Beth Garland, Senior Product Manager, Currencycloud
Last year was an unpredictable one for the FX markets. The US Dollar levelled the Euro, the Pound crashed during Liz Truss’s leadership, and most currencies were dwarfed by the greenback. This volatility may have been lucrative for many speculative FX traders and banks who make a profit on buying and selling currencies.
However fluctuating rates are less welcome for the average person or business. When working in the deliverables (rather than the speculative) market, rates must be linked to something tangible, such as an invoice payment or international remittance.
Volatile FX rates are a product of economic uncertainty and it’s set to be another unpredictable year for European businesses. Despite this, individuals and SMEs still have to move money around the world (remittances still grew by 5% last year) and, what’s more, FX can actually act as a source of revenue for businesses as these uncertain conditions change what SMEs and consumers expect from FX providers.
Managing increasing risk
Traditionally, providers have been laser focussed on providing the best rates possible, ensuring that total transaction costs sum up to pennies, rather than pounds, when businesses submit invoices. This means that businesses keep as much of their money as possible, and that the whole payment lands with their supplier, rather than each bank taking a cut of the transaction along the way.
The best way to secure these more competitive prices has typically been to provide real-time rates, but many providers are now starting to hold rates to offer customers more certainty under the current economic conditions. Holding rates means that the customer is offered a fixed price as the provider picks up the risk– something providers have tended to resist over the years, despite the fact that it can often produce better prices for both sides, particularly during volatile market periods.
Providers must find balance, but what can be done to offer customers an even more competitive price when holding the rate?
All in the balance
The past few years have seen a burst of innovation in this area. Weekend FX, for example, guarantees customers access to rates and conversions over the weekend, which can be held to allow payments and business to run as usual when markets close on a Friday. Data also allows providers to price as competitively as possible, taking on all the risk for customers over the weekend and providing good rates.
In addition to this, some institutions, including many neobanks, are now starting to offer FX forwards, which allow rates to be locked in for a future point in time, thereby mitigating risk. Forwards are extremely useful tools for locking in rates and are becoming ever-more popular. For example, businesses could use these forwards to pay a future invoice in Euros while managing their cash flow in GBP, without knowing how much GBP something will cost them down the line.
Driving innovation
Tougher economic conditions always lead to providers evolving new solutions to meet customers’ challenges. Event-driven architecture could be a crucial part of the way the industry meets the needs of the current time. Rather than requesting rates individually from multiple banks, providers are developing solutions that allow them to stream rates from a variety of banks simultaneously, resulting in a huge amount of data from which to choose the best possible rates for customers.
Traditionally, providers take a customer’s request and wait for a bank to respond before confirming the trade. With event-driven and a-synchronous architecture, however, providers will be able to accept a customer’s trade, send them confirmation, and manage this with the banks separately, unburdening the customer from this section of the process.
This can protect customers against struggling bank providers’ wide spreads and could enable more competitive rates to be found in real time. On the other side, event-driven architecture can also complete more complex requirements for customers, allowing for better risk management. Finally, it could improve pricing availability: today some banks will just stop returning a price for more volatile currencies. Creating this separation means that providers can price more reliably and consistently.
All in all, innovation in technology is key to balancing risk and pricing. The industry must evolve to keep up with instability in the markets, using technology to provide solutions that benefit customers. Weekend FX, FX forwards and event-driven architecture are all products of an increasingly unstable global economy and can be used to ensure that customers and consumers don’t suffer as a result of volatile markets.
