FX in payments: Keeping up with the rapid pace of globalisation

By Doug Houser, director, head of global cross currency solutions, Bank of America

26 November 2019

When it comes to commerce, the world is becoming an increasingly smaller place. Businesses of all stripes are looking to expand globally and at a pace not seen before. The growth of multinational organisations, particularly in the shared and gig economies, has introduced the need to make and receive payments in a multitude of currencies – all while complying with local jurisdictions, and monetary and tax regulations.

As innovative companies expand globally at breakneck speed, treasury and finance teams are under pressure to support the business, while minimising the size of local payment operations on the ground. For many of these companies, technology has made global expansion far easier, but does not address challenges around cross-border payments in certain regions.  Dealing with complex regulatory environments where currencies may not be freely traded, along with stringent supporting documentation requirements, can create a degree of treasury friction that hinders day-to-day business operations.      

Treasury professionals face multiple concerns in their cross-currency processing, including managing transaction risk, transparency, efficiency, cost, certainty, and reconciliation. For some, the greatest risk is not being prepared for rapid globalisation of the business. These businesses may be on the very leading-edge of digital transformation, but that doesn’t necessarily translate to having the specific regional expertise and knowledge to tackle the complexities of handling payments around the world. Here, we’ll discuss several solutions that are designed to mitigate some of the challenges of expanding globally. 

Having expert guidance is key to global payments success

Most businesses with global aspirations can benefit from having a bank that brings deep, on-the-ground experience to help them operate in different jurisdictions. It’s crucial to leverage the advisory strength of a bank at the beginning of the global journey to help manage the complexities of the payment function as the business rapidly expands into new regions. 

Easing the pain in regulated markets with paperless FX

Many organisations struggle to manage the cumbersome burden and the high operational cost of submitting physical documents for foreign currency trades in certain regulated countries. The extensive volume of paperwork required for regulatory review and approval can hinder companies from doing business outside the US, particularly when they have no presence on the ground. All too often, companies impose the task of managing these documents onto the receiver of the payments, or end up securing on-shore legal counsel to support this arduous responsibility.

The physical delivery of documents and manual population of documentation introduces tremendous operational inefficiency, and raises compliance risks. Use of a paperless FX solution addresses this problem.

A centralised, electronic platform for the creation, authentication and submission of FX documents reduces paper processes, driving improved visibility, productivity and cost efficiency. At the same time, such innovation lowers operational and compliance risks. A paperless support tool is an important way to reduce friction for organisations looking to facilitate global commerce in some of the fastest-growing, but operationally challenging markets.

Outsourcing rate exposure risk with guaranteed FX rates

For businesses that are growing internationally, treasury departments face real challenges when it comes to accurately forecasting cash flows and managing account balances efficiently given volatility in FX rates. The exchange rate variance, caused by the time gap between the date of invoice on a company’s ERP system and the actual execution of payment, can wreak havoc on the reliability of forecasts. 

A mechanism that provides a way to lock in or guarantee a FX rates provides an alternative approach, allowing treasury to offload their rate exposure risk to the bank. By locking in an executable guaranteed FX rate at which to convert all payables and receivables for a period of up to 90 days, organisations gain price certainty. This eliminates the need to estimate the FX rate at the time of invoicing.

A solution like this one enables businesses to hedge a large volume of small FX transactions in an efficient manner without entering into derivative contracts or using valuable credit capacity.  It enables treasury to execute FX payments using the same rate uploaded into their ERP system, thus eliminating any slippage due to FX movement between invoice and payment.  By outsourcing the risk to a bank, smaller infrastructure and personnel are required to hedge FX.

Cross-currency ACH reduces the cost of international payments

As we’ve covered, organisations that are growing rapidly face the challenge of making cross-border payments in a way that is both cost-effective and delivers the best end-user experience. Cross-currency ACH (CC ACH) offers an efficient means of moving funds around the world. For example, a company with rapid global expansion needs to provide an excellent payment experience for its vendors, employees, and customers. CC ACH provides an alternative to international wires or checks, and is especially relevant for companies that need to make frequent or recurring payments, such as payroll, pension, vendor, insurance or utility payments.  With this low-cost solution, the payment recipients receive their funds in a more timely and predictable manner.

CC ACH, when combined with API-based guaranteed FX rates, is an ideal solution because it allows a company to make low value payments in local currencies virtually anywhere in the world. Customers also are able to transact in their local currency, allowing them to remove FX risk. These solutions provide global companies with a convenient way to offer local transactions, even if the underlying transactions are ultimately cross-border. 

Looking ahead: what’s coming next in payments?  

In recent years, innovations have been made around paperless FX, guaranteed FX rates, and CC ACH. One of the advancements that lies ahead is multi-currency virtual account management (VAM), which will allow organisations to make collections on the ground in any country without having a presence in that country. This will remove the friction from local receivables, reducing the need to jump through all of the regulatory and compliance hurdles.

As consumers increasingly expect greater payment choice, including check, wire, ACH, real-time payment, and other methods, managing numerous digital wallets can be daunting. A global digital disbursement solution where payments are electronically deposited to the account of the payee, will solve this problem. This not only simplifies the payment experience for buyers and sellers alike, but also provides a competitive advantage to sellers. 

Ultimately, the key to leveraging the latest payables and receivables innovations is to work with a trusted ally that not only keeps up with the growth of its clients, but is at the leading edge of what is driving growth around the world.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development