How Automation Helps Treasurers Weather The FX Volatility Storm
The continuing uncertainty over Brexit and geopolitical volatility in the U.K. that has led to a depreciation of the pound are having widespread impacts throughout supply chains with touchpoints in the markets.
Reports Monday (Aug. 12) in Catering Insight showcased some of the foreign exchange hurdles businesses face as a result of that uncertainty. According to the publication, U.K. catering equipment importers working with Eurozone suppliers are struggling to manage the struggle of the pound against the euro.
“We cannot guess what the rate will be day-by-day, so it’s the only solution to pass on such a surcharge to protect our company,” one U.K. importer told the publication of its reliance on surcharges to mitigate the risk of currency fluctuations.
Last month, reports in the Financial Times made clear that businesses will increasingly be faced with decisions they must make about how to manage foreign exchange volatility.
“It’s no longer sustainable to absorb cost increases,” one clothing company told the publication.
“We are always behind the curve when the pound is falling, because the effect is immediate, whereas altering our prices to counteract that can only be done gradually,” another U.K. importer said.
Brexit-related volatility and the subsequent fluctuation of the pound has some businesses realizing they are no longer able to put off establishing an FX risk management strategy. According to Kantox Chief Executive Officer and Co-Founder Philippe Gelis, the key to mitigating FX risk is to not only establish a strategy but to stick with it.
“FX is much more about deciding how you want to manage risk, than executing transactions,” he told PYMNTS in a recent interview. “A business must decide what their risk appetite is, how much risk they want to hedge, what kind of financial products they need. And then it’s also about execution, and making sure you stick to your hedging policy.”
A geopolitical event like Brexit, jarring for markets, is not necessarily the time to begin considering one’s FX strategy, either, yet research suggests that corporate treasurers today are beginning to explore different FX hedging strategies as a result of those events. A survey published earlier this month from Bloomberg revealed nearly two-thirds of treasurers believe they need to improve or are considering improvements, on current hedging strategies.
Yet those treasurers say that adopting a new FX management technology is a key barrier to improving those strategies.
Gelis emphasized the importance of automation in technologies that businesses do decide to adopt. It is important not for an FX management or hedging tool to be able to quickly react to an event like Brexit, but for that tool to be automatically and constantly hedging forex risk anyway — negating the need for a solution to react to a geopolitical event.
But that, he said, is also one of the largest challenges in this market.
Whether from accounts payable, accounts receivable, internal reconciliation, mergers and acquisitions or other financial processes that occur across borders, corporates often execute thousands-upon-thousands of micro-transactions per day, said Gelis, and often, they’re all hedged manually.
Banks have not historically focused on sophisticated, intelligence and automated FX management products, instead choosing to differentiate themselves from the competition by offering lower costs. Even though banks have also been investing in improving the speed and visibility of cross-border transactions, Gelis noted that this does not necessarily have a direct impact on corporates’ hedging strategies.
“In the end it’s always about price, price, price,” he said. “But if you really want to automate and streamline [FX hedging] operations, banks offer basically nothing.”
That gap in the market has encouraged Kantox to collaborate with traditional banks, most recently announcing a partnership with Silicon Valley Bank in the U.K. as part of the growing trend of bank-FinTech collaboration. Gelis noted that the company plans to announce more partnerships with traditional financial institutions moving forward.
Being able to integrate with banks is one side of the automation challenge, while the other, he said, is to integrate directly into corporates’ back-end ERP systems. That application programming interface (API) connectivity with both banks’ and corporates’ systems enables the always-on hedging performance organizations need today to endure the volatility of events like Brexit or the U.S.-China trade wars.
As highlighted by FinTech Neo in a previous interview with PYMNTS, corporates, particularly smaller businesses, may view these events as barriers to stepping onto a global stage. At the same time, however, these events also raise awareness as to the importance of currency risk management and hedging strategies.
For organizations and their treasurers to ensure that volatility, businesses need to clearly define their risk appetite and hedging strategies. And to stick to that hedging strategy, processes must be automated. That could require a shift in the way businesses think about FX risk, however.
“What I’m told by most companies is that if there is geopolitical news, they react — to hedge, or not to hedge?” said Gelis. “With machine [technology] imbedded in their [enterprise resource planning] ERP, it’s fully automated. It’s hedging 24 hours a day.”