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As digitalisation shapes the evolution of the FX payment ecosystem, what is possible for treasurers looking to unlock efficiencies and growth opportunities?
Prior to the coronavirus crisis, few corporates had thoroughly reviewed the way they processed their foreign currency payments. But with remote working and rapid digitisation, treasurers are starting to explore the benefits of automating their transactional foreign exchange (FX) workflows. In our article, Sat Khuntia, Head of FX Sales, and Daniela Eder, Head of Payments & Cash Management Europe, examine the ways in which the FX payments ecosystem is evolving and outline a range of digital tools that could assist treasurers in the post-Covid-19 world.
You can also hear more from our experts as Daniela and Sat delve deeper into how automated tools have helped our clients combat the turbulent Covid-19 FX landscape, illustrated with a real life example of the BARX NetFX tool in action, in our audio recording.
There’s an old adage that says, “don’t fix something if it isn’t broken”. And many corporates had taken this attitude towards their transactional FX workflows, until the pandemic hit. Before the crisis, transactions were agreed with counterparties, spot FX deals were made, and cross-border payments were initiated. Transactional FX was simply part of business as usual – and, often, little thought was given to the potential for operational efficiencies and strategic gains by improving these workflows.
The turning point came when treasury practitioners across the globe began working from home and currency volatility skyrocketed. As Khuntia explains: “When the world went into lockdown, treasury staff were faced with the reality of making FX-related payments, dealing with foreign currency receipts, and managing the company’s working capital in multiple currencies, via remote channels. Initially, many struggled to access the necessary systems from home and the amount of manual work involved in transactional FX workflows was highlighted.”
Treasury leaders soon began to question the validity of such a manual approach in a world that was shifting rapidly towards digital and automated solutions.
The inherent risks involved in manual FX processes also became apparent – and the crisis has provided a huge incentive for treasurers to take greater control of risks, maximise operational efficiencies and unlock growth opportunities.
Head of FX Sales at Barclays
Increased volatility in the FX market has also added to the interest in automated solutions, says Khuntia. “At the start of 2020, the economic environment was relatively benign. Volatility in the euro even reached a record low in mid-January^. Soon, though, markets caught wind of the emerging coronavirus crisis and volatility began to spike. By mid-March, the US dollar was in enormous demand as investors looked for a safe haven and a number of corporate treasurers were taken by surprise. FX volatility quickly rose up their list of concerns.”
This is borne out by the results of a new research report published by TMI, in partnership with Barclays, which surveyed 300+ treasury professionals and CFOs on current European treasury trends. According to the report, entitled New Europe: Is Your Treasury Fit for the Challenge? PDF†, 42% of respondents see FX volatility as their number one macroeconomic concern for the year ahead.
With the full economic impact of global lockdown becoming apparent, cash flow uncertainty also became a significant concern for treasurers. Goods and services could not be consumed at the same volumes, or in the same way, as before. Khuntia observes: “Not only did this put greater pressure on treasurers to have real-time visibility and transparency over their cash management and FX risk management, it also saw a shift in business models towards digital channels, which directly impacted treasury.”
Eder agrees, adding that: “E-commerce has had a significant boost^ from the pandemic and many companies have expanded into new markets via digital channels. This presents treasury functions with fresh FX challenges – from paying new suppliers in local currencies, to selling goods and making refunds in foreign currencies. Treasurers are therefore having to deal with increased risks from currency conversions and fluctuations, as well as a lack of pricing transparency, varying transaction costs, and operational risks.”
On the upside, this focus on transactional FX is a great incentive to embrace technology which can help to transform FX payments into a strategic tool for boosting sales, building stronger buyer/supplier relationships, and improving both cash and risk management. “There is a whole ecosystem of solutions available in the wider market to support transactional FX, ranging from instant payments and SWIFT gpi (see ‘Smarter payments’ section below) to automated FX risk management tools from banks and vendors. Fintechs also have a role to play, as do technologies such as application programming interfaces (APIs),” says Eder.
