how they can be tactical around FX risk management.”

Lovewell echoes the advice to be curious, particularly regarding what different business areas are doing. It’s important to understand from where the transactional FX scenarios are emerging as a result of a company’s contracting with customers and suppliers. 

“Are there other activities going on in the broader business that are not being brought to treasury but could create FX within their payment journeys?” she questions. “Also, when treasurers are thinking about automating and optimising how they manage payments and collections with their bank, they should consider the FX element of that automation and that channel connection they have with their providers – aiming to integrate all elements.”

Finally, when considering the technologies that can support the management of FX in cross-border payments, it is essential to understand what is available in the market today and which are more theoretical or in development, says Pedersen.

“Use the 80/20 rule – 80% of the focus on technology should be on ones that are being used today,” he concludes. “APIs are a great example of that, versus blockchain and CBDCs, which are much further out for treasury to use in real-life scenarios. Be aware of these developments, but spend 80% on the technologies that are actionable today. And FX, especially in relation to payments, is one area where these developments are extremely tangible.”

All six-parts of our “Essential Guide to Treasury Payments and Embedded Finance” will be published on our dedicated Hub, so do regularly check this for new instalments. They will also be published on the TMI website, with whom we have collaborated on this series.

[1] https://www.bankofengland.co.uk/payment-and-settlement/cross-border-payments

[2] https://www.kyriba.com/news/kyribas-currency-impact-report-record-47-billion-in-fx-headwinds-for-multinationals/