At what point can a business acknowledge foreign exchange (FX) in their procure to pay (P2P) process, and at what cost?

Over the last two years, as a result of COVID-19, trade has endured volatility, global supply chain disruptions, and a surge in prices. 

This has created enormous FX opportunities but brought with it even greater FX risk. 

FX markets have an abundance of liquidity (c. $6.6 trillion traded daily) and as such, supply and demand align very quickly.

Unfortunately, the cost of living crisis and inflationary pressures (10.1% in July 2022, expected to reach 14% in Q4, with Goldman Sachs predicting it could hit 22% in 2023), especially in the energy sector due to the Russia-Ukraine conflict and interest rate rises, have created a huge downward negative economic multiplier and decreased the value of the pound. 

Money markets are pricing in a further 75 basis points (BPS) rate hike from the Federal Open Market Committee (FOMC) for a third consecutive month. 

In tandem, there have been developments such as the 3% sterling loss against the euro and a 4.5% loss against the US dollar in August alone. 

This consistently negative macroeconomic data creates uncertainty en masse––and if there is one thing global financial markets dislike, it’s uncertainty.

International transactions 

Digitisation

Despite the overall volatility in the market right now, predictions for the future of the eco-system are looking less troublesome. 

Accenture, a technology and outsourcing consultant, sees the total value of cross-border payments growing by 5.6% next year, driven by corporate payments. 

While there are attempts to digitalise the global payments network, in many cases, international payments can still take days, even weeks, to arrive. 

The messaging can be slow, the fees can be substantial, and there is often uncertainty as to what amount will end up in the recipient’s account.

This apprehension derives from using a payment provider without local accounts and, in turn, necessitates the use of intermediary banks. The banks take their cut in the international payments journeys from executor to beneficiary.

FX risk

FX transactional risk is dictated by the fluctuation of FX rates. The consequences of such volatility can significantly impact international transactions prior to settlement. 

There is currently a multitude of fintech products that can aid in mitigating these risks at several stages in the P2P lifecycle. 

Global accounts are considered the most reliable if one is looking to navigate a less risky enterprise within the field of multi-currency payables and receivables exposure. Their relatively simplistic nature allows for comparable security as opposed to other more complex financial instruments since most ‘insurances’ carry a premium. 

It is a balancing act for many, if not most, small- and medium-sized enterprises (SMEs) tight on cash flow. 

Failing to mitigate FX risk can have a subtle pricing impact leading to margin erosion and the squeezing of profits. This often generates consequences whereby business models are simply no longer viable. 

The P2P process

P2p is the process of integrating purchasing and accounts payable systems to create greater efficiencies.

It exists within the management process and involves four key stages: 

1. Selecting goods and services 
2. Enforcing compliance and order
3. Receiving and reconciliation
4. Invoicing and payment

At each stage, a business should ask the following questions: 

Sourcing 

• Where does the business source from? (Multi-currency and multi-country?)
• How does the business manage the sourcing process? Is it one supplier or many?
• Does seasonality affect where you source from?

Approval

• How does the approval process work? (two-factor authentication [2FA], e-mail, a single person etc.)  
• If someone central to the approval process is away, what is the procedure? If there is none, it may lead to late payments or the general eroding of trust in company relationships.  

Purchase orders and goods received

• What credit terms does the business have with its suppliers? 
• Does the business have rebate agreements––how are these processed? 
• Are there any charges associated with the delivery of goods? 
• What rate protections exist on goods that do not comply with company standards?

Invoice matching

• Have lead times and associated costs of missing a supplier payment been communicated?
• Where is the information pertaining to the invoice stored? Who has access? It is important to note this for both efficiency and security. 
• If details need amending, how is this process managed? 

Payment 

• How are international payments currently facilitated? Is it via a bank or a broker?
• What is the preferred method of payment––type, currency, timeframe? 
• What procedure is in place for time-sensitive payments? 
• If or when a payment is recalled/lost, what is the procedure for tracking? Has there been a factoring in of the cost and the currency? 
• How many people can you pay out (in multiple currencies) at one time? 
• How are the beneficiaries notified that a payment has been sent?

Reconciliation 

• What is the process of keeping these two sets of records in agreement?

P2P volatility: figures, risks, and solutions

Spot Monthly 

In this example, between March 2022 to August 2022, UK businesses buying products from the US now pay c. $10,000 more for every $100,000 per calendar month (PCM). As of September 5, the pound-to-dollar interbank rate is around 1.15, meaning $100,000 would now cost circa £87,000.

Unless the business has a very high margin product/service, this is the difference between breaking even and profit. 

Businesses fortunate enough to be selling dollars (i.e., receiving dollars and converting back to sterling) are undoubtedly enjoying these sub-1.20 levels. 

But, for businesses that fall outside these parameters, there is no one-size-fits-all solution. Certainly, there are some obvious answers for companies dealing with multiple currencies, namely risk management and knowing the risks of a company’s global business model.

The future of FX 

The upcoming months will hopefully see an end to the Russian-Ukraine conflict, a new UK Prime Minister, and with it, probable new economic policies that will impact FX markets. 

There will inevitably be more digitisation of the fintech ecosystem, with new platforms and products coming to market. 

Ultimately, businesses working on a global scale, paying out and receiving in multiple currencies, will need a global payment provider facilitated through local bank accounts.

Knowing the entire P2P process and associated lead times of the stages presents a business with enhanced visibility around the timelines and obligations. What is equally important is choosing the right payment provider with whom a business can partner.