Nande Khin, CFA

Harnessing Technology: Taking the Risk out of FX Risk Management for E-commerce Players

March 2023 in Expert Opinions

By Nande Khin, CFA, Head of Treasury, M-DAQ Global

Over the past couple of decades, technology has played an increasingly significant role in shaping the evolution of foreign exchange (FX) risk management for businesses.

With the growth of digital platforms and the availability of real-time data, it is now easier for companies to monitor and manage their FX exposure.

Algorithmic trading technology, for example, allows companies to react more quickly to FX volatility by automating their FX trading, executing hedges based on pre-set rules. This allows them to reduce their FX risk dramatically.

Increasingly, other technologies – such as artificial intelligence and machine learning – have helped businesses to analyse large amounts of data in real-time, and identify patterns and trends, allowing for more accurate predictions of demand and cashflows. This in turn enables them to manage and hedge their FX risks better.

E-commerce Businesses have lagged in FX Risk Management technologies

Yet one sector of businesses has lagged in its adoption of these new technologies in FX risk management. Ironically, it is a sector that, arguably, has the most to gain from embracing technology-driven FX risk management.

This is the cross-border e-commerce sector. Most e-commerce platforms these days conduct borderless businesses. FX risk can have a significant impact on their profitability by affecting the cost of goods sold, transaction fees, and other expenses.

Importantly, changes in FX rates can impact their end-customer behaviour and purchasing power, which can affect the e-commerce platform’s revenue and market share.

A 2022 report by Shopify1 affirms what we already know: e-commerce customers are ultra price-sensitive, with three-quarters of them citing price as a key factor influencing their purchasing decision.

With traditional payment gateways and payment processors charging upwards of 4-6% for multi-currency transactions, an e-commerce platform that can reduce this FX mark-up for its end-consumers will likely benefit from more sales – leading to higher revenue and market share.

Transparent and stable location currency pricing upfront

A few e-commerce platforms have realised this and have taken the FX risk upon themselves by offering a “dynamic currency conversion” (DCC) to customers at checkout, with FX rates that are purported to be more attractive than what traditional payment intermediaries have been charging.
However, not only does this expose these e-commerce businesses to significant FX risks – especially given that the funds settlement timeline in e-commerce can stretch to more than a week – it may also be counter-productive due to the introduction of last-minute price shocks to customers at checkout.

Letting overseas customers see their purchases in their local currencies only at checkout may lead to so-called “shopping cart abandonment” and lost sales.

According to Coresight Research2, the overall shopping cart abandonment rate stands at 74% – 77% for the retail industry, and one of the main reasons for this was extra unanticipated costs at checkout. Data from also shows similar shopping cart abandonment rates.

Therefore, to improve online conversion at checkout, e-commerce platforms need to avoid giving customers last-minute shocks. This means lowering FX costs where possible and displaying transparent pricing in the customer’s local currency upfront – and not just at checkout. This will provide customers with price “clarity” in their shopping experience.

Just as importantly, these local currency price displays also need to be static and stable – at least during the course of 24 hours – to enhance the customer experience. Although real FX market rates jump around every few seconds, no customer wants to contend with a fluctuating cart price. What they want is price “certainty”.

Data-driven FX Risk Management technology for “Clarity and Certainty’’

E-commerce platforms are thus faced with a conundrum: keeping FX mark-ups low, yet stable throughout the day, but without taking on significant FX risks that they are not capable of managing as it is not their core business.

Utilising technology in the right way can help to achieve those aims, while mitigating the FX risks. This is where data mining with pattern/trend identification can lead to accurate predictions, not of future price movements in FX, but of sales volume.

However, many e-commerce platforms do not have the resources to invest in such technologies. They may not even have a dedicated treasury department looking specially at FX risk management. This is where they can partner with FX risk specialists like M-DAQ.

By harnessing data through its predictive engine and proprietary algorithm, M-DAQ aims to remove FX volatility, providing “clarity and certainty” to its clients. Its e-commerce enabler product M-DAQ Aladdin+ offers 24hr-72hr guaranteed FX rates that e-commerce platforms can use to display their products in multiple currencies.

E-commerce players can seamlessly integrate M-DAQ Aladdin+ into their pricing strategy online with ease – allowing them to:

  1. Price their products with competitive FX rates, that remain fixed throughout the day.
  2. Apply this same original rate even to customer refunds i.e. the customer can get back exactly what he/she paid – even if the market FX rate has changed.
  3. Outsource all the FX pricing risk from 1) and 2) at a very low fee.
  4. Earn a stable, reliable, yet risk-free source of additional profit by adding their own FX mark-up.

By leveraging on the right FX partners like M-DAQ, e-commerce platforms can, thus, still enjoy the FX risk mitigation derived from technological advancements without having to invest resources into the technologies themselves. In addition, they are also freed up to focus on what they do best – their core business.

1.Shopify Plus, The Future of Commerce 2022
2.Coresight Research, Tackling Online Cart Abandonment: How To Convert the Three in Four Carts Lost at Checkout