Bringing this to life, Khuntia shares some examples of best practice from clients he has worked with: “We have a number of clients who have already embraced automated FX solutions via our online banking channels. One functionality that has proved popular, especially since the crisis began, is the ability to upload a payment file onto our cash-management channel and have the pre-agreed FX rate automatically applied to each payment in that file.”
This means that there are no hidden fees and there is no manual work required – which vastly reduces error rates.
Head of Payments & Cash Management Europe at Barclays
Eder adds: “Rather than treasury personnel being tied up filling in FX rates for hundreds of individual transactions, a single payment file can be uploaded at the touch of a button and the legwork is done for them – enabling them to be redeployed to more strategic tasks. What’s more, all of the information about the payment can be viewed online in real time, providing total transparency.”
Automated FX solutions also exist for those corporates needing to make refunds in local currency to customers. Khuntia continues: “Sectors such as travel have been inundated with refund requests as a result of global lockdown. With buyers and sellers typically in different countries, making refunds can result in FX exposures where rates have changed since the time of purchase. Via our automated FX channels, we can provide cancellation/refund cover, which means that if a cancellation or a refund happens on a transaction after several weeks, we remove the FX risk by automatically giving them the original rate used. All of this functionality happens behind the scenes via API and has been a huge benefit for clients during the crisis.”
It is not just automated FX solutions that are enabling corporates to improve their transactional FX workflows. Advances in the payments’ ecosystem are also having a significant impact. Eder comments: “Instant payments are accelerating the move towards interoperable payment standards across the globe, with regulators working on adoption of ISO 20022. Initiatives such as SWIFT gpi are also looking to establish real-time cross-border payments as the ‘norm’ – and this brings with it the ability to gain much greater visibility and transparency over transactional FX.”
What Eder is alluding to here is the SWIFT gpi Tracker, which via a unique end-to-end transaction reference (UETR), enables corporates to view the progress of a payment between banks in the payment chain, as well as having complete visibility over any deducts, including fees and FX rates.
Thanks to regulations such as the revised Payment Services Directive (PSD2), new players – in the form of payment service providers (PSPs) – are also shaking up the cross-border payments space. “Corporates have more and more options for making international transactions. They can make payments via the cloud, through fintech services, for example. Banks are also increasingly partnering with PSPs as a way to offer the most innovative digital payments capabilities to their clients,” she notes.
The beauty of these solutions is not only the choice, speed and transparency they enable, but also the fact that they are digitally native. This enables easy automation of payments workflows.
On the subject of APIs, Eder believes this is one area where the automation of transactional FX will continue to evolve in the future. “APIs are already being used by many large corporates to consume FX rates and I believe this will be a growing trend,” she notes. Khuntia agrees, adding that “the benefits of the API solution are that it’s a live channel and on demand – the client’s computer requests FX rates and they are sent instantly from the bank. If the corporate wants to undertake a transaction, they then simply make the instruction and the deal happens instantly. APIs are also extremely secure, which is important in these days of heightened cyber risk”.
For those treasurers looking to make efficiency gains and strategic advances in their transactional FX sooner rather than later, Eder shares some tips:
Don’t stop the continuous improvement journey.
“Many corporates have been distracted by the Covid-19 crisis, when really it is a great opportunity to get things done. Focus on the areas that are clearly inefficient – like manual workflows around FX payments – and explore automated solutions,” she notes.
Educate yourself on the technologies available.
“Not every solution is right for every corporate. As discussed, there are many payment technologies out there and numerous automated FX solutions. Speak with your banks, vendors and fintechs to understand the possibilities. Also interact with your peers to see what can be done in-house before adding external solutions,” Eder comments.
Implement those technologies.
“Often corporates spend a long time researching technologies but never implement them, or wait too long before putting them in place and things have moved on. The only way to get ahead is to make the move!”, she suggests.
