Integrating Cash Management and FX for Global Growth
By Lance T. Kawaguchi, Managing Director and Global Head – Global Banking Corporates, HSBC Global Liquidity and Cash Management and Rahul Badhwar, Managing Director, Global Head - Corporate Treasury Solutions, Global Markets Corporate Services, HSBC
The economies of various developed and emerging markets look set for a benign period of growth . Leading corporates are already responding by building out their international operations, while also evolving their business models to capitalise on the expanding global consumer marketplace. As a result, many corporates are finding themselves transacting ever more cross-border business, which is driving commensurate growth in their payables/receivables and FX activity. Lance Kawaguchi Managing Director, Global Head – Global Banking Corporates, Global Liquidity and Cash Management and Rahul Badhwar Managing Director, Global Head – Corporate Treasury Solutions, Global Markets Corporate Services at HSBC, explain how in order to deliver the optimum result for a client's corporate treasury in this environment, a bank must be able to offer a holistic approach that combines cash management and FX.
The global consumer marketplace: changing business models
One of the biggest changes certain business sectors have had to contend with in recent years has been the rapid evolution of the global consumer marketplace. The traditional business model for these sectors was to establish a local subsidiary that would sell to local retailers or distributors, who in turn would sell to the end consumer. In a world that has gone online and mobile, that is no longer the only channel that needs to be supported. Making sales direct to the end consumer has also become extremely important - and these consumers have a variety of options when paying for goods and services. Businesses need to ensure they can support consumers' payment choices to make the sale or transaction as smooth as possible – be it via a mobile wallet, credit card, smartphone or any other method.
Additionally, these consumers are not bounded by country, they are global. This has obvious implications for FX management, because foreign currency transactions in this environment are real time and high volume, in contrast with the traditional retailer/distributor model. In this context, FX management also has an immediate link with customer payments. Individual treasuries are dealing with this in a number of ways, but most strategies probably fall into one of three broad categories:
- Ignore: growth is the overriding objective, so the collection solution deployed will not consider FX, as total sales growth is the primary target, not per customer net revenue.
- Binary: the treasury either insists on customers paying in the corporation's functional currency, or always collects in local currency and manages the FX risk itself.
- Advanced: local currency pricing is used to enhance customer acceptance, but is adjusted periodically in order to manage FX risk. This approach has the advantage of supporting customer perception that the company's products are local, while still enabling the treasury to manage the FX risk more precisely.
In the longer term, the advanced approach could be an option, as it may enable both revenue maximisation and risk minimisation. However, it also involves deciding on the frequency of local pricing adjustment, which requires balancing effective risk management against irritating or confusing customers with continual FX fluctuations. One approach is to analyse customers' e-commerce journeys using various metrics, such as the average period between customers putting items in their baskets and finally checking out. Achieving this equilibrium between risk and return is far easier if partner banks are able to offer an innovative approach and holistic solutions.
FX conversion and risk management
The opportunity within...
This need for holistic FX and cash management solutions doesn't just apply to corporates handling high volume online global consumer business. It is equally applicable to any corporate dealing with a large quantity of transactions in foreign currency, because there are two aspects to managing FX linked to payables and receivables: conversion/execution, as well as managing risk arising from these exposures. Significant inefficiencies can arise in relation to conversion because - depending upon industry sector - the number of transactions can be high and the average value of transactions can be modest. Therefore, the task of making manual conversions can be disproportionately onerous in relation to the benefit achieved. The resources used could be better deployed for more strategic FX activities, such as managing the risk associated with payables/receivables or M&A, or balance sheet hedging.
One alternative is to hive off the high volume conversion of FX transaction tickets to a bank that can offer transparency and automation. In the case of payments, all the client has to do is submit a single payment file, with the currency for each payment indicated. The process is similarly low touch for corporates handling a high volume of FX transaction tickets for inflows (such as those active in the global consumer marketplace), with the bank providing automated conversions of receipts. In both cases, being able to deal with a single bank across multiple countries is a significant advantage, as the resulting consistency of user experience and data simplifies matters from a client perspective.
In addition to clarity over the spreads charged, solutions for these types of transaction should also aim to provide automation that can assist treasuries in increasing their straight-through processing rates. Furthermore, some clients also require that FX rates be held for a specific period of time, anywhere from 30 seconds to 24 hours.
Clients are driving these innovations in order to support rapid growth, such as those already active in the global consumer marketplace, or traditional companies looking to make use of the new technology. Whichever the case, clients are likely to benefit if the bank concerned is able to deliver a consolidated approach and solutions across both foreign exchange and cash management to help them solve their challenges.
Nevertheless, segregating FX conversion and FX risk management can be a complex task. Corporations that have evolved over many years may have multiple intertwined FX and cash management processes and systems that can be difficult to separate. By contrast, younger corporations will often find it easier to segregate the two activities.