Part one: FX for SMEs – between a rock and a hard place
Part one: FX and hedging for SMEs – between a rock and a hard place
The process of transferring money between international bank accounts has changed immeasurably. Rewind a few decades to when businesses and consumers were forced to endure a costly and painful service with no alternatives to the banks and specialist money transfer companies that dominated the high street.
Common pain points included high commissions on FX transactions, slow payments and the need for different bank accounts around the world to make payments in different currencies. In many cases, the technology was old, prone to error and often required human intervention. It was a big reason for the extortionate fees (north of 10% in some cases) that both consumers and corporates were forced to endure.
Large multi-national corporations were the only businesses to have access to the technology they needed, with everyone else being priced out or left out in the dark. There were no readily available automated solutions that provided small and medium-sized businesses with everything in one place – cash flow, payments, bank accounts, FX trading and analytics – at a reasonable cost.
Today, we live in an age where the average retail consumer sends money from their bank account to a retailer by tapping a watch against a pocket-sized device at no extra cost. Meanwhile, multinational businesses are catered to by the largest banks and utilise the technologies that barely existed just a decade earlier. By virtue of their global size and scale, they can transfer money between their cross-border, multi-currency accounts seamlessly and buy and sell currencies at extremely favourable rates.
In both cases, the fees charged have fallen dramatically. How times have changed… Or have they?
Small and medium-sized enterprises – the squeezed middle
There is no doubt that the fintech revolution has resulted in winners at both the top and bottom end of the market – i.e. large, multinational corporations and individual consumers like you and me.
However, SMEs fit into neither of these categories. This ‘squeezed middle’ includes companies that trade globally, make and receive payments in dozens of currencies and require international bank accounts. Yet, not only are they dissatisfied with their treasury systems, but they continue to pay over the odds.
Let’s put this into context.
According to the Bank for International Settlements’ Triennial Central Bank Survey, non-financial institutions such as corporates account for 7% of global FX market turnover. That equates to more than USD396 billion a day. Of course, not all of these institutions will be corporates. But the fact remains that many will typically be charged fees as high as 3% from their banks.
This point really hits home when one realises just how many businesses are affected. There were 8,000 large businesses in the UK with more than 250 employees in 2019, accounting for 0.1% of all businesses. In contrast, there were 5.9 million SMEs, accounting for 99% of all businesses. It is a similar story in the European Union. That’s a lot of corporate treasurers paying over the odds.
Take, for example, a medium-sized international shipping company executing transactions across borders in 15 different currencies. Legacy treasury systems mean long lead times and high commissions, due to paying a bank to convert incoming and outgoing transactions into the local currency.
Furthermore, each of these 15 currencies is held in a separate account and operate in silos, meaning the CFO is unable to view the business’ cash flow in real-time. This lack of full financial visibility across their business is a significant problem. Over time, this adds up to a lot of unnecessary costs and time absorbed from corporate FX processes and hampers risk management.
Managing corporate FX risk requires real-time market information for effective strategy execution. However, for SMEs, this often involves installing expensive and complex add-on market terminals.
When it comes to FX risk management, the majority of hedging programmes are limited to providing an analytical outlook, ranging from three to six months, due to their lack of visibility and connectivity. This restricts how easily treasurers can manage and oversee their FX risk strategies.
Likewise, legacy post-execution management and the handling of trades from booking to settlement involves multiple suppliers and vendors, often creating complex paper trails with slow and inefficient communication flows. Solutions for these common problems have, up until now, largely been unavailable and inaccessible for SMEs.
 House of Commons Library Briefing Paper Number 06152, 31 July 2020