His final words of wisdom for treasurers looking to go down the automation path are to ensure that any digital treasury projects dovetail with the digital strategy of the wider business. “The crisis has led to rapid shifts in business models, with companies embracing digital channels like never before. To grow with the business, and help the company reach its international growth goals, treasury must be on the same page in its digital execution. This is not to say that treasury cannot lead the digital discussion – it absolutely can – especially when armed with up-to-date insight on the latest technologies,” he concludes.
Automating transactional FX
- Daniela (‘Dany’) Eder, Head of Payments and Cash Management for Barclays Europe
- Sat Khuntia, Head of FX Sales, Barclays Corporate Banking
Dany: Hello and welcome to our latest podcast in our series, exploring what is possible, for treasurers in the new Europe. My name is Dany Eder, and I’m Head of Payments and Cash Management for Europe and today I’m joined by Sat Khuntia, Head of FX Sales for Barclays Corporate Banking. And we’ll be discussing how we can support corporates with unlocking efficiencies and growth opportunities through the automation of transactional FX. Welcome Sat!
Sat: Thanks a lot, Dany, and I look forward to speaking with you on this very important topic.
Dany: We’re more than six months into the Covid-19 crisis and we’ve seen a lot of movement in the market. What have been some of the largest lessons learned in terms of FX transactional activity? Is more automation needed?
Sat: Thanks Dany. The short answer to your second question is ‘yes’; but let me elaborate a little bit. 2020 has been a very eventful year, right, and definitely so in FX. So, two major things happened in this particular space. One is the macro events – the way they unfolded after mid-March leading to lockdowns across all the major economies in the world. That resulted in epic FX volatilities, which lasted through for several weeks after that. Those volatilities certainly made it very difficult for our corporate clients to manage their FX exposure. That was one big thing that happened. The other thing that happened was disruption in the workplaces and work life – not only for us but also for our clients. The stay-at-home and the work-from-home environment became the go-to model for everyone and that just meant that clients who had automated their FX workflows were certainly in the pole position. They were in a much better position to harness the efficiencies of said solution.
We heard great, positive feedback from our clients who had implemented automated FX solutions. And other clients who were on that journey, they have started reviewing their current workflows, and they are looking to automate as much of their FX risk management, execution and payments as possible. So yes, the short answer is yes, automation has certainly surfaced as a key topic amongst the corporate treasury audience.
Dany: You touched on efficiencies and I want to dig a little bit deeper with you into that topic. So, what are some of the efficiencies that FX transactional automation can bring to the treasurer?
Sat: Yeah, I mean three things come to mind, essentially. The first is of utmost importance in the current environment, is resiliency. So, as I mentioned, this work-from-home model has been adapted widely across industry sectors. So, clients definitely need automated FX solutions which are resilient, which can work without any human intervention. And that has been a critical learning lesson in this pandemic.
The second one is risk reduction. If you automate your FX workflows, be it for risk management or for execution or payment purposes, you are certainly reducing the risk within your business. And finally, what it leads to is efficiency. It frees up the staff time and they can focus on more value-added functions. Now, these three trends are not new, but I think what has happened post-pandemic, these trends have accelerated and they will get much widely adopted across industry sectors.
Dany: Thank you, Sat. So, putting that more into context with us here at Barclays, how are we supporting some of those efficiencies with FX transactional processes, and what have we seen that has really been some of the key services of how we've helped our corporates through these challenges in the last couple of months?
Sat: Thanks Dany, really good one. You know there are just so many client examples that come to mind when I think about the benefits of the automated FX solutions. But one that I'm particularly pleased to share is actually the example of one of our key clients who is in the global travel business.
It's a fairly diversified business that they have, and they have automated the FX workflow, both risk management as well as the execution of it, through one of our products known as BARX NetFX. So, this part of their business is actually a travel wholesale business; their customers or clients are essentially the travel agents, including the online travel agents, and their suppliers are essentially hotels and properties all over the world. So, as you can imagine, if you have a business model of this sort, it just exposes you to a number of currency risks. So they had luckily automated all of this exposure management through us on BARX NetFX. And when the pandemic hit, there was a huge amount of cancellations that started happening, a lot of the UK travellers, for instance, started cancelling their Easter holidays to continental Europe, and so on and so forth.
