-

Transactional FX automation

As the speed of global commerce increases, so does the desire for transparency. Is automating transactional FX workflows the answer for treasuries?

Gibran Maqsood, Director, Transactional FX Sales, Europe and Loic Merlot, Head of Cash Management in France, Belgium and the Netherlands discuss the factors driving changes in Foreign Exchange practices and the opportunities those changes present for improving global cash management.

Unstoppable forces

Several catalysts have been responsible for driving changes in the way global FX is managed by corporates. Growth in cross-border trade and international e-commerce have both played their part.

A new mandate

Treasurers not only have the responsibility of reviewing and optimising their FX practices, they now have access to tech solutions that make doing so a far simpler process.

Streamlining FX

Automation and integration are the keys to increasing FX transaction speed, reducing transaction risk and providing deeper insights.

The right fit

There may be no one-size-fits-all solution, but the proliferation of maturing tech has made it possible for corporates of all sizes to find FX tools that meet their needs.

Unstoppable forces

Maqsood is clear from the outset that “there are two broad areas within FX that concern treasury. The strategic and the day-to-day” which he calls “systematic or transactional FX. The latter typically involves relatively low-value transactions”, but “the cumulative effect on both cash and risk-management can be significant”.

In terms of catalysts for change Loic Merlot lists growth of cross-border trade and the boom in international e-commerce as key reasons FX flows must now be managed more efficiently. It’s anticipated that the cross-border B2C e-commerce market alone will record a compound annual growth rate of nearly 28.4% between 2020-2027^, so effective management of transactional FX will become even more important.

“Covid-19 has led to a greater call for transparency among corporates, especially visibility over the FX pricing attached to international payments and receipts,” Merlot observes. “And with solutions such as SWIFT gpi’s Tracker providing this level of granularity, corporates are now searching for comparable transparency across all areas”.

Regulation is also contributing to the changing face of transactional FX. The Global Foreign Exchange Committee’s ‘FX Global Code’ for example is intended to promote a robust, fair, liquid, open and appropriately transparent wholesale FX market. In response to this type of regulation “banks are placing even greater scrutiny on all areas of FX and enhancing their solutions around transactional FX”, notes Maqsood.

The TMI and Barclays European Corporate Treasury Survey 2021 shows that 58% of treasurers are currently considering automating their low-value FX payments with their banking provider.

Source: TMI and Barclays European Corporate Treasury Survey 2021^ (PDF).

A new mandate

The onus is on treasury departments to review and improve operations and cash management processes. Maturing tech gives them the means to do so.

Merlot believes treasurers will be asking themselves if they “really need bank accounts in myriad countries and currencies? Inevitably, they would prefer to streamline their cash management structure, reduce internal costs, better manage their balance sheet, and minimise FX risk”.

Maqsood agrees, adding “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”.

To illustrate his point, Maqsood gives the simple example of a business whose functional currency is Euros, paying a supplier in US Dollars. Carried out manually, it could take several hours or even several days due to the numerous steps involved in FX conversion. In addition, there’s much greater operational risk because of human involvement.

Typical manual transactional FX workflow
1

Client needs to pay a USD invoice to a supplier

2

Client sells EUR and purchases USD using FX execution platform

3

USD credited to USD currency account

4

Client subsequently has to manually settle FX trade and pay EUR, and also ensure funds are placed in the correct USD account

5

Client then initiates a payment from USD account to USD beneficiary

6

Supplier receives USD payment

Economic and operational risk: Potenially multiple users at each stage (for FX and Payment) timing mismatch between USD credit and payment leg being actioned, inefficient use of resource to fulfil payment run.

“Furthermore,” cautions Maqsood “if many similar payments are being aggregated and converted at once, the risk of the currency moving against you can become significant”.

As a result, what we’re seeing, says Maqsood, is “more and more
corporate treasurers opting to implement integrated transactional FX solutions, which primarily target the low-value high-volume FX environments”.

Streamlining FX

An integrated, automated, solution which runs on fully straight-through processing (STP) can offer much more efficient transactional FX. The currency conversion is performed at the point of sending the payment, rather than a few days previous and touchpoints are minimised as everything can be performed from the buyer’s banking platform.

Example of integrated FX payments approach using STP
1

Client needs to pay a USD invoice to a supplier

2

Client sells EUR and purchases USD using automated solution and selects beneficiary

Solution executes exchange of EUR to USD at pre-agreed margin and simultaneously remits USD to desired beneficiary account

3

Supplier receives USD payment

Economic and operational efficiency: FX execution and payment leg initiated simultaneously, reduced impact on manual resource required, automatic capture and reporting on all deals. Execution via this process is very simple. The user instructs which currencies to debit or credit and selects the beneficiary, then the system will fulfil this automatically.

“The operational benefits of the STP approach are clear” says Maqsood, but those “used to manually managing their FX risk will be used to very tight margins”. With the integrated solution, “the pricing might appear unappealing – but the margins are locked-in and totally transparent, which complies with growing governance requirements”.

There are additional cash management benefits too, adds Merlot. “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 invest it for a little longer”.

In a nutshell, says Merlot, “taking transactional FX seriously can result in operational and economic efficiencies, while increasing speed and accuracy, and reducing risk”.

The right fit

“The ideal set-up will vary from corporate to corporate, depending on the objectives of the treasury team,” explains Merlot. “Nevertheless, those sharing the goal of simplifying account structures by automating transactional FX at the point of inception can achieve a single account solution that allows them to make and receive payments in multiple currencies – with minimum hassle and maximum benefit”.

Maqsood adds that with the solutions now available we’re entering an era of FX democratisation. “A few years ago, automation of FX-related processes was reserved for only the biggest corporations. Now, it’s becoming available for businesses of all sizes.”

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.

Gibran Maqsood

Director, Transactional FX Sales, Europe

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.

Loic Merlot

Head of Cash Management in France, Belgium and the Netherlands

Important information

Content taken from article originally written^ by Eleanor Hill and published by Treasury Management International.

Read related Insights

Global Connectivity

Europe

Across Europe, we provide corporate banking services supported by deep local market knowledge.

insights

European Treasury series: 2021

We explore the latest challenges, opportunities and insights facing corporates across the continent through our European Treasury series.

insights

Keeping pace with real-time payments

Real Time Payments are fast becoming essential in a B2B environment, so how can treasurers take advantage of the latest innovations?

insights

ESG and D&I: The case for treasury KPIs

With ESG becoming a board-level priority, how can treasury teams proactively support the wider organisation’s ESG goals?

insights

Cybercriminals set their sights on treasury

Ransomware attacks are evolving and put large corporations at risk of losing huge sums. How can treasuries protect themselves?

insights

The Europe edit: listen to our latest podcasts

Hear Barclays experts discuss the latest challenges and opportunities ahead for corporate treasuries in Europe.

Insights

What is possible? International Insights

Your hub for international corporate insights. The latest on international trade, global corporate treasury, FinTech and other topical content.