Effect of foreign exchange fluctuation on Cross border payments

Effect of foreign exchange fluctuation on Cross border payments

20 Sep 2019 12:52 PM

Economies across the globe are connected more than ever and cross border trades have become the norm of the day. Most economies are run by selling their produce to other countries while many import oil for their regular running of economies. In either case, there is cross border transaction. The opportunities which a corporate reaches out to are more than the trouble they go through to ensure their payment is made in a complex international system which is governed by many a policy.

What is cross border payment?

A cross border payment refers to transactions which are operated in atleast two different countries. The operations may be between individuals, corporates or financial institutions. These countries can be geographically sharing a border or far from each other. The transactions are completed when the entities exchange foreign currency. The daily volume of transaction for a multinational company is huge making them rely on efficient supply chain. Also if payment is to be made to multiple foreign suppliers, then cross border transactions become important. Thus need for automation of cross border payments is high.

Many countries have policies which involve processes which have to be followed while transacting across borders. For example, the European Union has a regulation wherein banks are to charge same to cross border transactions as those applied to domestic transaction where the payments are in Euro. But if the currency is different, then foreign exchange rate is applicable.

With ever changing regulations and policies, and also evolving digitalization the cross border payment scenario is ever changing. The banks generally have fees which are not clearly visible or one has difficulty in tracing the payments. Online payments made though SWIFT (Society for Worldwide Interbank Financial Telecommunications) made the payment fast, but effective payment processes and support are some reasons why one chooses one bank over another.

Each time a payment is made or received, the transaction is exposed to foreign exchange risk. This transaction exposure has to be managed by leveraging on the digital technology. This ensures the real-time payments are made keeping in mind compliance and regulatory security. The technology has reduced the transaction time to a few minutes if not seconds.

Foreign exchange risk

The cross border payments being exposed to Foreign Exchange Risk calls for keeping abreast of the markets with which the deal is made. But simply tracking the economies of both nations is not justified now as the markets are more interlinked than ever before. Social media and news reporters have made the availability of information faster. Thus an event in say Saudi Arabia will affect the movement of currency in Japan. Even though they are not directly connected to each other. Thus Transaction Exposure calls for a closely knitted understanding of the foreign exchange market along with other markets.

Timely tracking of the currencies one is exposed to gives a better understanding of when and how to hedge to ensure foreign exchange risk is mitigated and costing is not affected. One needs to assign the forex treasury portfolio to advisors who would manage this Foreign Exchange Fluctuation.

Cross border sales

Most cross border sales for corporate are done after the buyer has ensured the quality of product and reliability of seller, especially before the payment is made. But with the likes of Amazon, the online retail sales has picked pace more than ever as it gives choice to the customers. But if the final payment is made in a currency than the user’s there might be a delay in the transaction as the user will verify the foreign exchange rate and then after converting to their local currency may or may not go ahead with the purchase. Thus if the price is quoted in local currency, it keeps the user at the final purchase site and not redirect him elsewhere. If the price is quoted in foreign currency, the conversion charges may be a lot higher as charged by the bank at the time of conversion. When this is realized later, the user may not want to shop again at the portal.

Thus one needs to analyze the situation and implement foreign exchange risk strategy to suit the business needs. It helps in optimizing the payments and leveraging foreign exchange to one’s advantage.

FX effect on transaction exposure

Hedging techniques are used to mitigate the foreign exchange risk which arises from the cross border payments or transaction exposure. There are many strategies which are available for a trader. From currency forward to futures and options to swaps, or using combinations of any of them helps in putting a strategy in place to ensure one does not go below the costing while formulating these strategies.

Myforexeye Fintech has been a pioneer in providing forex advisory services to their clients and helping them design strategies which are suitable to the needs of the clientele. Transparency in forex information is key to ensuring a good start. To know more about how we work reach out to us at www.myforexeye.com

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