Common pain points included high commissions on FX transactions, slow payments and the need for different bank accounts around the world to make payments in different currencies. In many cases, the technology was old, prone to error and often required human intervention. It was a big reason for the extortionate fees (north of 10% in some cases) that both consumers and corporates were forced to endure.
Large multi-national corporations were the only businesses to have access to the technology they needed, with everyone else being priced out or left out in the dark. There were no readily available automated solutions that provided small and medium-sized businesses with everything in one place – cash flow, payments, bank accounts, FX trading and analytics – at a reasonable cost.
Today, we live in an age where the average retail consumer sends money from their bank account to a retailer by tapping a watch against a pocket-sized device at no extra cost. Meanwhile, multinational businesses are catered to by the largest banks and utilise the technologies that barely existed just a decade earlier. By virtue of their global size and scale, they can transfer money between their cross-border, multi-currency accounts seamlessly and buy and sell currencies at extremely favourable rates. In both cases, the fees charged have fallen dramatically. How times have changed… Or have they?
Small and medium-sized enterprises – the squeezed middle
There is no doubt that the Fintech revolution has resulted in winners at both the top and bottom end of the market – i.e. large, multinational corporations and individual consumers like you and me. However, SMEs fit into neither of these categories. This ‘squeezed middle’ includes companies that trade globally, make and receive payments in dozens of currencies and require international bank accounts. Yet, not only are they dissatisfied with their treasury systems, but they continue to pay over the odds.
Let’s put this into context.
According to the Bank for International Settlements’ Triennial Central Bank Survey, non-financial institutions such as corporates account for 7% of global FX market turnover. That equates to more than USD396 billion a day. Of course, not all of these institutions will be corporates. But the fact remains that many will typically be charged fees as high as 3% from their banks.
This point really hits home when one realises just how many businesses are affected. There were 8,000 large businesses in the UK with more than 250 employees in 2019, accounting for 0.1% of all businesses. In contrast, there were 5.9 million SMEs, accounting for 99% of all businesses. It is a similar story in the European Union. That’s a lot of corporate treasurers paying over the odds.
Take, for example, a medium-sized international shipping company executing transactions across borders in 15 different currencies. Legacy treasury systems mean long lead times and high commissions, due to paying a bank to convert incoming and outgoing transactions into the local currency.
Furthermore, each of these 15 currencies is held in a separate account and operate in silos, meaning the CFO is unable to view the business’ cash flow in real-time. This lack of full financial visibility across their business is a significant problem. Over time, this adds up to a lot of unnecessary costs and time absorbed from corporate FX processes and hampers risk management. Managing corporate FX risk requires real-time market information for effective strategy execution. However, for SMEs, this often involves installing expensive and complex add-on market terminals.
When it comes to FX risk management, the majority of hedging programmes are limited to providing an analytical outlook, ranging from three to six months, due to their lack of visibility and connectivity. This restricts how easily treasurers can manage and oversee their FX risk strategies. Likewise, legacy post-execution management and the handling of trades from booking to settlement involves multiple suppliers and vendors, often creating complex paper trails with slow and inefficient communication flows. Solutions for these common problems have, up until now, largely been unavailable and inaccessible for SMEs.
The need for a modern, comprehensive and cost-effective TMS
FX execution and hedging have been a widely mismanaged feature of small and medium-sized enterprises (SMEs) for years, with no automation or analytics and high transaction costs. In many regards, treasury management remains hindered by increasingly outdated and fragmented processes. This becomes all the more apparent as other areas of finance move ahead in terms of efficiency, customer satisfaction and cost-saving benefits resulting from Fintech adoption.
A survey by Citi’s Treasury Diagnostics division found that over half of respondents believe their treasury management system (TMS) does not support financial risk management processes. Furthermore, nearly two-thirds of respondents are looking at new opportunities across the treasury function as a result of emerging technologies.
The need for a modern TMS that offers a comprehensive and holistic approach incorporating the full package has never been more important. If corporate treasurers continue to suffer from old, cumbersome technology and extortionate fees remain the norm, the effectiveness of their organisation’s broader risk management and cash flow strategy will be hampered.
The ability to buy and sell currencies, effective hedging and risk management, real-time cash flow management, international multi-currency bank accounts and fast payments all in one place – underpinned by cutting-edge Fintech and with appropriate regulatory oversight – should not be restricted to a handful for large corporations.
An ecosystem and infrastructure fit for the Fintech revolution
Fintech innovation has transformed financial services at a rapid pace, enhancing customer experiences and accessibility and making services faster and more streamlined. As a result, costs have fallen, barriers to entry have been reduced and new entrants have emerged to take on the incumbents. Yet, amidst the rise of challenger banks and alternative payment providers, relatively few innovations have found their way into the corporate treasury space.
Take international payments and bank accounts, for example. In an increasingly globalised world, very few companies operate using a single currency. Despite this, making international payments remains a costly and cumbersome process, and multi-currency accounts remain inaccessible, require manual input to operate and take weeks to open.
This is hard to justify when supply chains and customers span multiple nations, currencies and continents – treasurers need an equally global bank account that is fit for purpose.
To address these issues, treasurers have sought to utilise different platforms and integrated technology systems to ramp up efficiency and automation, while reducing costs. But this has only created layers upon layers of complex technology systems, processes and plugins.
This approach is not sustainable – it increases maintenance costs and hinders operational stability in the long-term. If one cog in the machine breaks down, the knock-on effects could be disastrous.
Buying your way out of a problem that has hampered corporate treasurers for decades is not the answer – it’s not the number of plugins, add-ons and systems that will bring corporate treasury into the twenty-first century, but the functionality, interoperability, security and ease of use of a treasury management system. This has become even more critical as treasurers become accustomed to working remotely.
Put simply, enabling treasurers to perform all of their key functions without having to switch between different platforms and technology providers is crucial. The days of plugin tangles and convoluted processes are over.
In order to fully address the pain points faced by treasurers today, modern systems and platforms must address the lack of availability and high costs associated with multi-currency accounts, payment processing and FX conversion fees. There is a huge opportunity to streamline existing processes and access all of the key services treasurers need – multi-currency IBANs, automated payments and collections, FX hedging and risk management and enhanced security – from one comprehensive dashboard. With the technology and knowledge available today, such services recognise the digital and global requirements of a modern, global corporate treasury division.
Getting bang for your buck
SMEs are the engines of the global economy, but this segment of the market has historically been overlooked by Fintech revolution that instigated a wave of business and product innovation over the past decade or two. FX execution and hedging have been widely mismanaged features of small and medium-sized enterprises (SMEs) for years, with no automation or analytics and high transaction costs.
That is now changing. With some banks choosing to leave this space and other incumbents failing to adapt to the new technology landscape, it has left a gap in the market for new Fintech solutions to take their place.
Of course, nothing in life is free and the concept of paying a fee in return for receiving a service is embedded into our day-to-day lives. But the fees paid should offer value for money and align with the quality of service received. Crucially, corporate treasurers are the 99% of businesses who are now charged fees that mirror what we see at the top and bottom end of the market – typically below 0.5% in some cases.
This coincides with the emergence of TMSs using nimble and modern technology that is accessible to corporate treasurers of all sizes. Through the efficiencies offered by modern technology, these systems offer the same services and tools available to those at the top end of the market, but at the fraction of the cost.
It’s been a long-time coming, but corporate treasurers are finally getting bang for their buck.