Invisible FX

Most corporate treasuries have done a good job of eliminating the margins on high-value cross-currency payments through the use of ECNs, FX platforms and shopping around key FX players. They tend to have a minimum threshold, say £100k, above which cross-currency payments are considered a “trade” and are booked via the central treasury team. However, cross-currency payments below that threshold, usually low-value but high volume, often fall into the “black hole” in terms of price transparency – the ‘invisible FX’.
 

Treasury Managers in the dark

These payments are typically handled in a Shared Service Centre or financial operations teams such as AP (accounts payable) or AR (accounts receivable) teams which are frequently located in distant offshore locations and are often not visible to the corporate treasury.

Frequently treasury managers in large firms admit to being in the dark in terms of the total value of such items, how they are being processed or what sort of FX pricing mechanism is being applied. Yet, these lower-value items can add up into hundreds of millions, or even billions, of pounds in aggregate value, and therefore even a small improvement in margin can yield significant material savings.

The solution on these payments is to automate the entire process so that a £5 payment also gets the benefit of a live rate and a pre-agreed margin from their relationship bank. The ‘invisible FX’ opportunity is most glaring in the payables side but the cost saving potential is equally large on receivables side. Each time a foreign currency receipt hits a bank account, the bank would usually apply a ‘rack rate’ for the FX which could typically be as large as 2%-3%.

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The business case for a solution

The potential business case for developing a solution for the invisible FX within an organisation is compelling and should be a priority. Cost savings could be significant and driven by:

• Obtaining a standardised FX pricing for these low-value transactions. If these transactions are handled by one or few relationship banks, these banks may be inclined to offer preferential pricing given the significant volumes involved.
• A reduction in the number of bank accounts. Typically, if there isn’t significant incoming and outgoing flow in a particular currency, marginal currency accounts are ripe for closure. Instead, the corporate treasury should leverage the cross-currency payment platforms of banks which typically allow transactions in 100+ currencies out of single account.

Technology innovation

These low-value cross-currency transactions tend to be high-volume in nature so automation is key to success. It is difficult, and expensive, to have an in-house FX dealer to manually handle these transactions. Thankfully, banks have developed solutions which are typically part of their cash management channels. Broadly speaking, there are 2 category of banking solutions:

• Bank portals: The banking portals of leading banks facilitate the usual cash management transactions and most leading bank portals also allow cross-currency payments. For instance, Barclays.Net, Barclays’ banking portal, allows cross-currency transactions in 100+ currencies. Corporate clients typically can pre-agree a FX margin which will then be applied to the mid-rate for the currency pair. To enhance price transparency, we also stream the live mid-price so that clients can compare the market rates available on Thomson Reuters/Bloomberg.
• Host-to-Host channels: This solution is ideal for corporate treasuries who place a premium on automation of these low-value transactions. While live rate streaming is not possible via this channel the automation benefits for corporate clients is significant. As long as FX margins have been pre-agreed with the banks it is probably the best automated solution for clients with high volume of these transactions.

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A strategy for invisible FX

Corporate clients planning to realise these cost savings from their invisible FX flows should treat this as a strategic global treasury project. The first step is to identify the volumes and value of these payment and receipt transactions across all subsidiaries. A careful examination of bank statements for a quarter should be sufficient to identify these flows.

The next step is to understand what FX margin is currently being paid on these transactions, which will then help develop the business case for centralising this FX flow with a single, or few, relationship banks. A discussion with the bank or banks should follow to understand their solutions and the pricing offered.

Finally the invisible FX flow embedded in the Account Payable and Account Receivables process should be channelled through the new arrangement to ensure that the low-value cross-currency transactions get the full benefits of live FX rates and pre-agreed margin.  

Full automation of these transactions will ensure fewer errors, and automated reconciliation within the ERP/TMS platforms, leading to significant productivity gains. 

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