Now, one of the features that we have in this automated FX product is that, any cancellation that happens up to a pre-agreed level, we can honour the original FX rate. So basically, it eliminates the FX risk for the client. And that came in very handy when those cancellations happened. And at least our client had one thing less to worry about, and they've been very thankful about that.
And similarly, I can also say that a lot of our clients who use our FX payments channel to make or receive payments in different currencies, those channels performed fabulously, and it was really good that those electronic channels helped the cash flow, which is a lifeline of these global companies, work smoothly throughout this period.
Dany: Thank you Sat, that is a very interesting example and we are really helping our clients rise to the occasion, especially in these challenging times. That is a really a positive message to hear, and I'm sure that this product will now be highly in demand going forward.
I want to come back to a little bit more around the digitalisation as well, and the emerging technologies, and how this is supporting much of the automation that we've been talking about. And, maybe some of the investment that is going on globally is obviously on the APIs, and we are also very much investing in this technology. Share with us a little bit how this is affecting FX transactional business.
Sat: Really good question. I mean, digitalisation is very much the future, not only in FX but almost all other aspects of business. But when I look at FX specifically, there are two broad areas that come to mind. One is that most of our clients’ businesses are also moving online. So, their business model is kind of morphing or evolving. And it's not only the retail sector. Clearly, the retail sector was very much at the forefront of this disruption along with the travel sectors, but there are many other parts of the industry sectors which are digitising very rapidly. So, we need to develop FX solutions which can adapt to that environment and help our clients manage the FX risks and execution in their eCommerce channels. That's kind of the first part of it. The second one is that the solutions that we deliver to our clients also should be leveraging the latest digital technologies that are available.
And that certainly brings to mind things like APIs – you are 100% right, APIs are absolutely revolutionising this space because of light connectivity – it’s what increasingly more and more clients are preferring – but there are other technologies also which are increasingly being leveraged, and I can think of machine learning, to again automate processes and leveraging big data and data analytics as well. So, these three technologies, I would say, which is APIs, machine learning and big data, are already finding evolving application in this space. And I think you will see much more on this front.
Dany: We do cover a very wide range of client segments at Barclays and APIs, we're seeing, is in demand and also is a much-needed development going forward, considering the evolution with this technology. What's ahead for us, Sat?
Sat: So, the way I look at it, Dany, is clearly these are very difficult times – for all of us and for our clients. And I sincerely hope this will pass. But they say never waste a crisis, so I always request my clients when I speak to them, this is a good time to review your FX management processes and look at the workflows, look at things that we can automate. There's a wide range of digital solutions that are available that they can leverage. So I think, going forward, what we will see is rapid adoption of some of these digital technologies that I mentioned earlier. And it will just be an accelerating trend.
As I mentioned earlier, this is not the beginning. I mean, I think we are already in the middle part of the journey; it just will accelerate much further. It's taken us the last 20 years to grow eCommerce businesses globally and the digital channels. I think the next leg will be much faster and quicker.
Dany: I couldn't agree more with you. Your final words of advice to our treasurers listening today?
Sat: Yeah, so the final advice would be, please engage with us; engage with your relationship banks and FX providers. Keep this dialogue ongoing because it's a collaborative process. We get to know about the pain points only when we speak to the clients, and then we evolve solutions which meet their requirements. So let's maintain this two-way dialogue, and that will help all of us evolve.
Dany: Thank you for joining me today on this podcast, it was a very interesting 10–15 minutes of sharing of insights. Thank you so much.
Sat: Thanks Dany, it was my pleasure.
Dany: That concludes our podcast for today. Thank you for listening. You can learn more about how we can support corporates across Europe by going online at Barclayscorporate.com/Europe.
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