Taking Payments and Foreign Exchange to a New Level

Amidst rapid change across the payments landscape, growth in the global foreign exchange market and a greater focus on reducing risk, corporates are looking at how best to simplify their international cash management processes end-to-end, in order to increase efficiency, reduce cost, free up resources and improve visibility. Leading banks are developing solutions not just to assist corporates with managing and integrating foreign exchange and payments effectively, but also to help them analyze the right metrics and benchmark against peers so they can develop a roadmap for superior performance.

The Evolving Payments Landscape
With the evolution of multicurrency offshore systems, greater focus on managing risk and liquidity in clearing systems as well as market dynamics such as the adoption of real-time settlement of non-urgent payment clearing systems in more Asian markets, the increasingly rapid pace of change in payments and foreign exchange (FX) is forcing corporates to deal with a more complex environment, whilst simultaneously determining how best to leverage it for competitive advantage. The shift from batch processing of Automated Clearing House (ACH) payments at the end of the day to real-time gross settlement (RTGS) intraday in some countries in Asia, for example, will enable corporates to gain greater visibility over cash, reduce costs by accessing their funds faster, and improve working capital management. To take full advantage of intraday settlement, however, corporates need to select a bank that can determine the most optimal way of settling a payment or be paid through non-urgent or urgent clearing systems such as RTGS, yet allow a corporate to have control over their funds transfer processing needs.

Concurrently, even though the percentage of cross-border FX trading fell from 65 percent in 2010 to 58 percent in 2013, according to the BIS Triennial Central Bank Survey, the amount increased as total daily volumes surged from US$4.0 trillion in 2010 to US$5.3 trillion in 2013. As corporates expand internationally and do business in more locations, the need for FX payments grows. With FX trading becoming increasingly concentrated into five global financial centers in the UK, US, Singapore, Japan and Hong Kong, corporates may also need to assess their locations for FX processing.  

Effective Processing
As corporates expand, their primary needs are to improve efficiency, connect seamlessly to their Enterprise Resource Planning (ERP) system without new significant investments, enable customizable control through automation of key functions, and increase funds visibility with transaction activity reports. Corporates may also look for additional services such as automated cross-border cross-currency sweeps and cross-border book transfer, for example, so they can optimize their cash positions and streamline operations.

Banks can also help to alleviate the corporate’s payment processing pain points by determining whether the payments are urgent, deciding whether to route the payments via low value ACH or RTGS, and processing them in an accurate and timely manner without the corporate having to change data elements such as clearing codes, file formats or connectivity.

Corporates increasingly want greater visibility over their funds movement. They need to be able to track and trace the status of their payments and collections, for example, status of an incoming credit requiring FX conversion, or confirmation that funds have been received by their vendor so that it allows them to better manage their cash positions and fund working capital.

In this changing environment, banks are looking strategically at how to support corporates through optimizing payments and FX processing. Some have set up specialized internal units to assist their clients. Corporates can look for a bank that has this internal support and the capabilities to give them greater visibility over their funds, book FX payments from anywhere, take ownership of the transaction, decide the best way to route the transaction, make reconciliation easier and receive an end view of the payment life-cycle. 

Optimizing the Cash Management Structure
Along with making decisions about how to process payments effectively, corporates also need to decide how to manage foreign currencies so that they optimize FX, even if it is through something as simple as analyzing whether to set up a Euro account or to debit their US dollar account for Euro payments. Having a single account can result in lower costs and enable the corporate to focus on more strategic activities, as they would not need to manage the extra reconciliation, account funding and resources of another account. On the other hand, a corporate with a US dollar account may wish to open a separate Euro or Singapore dollar or RMB account to optimize two-way flows based on the business and volumes they are processing.

