Editorial Consultant, Treasury Management International (TMI)
As the speed of global commerce increases, and the desire for transparency across all areas of business intensifies, more treasury teams are discovering the benefits of automating their transactional foreign exchange (FX) workflows. In this article, two senior leaders from Barclays Corporate Banking explain the drivers behind the rise – and democratisation – of transactional FX solutions, with a strategic eye on the cash management implications of this trend.
“Great things are achieved through lots of tiny, unglamorous milestones.” This quote from Professor Michael Bliss, a distinguished Canadian historian known for telling the complete story behind the discovery of insulin, was not originally intended for the ears of a corporate treasury audience. Yet the sentiment closely echoes the thoughts of Gibran Maqsood, Director, Transactional FX Sales, Europe, on the topic of transactional foreign exchange (FX).
Gibran Maqsood Director, Transactional FX Sales, Europe, Barclays Corporate Banking
“There are two broad areas within FX that concern treasury. First, there is the strategic or discretionary side which involves hedging – often very significant – currency exposures. Then there is the day-to-day, far less ‘glamorous’ aspect of international payments and receipts, which can be called systematic or transactional FX,” Maqsood explains. “While the latter typically involves relatively low-value transactions, the cumulative effect on both cash- and risk management can be significant. And in today’s operating environment, treasurers have a great opportunity to review and optimise their transactional FX processes.”
Time for change
Elaborating on the catalysts currently shining a spotlight on this area, Loic Merlot, Head of Cash Management in France, Belgium and the Netherlands, says: “With the growth of cross-border trade and the boom in international e-commerce, the need for organisations to manage the FX flows associated with those transactions has increased enormously.” And although Covid-19 and Brexit put a dampener on global trade flows in 2020, there has been an impressive rebound in 2021 [1]. What’s more, the cross-border business-to-consumer (B2C) e-commerce market is anticipated to record a compound annual growth rate of nearly 28.4% from 2020-2027 [2], suggesting that efficient management of transactional FX will only become more important in the years ahead.
Merlot continues: “Covid-19 has also led to a greater call for visibility and transparency among corporates, in order to aid accurate forecasting. Naturally, this includes visibility over the FX pricing attached to international payments and receipts. And with solutions such as SWIFT gpi’s Tracker providing this level of granularity, corporates have witnessed the art of the possible – and many are now searching for comparable transparency across all areas.”
Elsewhere, regulation is also driving greater focus on transactional FX, believes Maqsood. He cites the FX Global Code, which is maintained by the Global Foreign Exchange Committee (GFXC), as a prime example. As a set of global principles of good practice, the code is intended to promote a robust, fair, liquid, open and appropriately transparent wholesale FX market. “The code has implications for both banks and corporates, as suppliers and buyers of FX services. As a result, banks are placing even greater scrutiny on all areas of FX and enhancing their solutions around transactional FX. At the same time, treasurers are re-examining their behaviours and pinpointing areas ripe for improvement – and transactional FX is emerging as an area that is receiving a lot of interest now,” he notes.
Backing this up, the results of the TMI and Barclays’ European Corporate Treasury Survey 2021 show that 58% of treasurers are currently considering automating their low-value FX payments with their banking provider.
Fig 1: The Rising Popularity of Automated Transactional FX Solutions
Source: TMI and Barclays’ European Corporate Treasury Survey 2021
“This re-examination comes at a time when payments and collections processes are already shifting because of the growing use of real-time instruments and the advent of emerging technologies”, adds Merlot. “Increasingly, corporate treasurers are exploring the benefits of technologies such as robotic process automation [RPA], artificial intelligence [AI] and application programming interfaces [APIs], and virtual accounts, as they look to prepare for the era of truly real-time treasury.”
Out with the old
With these maturing technologies, and a mandate to review and improve their operations, treasurers are also questioning how they can optimise their cash management processes. Merlot explains: “Given the increased speed and complexity in their operations, treasury leaders are understandably asking themselves whether they really need bank accounts in myriad countries and currencies. Inevitably, they would prefer a way to streamline their cash management structure, reduce internal costs, better manage their balance sheet, and minimise FX risk by taking it at the most appropriate moment in any given transaction.”
This final point highlights the issue of inefficiencies in treasury workflows – and how this can impact transactional FX. Maqsood elaborates: “Corporates that have not yet taken the time to optimise their transactional FX typically take a very manual, piecemeal approach to it. This can result in numerous process inefficiencies and also leaves room for error.”
