Is fintech opening currency hedging for small businesses?
Written by Corinne MacMillan (pictured), Chief Product Officer at Corpay Cross-Border Solutions
Recent instances of FX volatility, not to mention the rising global COVID-19 cases spooking the market, ongoing fluctuations of the Australian dollar, and an ebbing sterling, is a good real-world demonstration of why currency forecasting is such an essential practice.
Forecasting can be valuable to businesses of all sizes because it gives the ability to help make informed business decisions and develop data-driven strategies. By engaging the right platforms, and seeking out the right expertise, some of the most serious consequences of big global financial shifts can potentially be managed effectively.
Up until recently, more complex functions, like the development of effective currency hedging and currency risk management strategies, were mainly available to 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.
Implementing effective currency risk management was likely out of reach, likely leaving SMEs at the mercy of when interest rates affected global markets. It followed in my opinion that SMEs 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.
Since then, fintech disruptors have helped to level the playing field, delivering the kind of technology which previously was not widely available. As such, access to these platforms has increased dramatically, to the point where businesses of all sizes can access tools that assist them to readily identify currency exposure, to potentially act quickly, with a wide range of currency hedging instruments at their disposal.
How can fintech platforms help with cross-border payments?
With estimations that global cross-border payments will tip $156 trillion in 2022, the market has been flooded by start-ups and technology providers promising to tackle long-held industry pain points like long settlement periods, high transaction costs, and limited accessibility. Fintech platforms have opened the doors to SME’s and are democratising access to the global market. Now, SME’s can access currency hedging and real-time cash flow visibility just as readily as large corporations.
The cross-border payments sector is primed for transformation due to evolving customer demands, emerging market growth, and the need for greater financial inclusion. Technology presents businesses with an opportunity to rebuild, enhance, and refresh products that have existed in the market for decades. Fintech platforms can help reduce manual efforts and potentially bring increased transparency to the overall process of currency hedging.
It is widely thought that 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 artificial intelligence is changing currency hedging
In the ever complex and dynamic world of global economics, developments and trends are becoming increasingly challenging to forecast. Many organisations have therefore begun to leverage artificial intelligence (AI) to help stay ahead of the competition.
AI removes as much manual labour as possible, which in turn, empowers both clients and traders to create and manage digitally, whereby forecasts are compared against current hedge portfolios to provide one unified methodology. This may help users identify exactly where their currency exposure exists.
With improved technology, and in particular the increased certainty and transparency that fintech disruptors can offer, the payments portion of doing business across borders may become much less risky than it has been.
By disrupting traditional finance practices, fintech platforms have put pressure on traditional banking institutions to modernise their service offerings. Ultimately, when you can blend key processes, such as currency hedging, global payments, and foreign invoice automation, you can create a more seamless experience for users that goes beyond what has traditionally been available to SMEs.