Protecting against currency risk

SPONSORED BY World­First

UK busi­ness­es with over­seas oper­a­tions have been hand­ed some harsh lessons dur­ing 2020 as the eco­nom­ic mire from the coro­n­avirus pan­dem­ic man­i­fest­ed on com­pa­ny bal­ance sheets.

Cur­ren­cy mar­ket volatil­i­ty and sup­ply chain inter­rup­tions caught out hun­dreds of com­pa­nies dur­ing the ear­ly weeks of COVID-19, high­light­ing the impor­tance of com­pre­hen­sive­ly man­ag­ing for­eign exchange risks through a struc­tured strat­e­gy with a cho­sen part­ner.

In the rel­a­tive­ly calm mar­kets of recent years, some finance direc­tors may have over­looked devel­op­ing a com­pa­ny-wide for­eign exchange pol­i­cy. While there was a spike in volatil­i­ty in 2016 after the Brex­it vote, 2018 and 2019 were rel­a­tive­ly calm.

But in 2020, this would have proved cost­ly. On March 20, ster­ling fell to its low­est lev­el against the US dol­lar for 35 years, with the GBP/USD exchange rate mov­ing from 1.3157 to 1.1494 in the space of a few days.

Those com­pa­nies that were mak­ing US-dol­lar pay­ments from ster­ling dur­ing that peri­od, with­out any for­ward con­tracts in place, would have seen a dra­mat­ic dif­fer­ence in the amounts paid from the same pay­ment were it set­tled on March 10, com­pared to March 20.

Fur­ther­more, if they were rely­ing on their tra­di­tion­al provider of bank­ing ser­vices, they may have been addi­tion­al­ly hit by uncom­pet­i­tive exchange rates, delays in set­tle­ment or high­er charges for the ser­vice.

“Up to 85 per cent of small and medi­um-sized enter­pris­es use their bank­ing part­ner for cross-bor­der for­eign exchange pay­ment ser­vices,” says Daniel Howe, man­ag­ing direc­tor, Europe, Mid­dle East and Africa, at World­First.

“Because they have a trust­ed rela­tion­ship, they tend to use their bank­ing provider for mul­ti­ple ser­vices, but that can some­times mean they get the raw end of the deal.”

If they haven’t already done so, com­pa­ny direc­tors with sig­nif­i­cant over­seas trans­ac­tions should move quick­ly to help mit­i­gate against fur­ther volatil­i­ty, with pre­dic­tions that mar­kets are like­ly to con­tin­ue their unpre­dictable behav­iours well into 2021.

Forward planning

Those seek­ing greater vis­i­bil­i­ty of their future costs may opt to use a for­ward con­tract. For­ward con­tracts allow you to secure an exchange rate for a defined peri­od of time in the future, help­ing with cash-flow plan­ning and poten­tial­ly mit­i­gat­ing cur­ren­cy risk.

By embrac­ing this approach, com­pa­ny direc­tors can more eas­i­ly bud­get for future rev­enues, costs from over­seas trans­ac­tions and book trans­ac­tions ahead of time, yet fund­ing them at a lat­er date.

“For­wards are par­tic­u­lar­ly rel­e­vant to busi­ness­es in the cur­rent mar­ket due to the volatil­i­ty,” explains Howe. “They offer a degree of cer­tain­ty at a time when busi­ness­es will be con­sid­er­ing plans for the next year.

“Com­pa­nies may need to agree pric­ing with a sup­pli­er and, if they are buy­ing or sell­ing at spot, that is an unknown.”

While for­wards can be a use­ful tool for fis­cal plan­ning, finance direc­tors should be aware that a lack of trans­par­ent pric­ing can some­times be used to inflate providers’ prof­its.

“When con­sid­er­ing the cost of a for­ward con­tract, oth­er vari­ables such as the inter­est rate dif­fer­en­tial between two cur­ren­cies can affect the price,” explains Tom Kid­dle, head of com­mer­cial at World­First.

“Many cus­tomers do not have vis­i­bil­i­ty of these vari­ables and how they affect the price of the under­ly­ing con­tract. In many cas­es, the cus­tomer has lit­tle cer­tain­ty of the mar­gin they are being charged for using a risk man­age­ment prod­uct.”

By com­par­i­son, World­First explic­it­ly breaks down how it has priced its ser­vice upfront. For­ward points are nev­er used as a mech­a­nism to charge more, but are instead used to reflect inter­est rate dif­fer­en­tials between two cur­ren­cies.

