Technology

How Can Technology Help Organizations Mitigate Their Foreign Exchange Exposure?

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The global economy has experienced significant advancements in recent years, meaning that more and more organizations are looking to conduct business across borders. Aggregators play an integral role in this process, as do the various technologies that they rely on.

However, to understand how the payment ecosystem works, and the very important role that aggregators, their partners and technology play, we must first understand what an aggregator is, and the key challenges organizations are facing.

Understanding the Role of Aggregators

Aggregators are known as the glue that helps all entities, spanning from businesses to governments, easily connect with a variety of payment platforms. Aggregators can play a very important role in ensuring that payments are properly routed, while also managing corresponding risks. One such risk is foreign exchange risk related to invoices billed in a currency other than the payor’s. For example, if a foreign invoice, such as EUR€-denominated invoice is billed to a US payer (whose domestic currency is USD$), is received on the first day of April with a 60-day payment due date and is later paid on June 1, the EUR/USD rate will likely not be the same at the end of the 60 days as at its beginning. This is because foreign exchange markets are dynamic and move very quickly. Therefore, the rate could have moved adversely for the distributor, creating a foreign exchange loss that aggregators – and technology – can help mitigate.

By leveraging the proper technology, as well as reliable partners, aggregators can improve the way foreign exchange exposure is managed and executed. Doing so not only can help improve downstream client experience, but can also help overcome many of the issues and risks that often arise.

Challenges of Traditional Hedging

Traditional hedging comes with various challenges that technology can work to mitigate. Three of the main challenges of this nature are:

  1. Visibility: There are not many technology tools on the market to help with the hedging process, and the tools that are currently available are often costly and quite labour-intensive to learn and/or operate. Most small organizations do not have the time or budget for these systems, leaving them with few options.
  1. Lack of resources: Organizations often operate very leanly, and they rarely have the capacity to hire a dedicated foreign exchange resource. Even if there were to be a dedicated resource or employee responsible for the process, this individual would need to understand all of the complexities of the foreign exchange market – a tall task if the company is operating in several markets. And they would also need to be available to execute hedges at all hours.
  1. Timing: Timing is everything when it comes to the markets, and when you’re operating in numerous markets, it can be very difficult to predict and/or manage. Organizations that operate in a global, multi-currency environment can have their profits significantly exposed to the vagaries of FX market volatility. The foreign exchange market is consistently fluctuating, and slippage can occur when an invoice is not timed correctly with the hedge. When these hedged rates and booked rates differ, it can undermine profit margins.

Tackling Hedging Challenges With Technology

Hedging through the right technology can help with all of these challenges, and many more. Such technology allows aggregators to reduce foreign exchange exposure at the individual transaction level, rather than as an aggregate for a group of transactions.

Furthermore, technology helps to improve visibility as all data are readily available and completed at the line-item level. This in turn helps with process improvements, as each invoice is dealt with programmatically with no human intervention required on a day-to-day basis.

For industries with thin profit margins, technology also allows organizations to minimize slippage as rates are locked-in in real-time, thus helping reduce the rate difference between the time the transaction occurs and the time the hedge is put in place.

Beyond the technology itself, however, it is critical that aggregators partner with the right organizations. Corpay is just such an organization for partnering with. Corpay can help you leverage hedging technology to enable achieving optimal benefits. Thus, by partnering with Corpay, aggregators can add further enhancements to their overall platform to drive efficiencies. This will not only provide clients with an end-to-end solution and enhanced experience but can also improve their bottom line.

To learn more about how you can leverage Corpay’s services, please visit: https://payments.corpay.com/cross-border

About the author

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Cheryl Girling

Cheryl Girling is the director of enterprise solutions at Corpay, and focuses on how technology can help organizations mitigate foreign exchange exposure.