Integrated Cross-Border Operations – Leveraging the Foreign Exchange Opportunity

by Greg Edwards, Global Head of Transactional FX, and Gareth Lloyd-Williams, Head of UK Corporate Sales, HSBC

Managing foreign exchange (FX) risk is a priority for every international treasury function, helped by a range of solutions which have emerged  in recent years to increase risk transparency and enhance operational efficiency. However, by leveraging innovative FX solutions, treasurers can also facilitate new commercial activities and create competitive advantage, whilst managing risk and cost.

Early stages of the FX innovation journey

Foreign exchange (FX) management has been an area in which innovation has flourished over the past decade or so, but this has largely been targeted at automating and increasing transparency of FX transactions between treasurers and their banks. This includes the evolution of bilateral dealing platforms (e.g., HSBC  evolve) offered by banks, and independent, multibank trading platforms. By leveraging these platforms, treasurers can seek competitive quotes on a wide variety of currency pairs and product lines from multiple counterparties, transact online and transfer deal and quote information to the treasury management system (TMS).

These solutions offer significant opportunities in managing risks and costs by enabling treasurers to seek the best quotes, demonstrate price discovery and achieve high levels of straight-through processing (STP) by integrating these platforms with their TMS. This integration often operates ‘two-way’ so that treasurers can aggregate exposures from across the business and then deal net positions in the market.

Not only do these automated dealing platforms offer considerable value for buy side market participants, such as corporate treasuries, but there are also benefits for their banks, as more resources can be invested in expertise and solutions to support clients’ wider FX requirements as opposed to quoting on regular transactions. The investment in more value added services is becoming increasingly apparent, with innovative solutions now available that offer the precision, transparency and automation that treasurers demand across the full spectrum of their FX requirements.

The cost and risk of foreign currency payments

One of the issues that affects companies of all sizes, and where the highest volume of transactions is typically involved, is foreign currency payments, i.e., payments or collections in a currency that differs from the account into which they are paid or received, which therefore need to be converted into the account currency. In many cases, it is not feasible or worthwhile for a company to hold accounts in every currency in which it pays suppliers or employees. For example, staff hotel bills, cross-border royalties or even pension payments to retirees living abroad can seem small in value when taken individually, but together they can represent a considerable sum. This results in significant FX risk, and time and cost to process multiple cross-border payments. Similarly, from a collections perspective, it is not always possible to dictate the currency in which a company receives cash, leading to conversion costs and potential loss of value date.

When faced with the challenge of cross-border payments and collections, treasurers need to avoid erosion of value, achieve visibility of FX rates used to convert the payment or collection amount, enable clear identification of incoming flows, and potentially enable automated reconciliation. While companies of all sizes, from the largest multinationals through to microbusinesses, may share the same objectives, there are clear differences in the resources and technology in place to address them.[[[PAGE]]]

The challenge for the bank, therefore, is to deliver solutions that are scalable and appropriate to different customer segments and use cases, without fragmenting our value proposition. At HSBC, we work with clients to understand their FX requirements from a cash management, risk management, transactional FX and customer solutions perspective, and construct solutions to meet these specific needs. To do this, we leverage FlexRate (see Figure 1), our central FX engine on which the bank itself relies, which gives clients confidence in the resilience and scalability of our solutions.

Commercial opportunities

The demand for solutions for foreign currency payments and collections is not restricted to a company’s cash and treasury operations, but also affects its wider customer strategy. As eCommerce models continue to flourish, companies have an advantage if they can provide local currency pricing in overseas markets. Data from the MCM Outlook 2014 Survey from Multichannel Merchant shows that just 27% of eCommerce merchants are set up to sell goods and services in foreign markets. The ability to pay and receive foreign currencies seamlessly, but without adding risk or cost, is therefore becoming a strategic enabler and potentially a competitive advantage.

Given that different industries, and companies within an industry have different commercial models, specific requirements can differ significantly. For an airline, for example, it may make sense to update FX rates on the booking site so that online users purchase tickets in their local currency at the FX rate valid at that time. For duty free purchases on a long haul flight, however, rates may need to be held for twelve hours or more. Not only is it important to have the right solution in place from a risk management perspective, but managing FX conversion precisely is a means of maintaining competitive pricing and therefore increasing revenue and market share. For example, HSBC’s pricing engine FlexRate  is designed to integrate foreign exchange conversion directly into each transaction, enabling companies to improve the customer experience by providing local currency pricing at the point of purchase.

All companies that already operate internationally or are planning to do so, particularly those with business models comprising an eCommerce element, should be considering their foreign currency risks and opportunities. This applies to companies operating in both the B2C and B2B spaces. Consumers already expect a high quality user experience, and tools that enable them to pay in their home currency using convenient payment methods can be a valuable contributor to this experience. However, business customers and suppliers increasingly expect to benefit from comparable tools in their professional lives as in their personal lives, so there is growing pressure on companies to increase payment and collection efficiency and convenience. Similarly, momentum is building in the development of ‘self service’ tools for both consumers and businesses to provide transparency and a higher quality experience whilst also reducing costs. One such self service capability is to decide in which currency to pay, providing convenience and potentially reducing risk for the supplier, whilst also creating competitive advantage.

Fig 1 - HSBC FlexRate

FlexRate - Single engine, targeted solutions

HSBC’s FlexRate is a pricing engine. It provides  the ability to integrate time guaranteed FX rates that allow customers to process collections or payments, and more. This allows us to update rates at the required frequency for the relevant use case, with full transparency and control over the spread.

Global Disbursements – single operating account, mass cross-border payments

For some companies a valuable solution in overcoming foreign currency payment and collection challenges is HSBC’s Global Disbursements solution. This enables clients to make cross-border payments in more than 130 local currencies from a single operating account, therefore providing more control over foreign exchange conversion on flows, as well as strengthening the company’s bargaining power with suppliers.

HSBCnet Get Rate – transparent and manageable FX payments

For smaller companies, HSBCnet Get Rate is a service that allows HSBCnet users to view and instantly book FX rates for priority payments and account transfers. This gives treasurers and finance managers a real-time view of the FX rate, the amount to be paid in the foreign currency and the exact amount to be debited from the operating account.[[[PAGE]]]

A partner in innovation

While we are seeing considerable growth in the range and depth of FX solutions, regulatory and cultural differences across markets can create complexity, particularly for global solutions. However, increased regulatory scrutiny also adds to the demand for solutions that offer transparency and auditability of processes and decisions. By sharing local domain knowledge, including regulatory requirements, advice on industry best practices and expertise in deploying innovative technology, the bank represents a valuable partner in clients’ eCommerce initiatives as well as cash and FX risk management. Through enhanced automation, risk management and versatility in payments and collections, treasurers can provide greater value to the organisation whilst also managing resources, risks and costs more efficiently.  

For more information, please email: [email protected]