At what point can a business acknowledge foreign exchange (FX) in their procure to pay (P2P) process, and at what cost?
By Richard Rawlinson
At what point can a business acknowledge foreign exchange (FX) in their procure to pay (P2P) process, and at what cost?
Over the last two years, as a result of COVID-19, trade has endured volatility, global supply chain disruptions, and a surge in prices.
This has created enormous FX opportunities but brought with it even greater FX risk.
FX markets have an abundance of liquidity (c. $6.6 trillion traded daily) and as such, supply and demand align very quickly.
Unfortunately, the cost of living crisis and inflationary pressures (10.1% in July 2022, expected to reach 14% in Q4, with Goldman Sachs predicting it could hit 22% in 2023), especially in the energy sector due to the Russia-Ukraine conflict and interest rate rises, have created a huge downward negative economic multiplier and decreased the value of the pound.
Money markets are pricing in a further 75 basis points (BPS) rate hike from the Federal Open Market Committee (FOMC) for a third consecutive month.
In tandem, there have been developments such as the 3% sterling loss against the euro and a 4.5% loss against the US dollar in August alone.
This consistently negative macroeconomic data creates uncertainty en masse––and if there is one thing global financial markets dislike, it’s uncertainty.
Despite the overall volatility in the market right now, predictions for the future of the eco-system are looking less troublesome.
Accenture, a technology and outsourcing consultant, sees the total value of cross-border payments growing by 5.6% next year, driven by corporate payments.
While there are attempts to digitalise the global payments network, in many cases, international payments can still take days, even weeks, to arrive.
The messaging can be slow, the fees can be substantial, and there is often uncertainty as to what amount will end up in the recipient’s account.
This apprehension derives from using a payment provider without local accounts and, in turn, necessitates the use of intermediary banks. The banks take their cut in the international payments journeys from executor to beneficiary.
FX transactional risk is dictated by the fluctuation of FX rates. The consequences of such volatility can significantly impact international transactions prior to settlement.
There is currently a multitude of fintech products that can aid in mitigating these risks at several stages in the P2P lifecycle.
Global accounts are considered the most reliable if one is looking to navigate a less risky enterprise within the field of multi-currency payables and receivables exposure. Their relatively simplistic nature allows for comparable security as opposed to other more complex financial instruments since most ‘insurances’ carry a premium.
It is a balancing act for many, if not most, small- and medium-sized enterprises (SMEs) tight on cash flow.
Failing to mitigate FX risk can have a subtle pricing impact leading to margin erosion and the squeezing of profits. This often generates consequences whereby business models are simply no longer viable.
P2p is the process of integrating purchasing and accounts payable systems to create greater efficiencies.
It exists within the management process and involves four key stages:
At each stage, a business should ask the following questions:
In this example, between March 2022 to August 2022, UK businesses buying products from the US now pay c. $10,000 more for every $100,000 per calendar month (PCM). As of September 5, the pound-to-dollar interbank rate is around 1.15, meaning $100,000 would now cost circa £87,000.
Unless the business has a very high margin product/service, this is the difference between breaking even and profit.
Businesses fortunate enough to be selling dollars (i.e., receiving dollars and converting back to sterling) are undoubtedly enjoying these sub-1.20 levels.
But, for businesses that fall outside these parameters, there is no one-size-fits-all solution. Certainly, there are some obvious answers for companies dealing with multiple currencies, namely risk management and knowing the risks of a company’s global business model.
The upcoming months will hopefully see an end to the Russian-Ukraine conflict, a new UK Prime Minister, and with it, probable new economic policies that will impact FX markets.
There will inevitably be more digitisation of the fintech ecosystem, with new platforms and products coming to market.
Ultimately, businesses working on a global scale, paying out and receiving in multiple currencies, will need a global payment provider facilitated through local bank accounts.
Knowing the entire P2P process and associated lead times of the stages presents a business with enhanced visibility around the timelines and obligations. What is equally important is choosing the right payment provider with whom a business can partner.
Richard Rawlinson is the VP Partner Sales EMEA for Irish fintech unicorn TransferMate global payments.
Comments are closed.
September 23, 2022
September 26, 2022
September 28, 2022
October 5, 2022