Digitalisation and global trading

The World Trade Orga­ni­za­tion sug­gests the pan­dem­ic may result in increased lev­els of inter­na­tion­al trade longer term, which means the use of cur­ren­cy risk man­age­ment solu­tions could become a pop­u­lar and pru­dent choice for busi­ness­es.

“The glob­al nature of COVID-19 and its impact on ecom­merce may encour­age strength­ened inter­na­tion­al co-oper­a­tion and the fur­ther devel­op­ment of poli­cies for online pur­chas­es and sup­ply,” it con­clud­ed in a May 2020 ecom­merce report.

Yet, while busi­ness­es have been quick to embrace online trad­ing, many have not con­sid­ered the con­se­quences of gen­er­at­ing rev­enues in mul­ti­ple juris­dic­tions.

“The real­i­ty is, as soon as you move online, you are glob­al,” says Howe. “Until now, for­eign exchange may not have been a major point of con­sid­er­a­tion for some, but there are lots of busi­ness­es in the UK, trad­ing glob­al­ly for the first time, exposed to risks they may not ful­ly under­stand.”

This under-appre­ci­a­tion of cur­ren­cy risks can part­ly be attrib­uted to the tra­di­tion­al opac­i­ty of the cur­ren­cy exchange mar­ket.

Most tra­di­tion­al providers are will­ing to quote you a rate for the a trans­ac­tion but few are will­ing to offer a cost. They may make addi­tion­al charges for ser­vices such as account open­ing or annu­al main­te­nance.

It can also be very dif­fi­cult to com­pare exchange rates in real time as mar­kets move so quick­ly. So, if busi­ness­es call mul­ti­ple providers, they won’t be com­par­ing rates at the same point in any one day.

Worse still, a com­pa­ny may receive intro­duc­to­ry favourable terms as an incen­tive for them to use a provider’s ser­vice, only to see this rate dete­ri­o­rate over time.

In an attempt to nav­i­gate this com­plex­i­ty, World­First has designed a clear fee struc­ture, based on the annu­al amount trans­ferred in any one year. Cus­tomers with annu­al trans­ac­tion vol­umes up to £500k are charged 0.5%, between £500k and £5 mil­lion 0.25% and above £5 mil­lion 0.15%.

Multiple uses

COVID-19’s effect on inter­na­tion­al busi­ness has already been pro­found. For the glob­al trav­el and tourism mar­ket, there has been enor­mous dis­rup­tion. Air­lines have faced mass can­cel­la­tions and refunds, while hotel book­ings between hote­liers and trav­el com­pa­nies have also been with­drawn.

Finance direc­tors oper­at­ing in the trav­el sec­tor have need­ed to han­dle refunds from for­eign mar­ket sup­pli­ers while want­i­ng to avoid con­vert­ing this cash back into ster­ling and crys­tallis­ing a loss.

“The trav­el indus­try has seen a recent increase in the amount of refunds received from can­cel­la­tions, par­tic­u­lar­ly at the start of lock­down,” says Kid­dle.

“By being able to serve our cus­tomers with a local col­lec­tion account, our cus­tomers have been able to avoid mul­ti­ple exchanges, into ster­ling and then back into the local cur­ren­cy at a lat­er date. In an indus­try where mar­gins are tight, hav­ing access to a local col­lec­tions solu­tion will cre­ate an impor­tant cost-sav­ing.”

For com­pa­nies with­out a bank account in each local juris­dic­tion in which they oper­ate, World­First offers cur­ren­cy accounts that can be opened in a mat­ter of sec­onds.

Unlike tra­di­tion­al bank process­es, which require an indi­vid­ual to be phys­i­cal­ly present, WorldFirst’s reg­is­tra­tion ser­vice for open­ing a cur­ren­cy account allows a customer’s cre­den­tials to be ver­i­fied dig­i­tal­ly.

“Trad­ing abroad can often be an alien envi­ron­ment for some com­pa­nies,” Howe con­cludes. “Through our World Account propo­si­tion, we offer a sin­gle plat­form that pro­vides cus­tomers with local domi­ciled cur­ren­cy accounts in ten glob­al mar­kets.”

For more infor­ma­tion please vis­it www.worldfirst.com

Q&A: International growth at the click of a button

A boom in busi­ness­es trad­ing on dig­i­tal mar­ket­places has under­scored the need for local cur­ren­cy accounts, but what do com­pa­nies need to con­sid­er as they go glob­al?