As they strategize their structure, corporates need to take into account the evolution of multicurrency offshore systems and the growing usage of currencies other than the US dollar, especially the Renminbi (RMB), as well as the expansion of RMB offshore clearing into other countries besides Hong Kong, such as Singapore, Taiwan and Malaysia. With more options and liquidity available in more markets, corporates need to identify and work with a provider that is able to handle payments, collections and FX through these offshore clearing systems effectively and seamlessly, where the ability to settle transactions domestically provides a viable option in faster payment processing.

To make an optimal decision, corporates need to identify their ultimate goal, whether it is centralizing funds for working capital, increasing yield or paying down debt, as well as to consider where their offices are located, their base currency, the types of payments they make and how they manage their funds. All these factors, as well as what is most efficient from a regulatory perspective, will determine the decision of an account structure and how to leverage the bank to eliminate the pain points for the corporate treasurer.  

Integration of Payments and FX
As they grapple with handling these changes, corporate treasurers are moving towards tighter integration of FX and payments platforms so they can take their business to the next level, focus on improving efficiency and manage visibility better.

The focus for corporate treasurers in recent times has primarily been on reducing or eliminating risk relative to FX exposures created by international business expansion, and defining an active foreign exchange risk management policy has been front and center.    Management of cross-border, cross-currency transactions applies in this evolving payments landscape and represents an opportunity for the corporate to consider the management of these flows.

While there is a plethora of information focused on risk management, managing FX exposure, hedging, and onshore-offshore that is derivatives-focused, corporate treasurers would want to ensure that they have the essential information to simplify their practices to track and manage all their payments and FX business effectively. A component of this information is price transparency for cross-currency transactions, which can at times be opaque. To keep up with market developments and simplify their processing, corporates are increasingly partnering with a bank that can help them track the myriad changes, reduce costs and fully leverage innovation regardless of the type of treasury model the corporate is running.

With foreign exchange market activity evolving, coupled with an increase in cross-border cross-currency transactions and a continued drive for efficiency and cost reduction, there is greater focus on management of the risk elements which FX introduces to international business. From a strategic risk management perspective, hedging has become more systematic and is typically underpinned by a defined policy. How that policy is executed is very much on an “it depends” basis, which can simultaneously be driven by the market, regulatory dynamics or by the corporates.

Simplifying and streamlining the ability to pay and receive globally in multiple currencies with ease and with clear visibility on all embedded costs, including FX margins which can at times be opaque, represents the ideal of fully integrated cross-currency transaction processing. To do so, corporates are focusing more on speed of delivery, access to alternate settlement channels, automated straight-through processing (STP) of payments and receipts, better pricing on dealing costs, and minimizing the usage of an FX line.

The New Value of Information
As they look to take payments and FX to a new level for their corporate clients, leading banks are thinking out of the box and exploring how to turn the massive amount of information they hold into meaningful insights. Metrics, interactive reports and analytics that enable corporates to understand their business better so as to make improvements to increase their bottomline, such as increasing the percentage of transactions that are straight-through processed, are usually at the top of the list. A corporate can see how their operations fare against the industry, which allows them to analyze where they can improve, in which areas they are performing well, and provides a way to benchmark how effective their processes are.

Leading-edge banks are thus thinking ahead and developing technology that can deliver the metrics and analytics to help clients manage cash, improve forecasting, make decisions based on key metrics, mitigate fraud and move to the next level in order to gain a competitive advantage.

To thrive in an increasingly complex and integrated payments and FX environment, corporates need to take advantage of leading-edge practices so they can process transactions more effectively and gain greater visibility over their funds. Leveraging the services of a leading-edge bank and tapping into the bank’s resources for benchmarks or analytics, can enable a corporate to understand their own practices better, reduce resource requirements and focus on what they do best.


Mark Burrough
Executive Director
Head of APAC FX Payments
J.P. Morgan Treasury Services
Email: mark.burrough@jpmorgan.com

Yaw Boon Fong
Executive Director
Head of APAC Payables, Receivables and Multi-currency Clearing Product Management
J.P. Morgan Treasury Services
Email: boon.fong.yaw@jpmorgan.com

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