- Dieter Stynen
- Global Transaction Banking FX, Deutsche Bank
An Executive Interview with Dieter Stynen, Global Transaction Banking FX, Deutsche Bank
In this month’s Executive Interview, Helen Sanders, Editor, introduces Dieter Stynen, Global Transaction Banking FX at Deutsche Bank to discuss some of the challenges and opportunities for cross-currency payments and collections.
What exactly are you referring to when talking about ‘cross-currency payments and collections’?
Treasurers and finance managers often have to deal with situations where cash is paid or received in a currency different to the currency of the bank account. For example, a company that does not have a KRW account paying KRW to a supplier might need to pay the amount from a EUR or USD account. Similarly, a company may receive KRW from a customer into a EUR account. These payments or collections are known as cross-currency payments/collections.
Assuming that it is possible to pay or receive different currencies into an account, what challenges does this present?
The problem with cross-currency transactions is that the bank has to exchange the foreign currency into the currency of the bank account or vice versa, a process over which treasurers typically have little control. Therefore, there is often no visibility over the FX rate that is applied, making it difficult to monitor FX costs. In many cases, clients are finding that the FX rates that are applied are uncompetitive, leading to significant ‘invisible’ but avoidable costs. In fact, as these rates are fixed and often updated only a couple of times per day, they are often priced with a margin to act as a buffer against currency volatility for the bank.
In theory, treasurers can avoid this by opening accounts in each currency, but this can result in fragmented liquidity and additional administration cost. Increasingly, therefore, companies are trying to reduce the number of bank accounts, particularly as administrative overheads are becoming more onerous as banks’ regulatory compliance requirements continue to grow.
What opportunities exist to overcome this challenge – after all, the ability to reduce the number of accounts whilst still facilitating international payments and collections is likely to be very attractive to treasurers?
At Deutsche Bank, we are helping clients to address this through our cross-currency payment and collection solution, FX4CashTM. This allows treasurers and finance managers to pay or receive more than 120 currencies through a single account. In addition, we give full transparency over the FX rate applied, which is essential for accounting and risk management purposes, and negotiate pre-agreed rate conditions with clients to avoid surprises and manage costs. As well as being able to offer competitive rates, due to our strong position as a top FX bank, we can also convert these flows using real-time rates – evidenced by a date time stamp per transaction – thanks to our direct connection with our global markets team.
In what circumstances is this type of cross-currency capability most valuable?
One frequent scenario today is that companies make payments to suppliers in regions such as Asia or Latin America in ‘hard’ currencies such as USD, EUR or GBP rather than the supplier’s local currency. This has advantages for the payer, as it avoids the need to hold potentially large numbers of foreign currency accounts. There are disadvantages for the supplier, however, in that it may not hold accounts in the payment currency. Therefore, their bank will convert the payment into their local currency. The supplier then faces the issue of lack of transparency over a potentially unfavourable FX rate. To overcome this risk and cost, suppliers will typically build the ‘hidden’ FX risk into the cost of goods and services, but this in turn raises costs for their customers.
By leveraging Deutsche Bank’s FX4Cash solution, a company can pay a supplier in its local currency without having to open a foreign currency account. This in turn enables the buyer to negotiate better conditions for the supply of goods and services as the FX component is eliminated. Our clients tell us that they are making savings of 3%-5% on the invoice amount, which has significant commercial implications when applied across multiple suppliers and currencies. Similarly, FX4Cash is also available for receivables, converting inbound FX flows into the supplier’s account currency in real-time, which also allows for account rationalisation, better centralised control and currency volatility mitigation.
As a result, we have had a lot of interest from clients, but there are challenges to take into account. Specifically, if the contract is denominated in ‘hard’ currency, procurement needs to be involved in renegotiating the contract to convert it to local currency. In some cases, treasury may need to work with procurement teams to help them understand the importance of FX issues and the benefits to the business.[[[PAGE]]]
Another challenge is that when a European business makes payments to a supplier in Asia, or vice versa, the difference in time zones means that the payment may be made at a time of day when market liquidity is low, and the board rate may therefore be less favourable than when liquidity is deeper. To address this, we introduced the concept of ‘warehousing’ payments through our Market Hours functionality. Payments are queued to be executed automatically when rates are favourable, therefore giving better value as well as optimal transparency over cross-currency payments.
An easier situation in which cross-currency payments offer particular value is intercompany funding. Today, treasury may fund local business units in the company’s home currency, such as EUR or USD, but the business unit will then need to exchange this into local currency in order to fund supplier and salary payments, which again results in excess costs and lack of transparency. Paying business units in their local currency is made straightforward, as treasury can organise this directly with the relevant business unit without involving other departments, and the ability to access funding in the local currency is beneficial for the business unit. Local currency funding allows treasury to reduce costs and risks at a business unit level, and centralise FX risk in treasury instead, which is typically better equipped to hedge these risks as necessary.
What do companies need to do to take advantage of this cross-currency payment and collection capability? Do they need to set up separate accounts?
FX4Cash is available through Deutsche Bank’s regular current accounts: there are no new accounts required, and no changes to electronic banking, host-to-host or other communication channels. From an accounts payable perspective, making cross-currency payments is exactly the same as making a regular payment, with the same formats, authorities and processes. The only difference is the currency of the payment.
Similarly, cross-currency collections are processed in exactly the same way as normal collections. However, as we provide consistent reporting of the original amount, FX rate and subsequent account credit on the respective transaction reporting messages, treasurers are able to automate processes such as reconciliation.
What type of organisation has been most attracted to FX4Cash so far?
FX4Cash is proving attractive to both financial institutions and corporations, but particularly to corporations. We are seeing growing demand from companies of all sizes, and across a variety of industries and geographies. The common feature is that companies are building their international supply chain, across both customers and suppliers. FX4Cash enables them to do this very effectively, without the need to extend their cash management infrastructure or establish new bank relationships or accounts. Key to the success of a solution such as FX4Cash is that it relies on the bank to have a local presence and expertise in the relevant countries, particularly for restricted currencies in regions such as Asia and Latin America. Consequently, it is not a solution that every bank is in a position to provide, but relies on a bank’s international network and its strength in both FX and transaction banking, areas in which Deutsche Bank excels.