Theo Sprague, Head of rela­tion­ship man­age­ment, ecom­merce & Daniel Howe, Man­ag­ing direc­tor, Europe, Mid­dle East and Africa

Why have com­pa­nies tar­get­ed inter­na­tion­al expan­sion through online sales plat­forms?

DH: The emer­gence of online tech­nol­o­gy has made it eas­i­er for small and medi­um-sized enter­pris­es (SMEs) to reach inter­na­tion­al con­sumers. Inter­na­tion­al trade has become sim­pler. Mar­ket­places like Ama­zon have made it almost fric­tion­less to sell prod­ucts in inter­na­tion­al mar­kets at the click of a but­ton. It is now as easy to sell a prod­uct in Aus­tralia as it is in the UK. At the same time, logis­tics and the cost to send and ship goods has come down sig­nif­i­cant­ly. I can buy a prod­uct from Chi­na, have it shipped to the Unit­ed States and I don’t even have to leave my office in Lon­don.

What impact did COVID-19 have on inter­na­tion­al cross-bor­der sales on these plat­forms?

DH: The dig­i­tal­i­sa­tion theme has accel­er­at­ed as a result of COVID. Peo­ple who weren’t buy­ing prod­ucts online six months ago are now shop­ping online. Now they’ve start­ed, they are like­ly to con­tin­ue. We have seen a fun­da­men­tal social shift in behav­iour.

TS: It has had a pro­found effect on our ecom­merce busi­ness and fur­ther accel­er­at­ed the high street’s demise. It is super easy and cheap. Dur­ing lock­down, the sales vol­umes have been com­pa­ra­ble to peak peri­ods like Black Fri­day or Christ­mas and for many it was only a mat­ter of sup­ply chain lim­i­ta­tions pre­vent­ing even greater suc­cess.

How has the finan­cial ser­vices indus­try kept pace with this change?

DH: In many ways, finan­cial ser­vices hasn’t caught up in the same way. It still presents a bar­ri­er for SMEs oper­at­ing inter­na­tion­al­ly. Dur­ing the pan­dem­ic, there have been restric­tions on peo­ple cross­ing bor­ders in many coun­tries, which has made it more chal­leng­ing to open tra­di­tion­al bank accounts in some juris­dic­tions. That’s why we believe in the impor­tance of our World Account propo­si­tion. The account is a vir­tu­al account that pro­vides cus­tomers with a local­ly domi­ciled cur­ren­cy account in ten glob­al mar­kets. I can get accounts in US dol­lars, or Aus­tralian dol­lars etc, local­ly domi­ciled in those coun­tries  same day, to make pay­ments to local sup­pli­ers.

TS: Tra­di­tion­al­ly the acqui­si­tion of an over­seas bank account is very labo­ri­ous. You need a phys­i­cal account in that ter­ri­to­ry. But we offer a way of hav­ing a whole suite of cur­ren­cy accounts around the globe all on a sin­gle plat­form. We made a huge hur­dle into a tick-box exer­cise by offer­ing a viable alter­na­tive, with­out the trade-off of secu­ri­ty or peace of mind.

With COVID-19 restrict­ing inter­na­tion­al trav­el, have you found inter­est from larg­er cor­po­rate cus­tomers for this prod­uct?

DH: The speed of access we offer to new mar­kets is appeal­ing and we have seen an increase in reg­is­tra­tions from busi­ness­es that are open­ing up to new mar­kets and seek­ing alter­na­tive ways of col­lect­ing inter­na­tion­al funds. This means big­ger busi­ness­es that were pre­vi­ous­ly offline busi­ness­es now need these accounts.

How are com­pa­nies like­ly to approach inter­na­tion­al expan­sion in the future trad­ing envi­ron­ment and what role will World­First play in sup­port­ing that?

DH: Inter­na­tion­al expan­sion will be dig­i­tal first for all com­pa­nies in the future. The process we have been through has pushed busi­ness online. We want to be an enabler of inter­na­tion­al growth, to sup­port busi­ness­es in tak­ing their busi­ness abroad. They need a broad­er range of ser­vices than just pay­ments and col­lec­tion prod­ucts. Com­pa­nies will increas­ing­ly need new prod­ucts and ser­vices in inter­na­tion­al mar­kets. For us, the impor­tant thing is we have a great core prod­uct, but we recog­nise SMEs will need more. The prod­uct suite we pro­vide must con­tin­ue to sup­port our cus­tomers’ growth because their inter­na­tion­al suc­cess is our suc­cess.

Forward planning

Digitalisation and global trading

Multiple uses