Is fintech disrupting SME currency hedging?
by Lead Monitor
Platform access to effective currency hedging, real-time cash flow visibility, and regulatory compliance support is being democratised by fintech and opening the door to smaller companies who need first-rate cross-border services.
Recent instances of FX volatility, not to mention the ongoing weakening of the sterling against an historically strong dollar is a good real-world demonstration of why forecasting is such an essential practice. By engaging with the right platforms, and seeking out the right expertise, some of the most serious consequences of big financial shifts can be managed effectively.
Up until recently, complex functions like the development of effective hedging and currency risk management strategies were mainly the preserve of large corporations with the capital to access resources. Smaller organisations tended to do business locally and were therefore less likely to export to boost earnings.
As such, they were unable to implement effective risk management and were at a loss when interest rates affected global markets. It followed that smaller companies did not have access to the same technological tools for risk management, due to both the cost of licensing and the lack of experienced staff to implement effective hedging programs.
In such an environment, currency risk management services were executed either by traders or account managers to help business finance teams understand best practices.
Since then, fintech disruptors have levelled the playing field, delivering the kind of technology which was once only within the gift of gatekeeping banking institutions. As such, availability of these platforms has increased dramatically, to the point where businesses of all sizes can access tools that enable them to readily identify currency exposure, and act quickly, with a wide range of hedging instruments at their disposal.
How can Corpay’s fintech help with cross-border payments?
According to Corinne MacMillan, Chief Product Officer at Corpay Cross-Border; an international payments automation and risk management solution:
“The more we conduct surveys and talk with our clients and internal traders who manage clients’ hedging needs, the more we understand how challenging and manual their processes can be.
“We see an opportunity to build a product or enhance what we have, to help reduce these manual efforts and potentially bring increased transparency to the overall process of currency hedging.”
Perhaps the trickiest aspect for tech platforms to master is the capture of real-time cashflow forecasts. This can help to highlight potential currency exposure, though a lot of work is required behind the scenes, such as identifying transfers between international multicurrency bank accounts, and manually creating these forecasts in tools such as Excel.
How AI is changing currency hedging
This is where AI comes in. Some disruptors have been known to use historical cashflow information and machine-learning logic to better forecast what the future is likely to hold. However, since many fintechs build ‘API first’ technology, meaning that all UX experiences built for customers have underlying APIs, any developments in AI and machine learning would need to take this into account and ensure systems are compatible.
“Capturing forecasted cashflows is our first area of specialism,” MacMillan says. “What this does is remove as much manual labour as possible from outside finance teams’ ERP [enterprise resource planning platforms].
“This, in turn, empowers both client and trader to create and manage digitally, whereby forecasts are compared against current hedge portfolios to provide one unified methodology. This helps clients identify exactly where their currency exposure exists.”
Another key consideration is that both banks and fintechs offering currency hedging are often expected to provide clients with some aspect of reporting against their hedge portfolio’s performance. This reporting may include alignment to complex regulatory requirements, or to the specific requirements of their internal credit/finance teams.
“This is a key area of focus for us at Corpay,” says MacMillan. “We have a rich set of hedging data, market data and information which we share with our clients for their use. We are on a mission to continue to ‘check the boxes’, but also to figure out, with our customers, the best way to provide them with this information.”
By disrupting traditional finance practises, fintechs have put pressure on traditional banking institutions to modernise their service offerings. From MacMillan’s perspective this is evident in cashflow forecasting.
“Ultimately you want to create a product which seamlessly blends together key processes,” says MacMillan. “Such as currency hedging, global payments, and foreign invoice automation: each blended with the key element of their ‘root’, which is FX trading. That’s what Corpay does.”
With the advent of new technology, and in particular the increased certainty and transparency that fintech disruptors tend to offer, doing business across borders may become much less risky than it has been.