Take the simple example, he says, of a business whose functional currency is the euro, but who needs to make a supplier payment in US dollars – on Friday. “In a manual environment there are several steps that go into making that payment. First of all, someone will need to book an FX trade, to sell euros and buy US dollars either by calling a dealing desk, or by logging on to an FX platform. Realistically, for Friday delivery of the payment, this would take place before the payment date, let’s say on Thursday (although this could be even earlier, depending on the process workflows of individual organisations). The US dollars would then be credited to the corporate’s account, and the euros debited, and various post-trade processes will be performed, including confirmation - it may also be necessary to manually reconcile the US dollar credit and euro debit. Then, once settlement has taken place, the banking platform or payment channel must be accessed to actually make the payment.”
From this explanation alone, it’s clear to see that the process is cumbersome (see fig. 2) and can take anywhere between several hours to several days due to the FX conversion, despite the fact that real-time payments can move in a matter of seconds. As a result, the corporate not only has to contend with operational risk due to the manual touchpoints but has also taken on additional FX risk (between Thursday and Friday in this particular example).
Fig 2: Manual Transactional FX Workflow
<em><sup>Click image to enlarge</sup></em>
“Furthermore, if many similar payments like this are being aggregated and converted at once, like a weekly run of US dollar payables for example, the risk of the currency moving against them can become significant,” cautions Maqsood. Merlot adds that the corporate also has to “find somewhere to park that US dollar cash until they require it, which comes with additional complications”. And although this example relates to an outgoing payment, the process for incoming funds carries similar manual burdens and economic risks.
Of course, there are many ways in which transactional FX solution can be set up – the above is just an example. “Sometimes we see automated solutions working in tandem with a traditional [or manual] FX execution solution,” explains Maqsood. “However, we see more and more corporate treasurers opting to implement integrated transactional FX solutions, which primarily target the low-value high-volume FX environments,” he comments.
In with the new
An integrated, automated, solution which runs on a fully straight-through processing (STP) basis can potentially offer a much more efficient solution for transactional FX. With such a set-up, the currency conversion is performed at the point of sending the payment, rather than a few days previous (see fig. 3) and touchpoints are minimised as everything can be performed from the buyer’s banking platform, with no new technology or additional system implementation required.
Fig 3: An Integrated and Automated Transactional FX Workflow
<em><sup>Click image to enlarge</sup></em>
“While the operational benefits of the STP approach are clear to see, some treasurers might initially question the value such a solution brings in terms of the FX rates,” says Maqsood. “Those that have been used to manually managing their FX risk will be used to very tight margins on their FX. In the integrated solution, the pricing might appear slightly wider – but on the other hand, the margins are locked-in and totally transparent, which complies with growing governance requirements. Therefore, the overall value that can be derived from transparent FX pricing – across all sizes of transaction – and an STP environment, arguably outweighs any opposing views.”
There are additional cash management benefits too, says Merlot. “It can be time consuming and expensive to maintain multiple foreign currency accounts – especially if this involves multiple bank relationships and notional pooling structures. The beauty of an integrated and automated transactional FX solution is that the corporate no longer has to hold on to foreign currency; they simply convert it at the time of the transaction. This also means that corporates have a few extra days to hang on to their original currency and can potentially invest it for a little longer.”
This approach can enable corporates to streamline their cash management structures, reduce banking and legal fees, and improve cash forecasting thanks to simplified FX workflows. Merlot adds that the STP set-up also removes the need for a complex IT infrastructure since everything can be executed on one platform. As such, the potential for errors and fraud is also vastly reduced – and reporting can also be enhanced, with consolidated information available at the touch of a button. In a nutshell, says Merlot, “taking transactional FX seriously can result in operational and economic efficiencies, while increasing speed and accuracy, and reducing risk”.
Simplicity for all
Despite the universality of the potential benefits, there is, of course, no one-size-fits-all solution. “Whether a corporate is looking to build an entirely new cash management structure, or to optimise their existing one, a transactional FX solution should exist as an integrated part of that ecosystem. The ideal set-up will vary from corporate to corporate, depending on the objectives of the treasury team,” explains Merlot. “Nevertheless, for those corporates sharing the goal of simplifying account structures, by automating transactional FX at the point of inception, the corporate can ultimately achieve a single account solution that allows them to make and receive payments in multiple currencies – with minimum hassle and maximum benefits.”
Maqsood agrees, adding that with such solutions we are entering an era of FX ‘democratisation’. “A few years ago, automation of FX-related processes, and transparency around those flows, was reserved for only the biggest corporations. Now, it is becoming available for businesses of all sizes, and across all types of FX transaction.”
Over the coming years, Maqsood expects to see many more requests for proposal (RFPs) seeking transactional FX solutions. “By integrating and automating their day-to-day FX payments, treasurers have an opportunity to become better strategic advisers to the board as they are freed up from manual processes and can bring greater efficiency, alongside deeper FX insights.”
Merlot echoes these thoughts, concluding that in a world where the external operating environment is becoming increasingly fast-paced and complex, “sometimes, the greatest sophistication can actually be found in simplicity”.
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