Growing Pains: The Basics of Cross Border Cash Management

CalendarApril 11, 2024

Growing Pains:

The Basics of Cross Border Cash Management

International expansion can be compelling: it can add scale, increase competitiveness, or reduce expenses. Small and medium-sized enterprises (SMEs), though, often stumble when trying to access local currency accounts as they grow.

Sending or receiving foreign currency payments can be frustrating –not to mention costly. Delays can be costly too, and forced conversions and inefficient exchange rates can reduce profit margins. A potential cost of anywhere between 1 and 5% on margin or pricing would not be out of the ordinary.

This cost is often swallowed as the cost of doing business internationally.

Fortunately, there are options that can offer SMEs more transparency and control.

Cash concentration and overnight sweeps, POBO, COBO1 and in-house banking are all very exciting topics for treasurers at large multinationals. SMEs (Small and Medium-sized Enterprises), though, often get tripped up on simply accessing local currency accounts when expanding across borders.

International expansion can be compelling to an SME: accessing global markets can add scale to a business, allowing it to play in markets where it has a competitive edge or can reduce expenses. With the growth of cross border eCommerce and information technology, doing business across borders is much easier than it has been in the past. However, trying to access international banking services is often not so feasible, even today.

Cross Border Banking – Lagging behind the pace of business

In my work, I often encounter North American or European companies who have found a market for their product on the other side of the ocean but who then begin to struggle with the simple mechanics of receiving and sending international payments across that expanse

The reality is, unless they already have a banking syndicate or extensive operations in each country/region, it can be immensely frustrating to access local bank accounts and payment capabilities in a different country. Even large commercial banks in the United States or Canada are not always able to get access to foreign currency accounts domiciled outside of the business’ domestic market; many therefore rely on financial institutions like Corpay Cross Border for correspondent-style services.

Why it Matters

Companies’ struggles with international payments can lead to an array of problems that extends beyond the competitive or service delivery challenges that come with receiving or accessing local currency or cheaper, more convenient domestic payment networks.

One of the biggest challenges is the potential impact on cashflow, particularly if you must wait for a correspondent bank to clear funds. In some countries and with some banks, that can take a few weeks; in better circumstances it may be a few days. In both instances, this is far less timely than the same-day or next-day settlement typically found via domestic payment networks.

There is also the matter of cost. Not having local currency capabilities can cost businesses between 1-5% in lost margin on forced FX conversions or pricing power. It may also limit the ability of finance teams to control the timing and execution rates of their FX transactions. Many times, I have seen businesses suffer reductions of their profit margin due to fees and conversion rates. These are amounts that far exceed the level of variance that would be considered acceptable in other areas of the business but seem to be ignored or simply chalked up to the cost of doing business.

New Technology, New Solutions

Operational, legal, and regulatory requirements can make setting up local bank accounts a time-consuming and onerous task. Fortunately, cross-border multicurrency accounts (such as ‘virtual’ accounts with virtual IBANs2) offered by some non-bank financial institutions are becoming more commonplace and are often easier for SMEs to access than traditional bank accounts in multiple jurisdictions.

Multicurrency accounts allow businesses to access inbound and outbound settlement in multiple currencies through a single KYC (Know Your Customer) and onboarding process. Additionally, these accounts are, in some cases, held in the business’ own legal name (rather than the name of the institution), streamlining reconciliation and helping reduce confusion from clients and vendors who may be concerned about payments involving a third party.

Technology and digitalisation have changed how the world does business. Prudently implementing the right tools for the tasks at hand can help SMEs flourish and compete on a global stage.

Opinions expressed in this article are those of the author. Please consider contacting an independent advisor of your choosing – an advisor completely independent of Corpay – to help you ensure that solutions discussed here are right for your business’ needs.

The hedging products described in this document can be useful but are also associated with significant added complexity; obtaining a thorough understanding of each such product's trade-offs/pros-and-cons (fully describing these is beyond the scope of this article) is important before choosing to use any of these products.

1 ‘Payments on behalf of ‘ and ‘Company-owned / Business-owned’

2 International Bank Account Numbers

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Sean Coakley, CFA

Sean Coakley, CFA

Director, Strategic Sales, & Market Strategist

Sean works with mid-market corporates, focusing on FX risk management and international working capital optimization. He blends experience in finance and capital markets with a robust understanding of business performance and capital markets knowledge.