Platforms that combine bank expertise and fintech innovation are set to be the future for FX
With a changing global outlook following the Covid pandemic, and a growing number of companies finding new markets around the world, the need for corporate treasurers to have a good grip on their FX risk, transactions and related costs, is greater than ever.
Many treasurers are starting to question whether their traditional bank partners alone can meet all their FX needs, yet are increasingly unwilling to accept lengthy implementation processes to set up new systems.
This is according to speakers at a Treasury Dragons Debate on The Future of FX, supported by Hedgebook, who see a growing demand for automated end-to-end solutions to enable faster decision-making.
“Treasury, like everything else in our lives, is influenced by technology and there is less acceptance of things happening slowly. We want it now and if one provider can’t fulfil our expectations then we move on to another who can,” said David Kelin, managing director at consultancy firm, DNA Treasury.
Shorter deployment times
“What we have seen in the past couple of years is the time to deploy these technologies needs to become even shorter. When it comes to time horizons of 12 or 24 or 36 months to complete treasury projects, that is far too long,” said Carsten Jaekel – head of global treasury services, GSA region, EY.
Improved real-time visibility is also important to treasurers, Kelin said. “When facing market volatility, it is critical to have visibility into your financial positions and make best FX hedging decisions to protect profitability.”
Pricing transparency has become a concern for some, he added. “Corporates are starting to question their banks and brokers about their pricing structures.”
The historic dominance of banks in the FX management sector has already started to be eroded by these demands from corporates, with many treasurers turning to the new fintech providers with their promise of faster, quick-to-implement, automated and potentially cheaper solutions. Fintechs typically have far lower operational costs than banks and can offer specific specialised products.
“There’s a danger banks will get left behind selling FX to corporates. They have lion’s share of the market, but they are being disrupted,” said Richard Eaddy, CEO of fintech Hedgebook which provides cloud-based treasury solutions to companies.
“Banks do need to find better and different ways to engage with their clients and obviously using technology is one of those areas,” he noted.
“Our own clients are looking for solutions, not products, from their FX providers. Having tools where the customer can interact easily with the bank, and the bank can seamlessly access the clients’ exposure and hedging information is really important. It then allows banks to provide their strategic input at an appropriate time enabling companies to make faster and better hedging decisions,” he added.
Stepping up to the challenge
There are some banks stepping up to the challenge, with Tom Stoddart, head of treasury services sales at Lloyds Bank, recognising that both banks and the new fintechs have something of value to offer the corporate treasurer.
He explained how banks need to look at delivering a better client experience from end-to-end rather than focusing on single components within a foreign exchange management system.
“An all-embracing eco-system is critically important, featuring some components from banks and the rest from fintechs,” he explained.
Banks should capitalise on what they are good at and then collaborate with fintechs on other aspects of FX management rather than building everything in-house, he said.
“What are banks good at? Banks take deposits and lend money - and are the experts in managing capital in the most efficient way. Are there gaps in our proposition, yes absolutely. Everyone is focusing on those gaps, but through the lens of delivering a better client experience – rather than designing “Ferraris” for each component part that don’t talk to each other,” he explained.
Kelin agreed that different systems need to be interconnected. “In theory, your treasury management system should be able to speak to your FX dealing system, which should be able to speak to your confirmation matching system,” he said.
The use of APIs [application programming interface] technology is key to providing these connected, end-to-end solutions rather than offering a suite of disconnected products. This technology allows other solutions to “plug in” to existing treasury management systems, speakers said.
“They are playing an important part in the digital revolution,” Eaddy said, explaining that clients now expect to have a single sign-on capability to access applications. APIs will allow treasurers to access data from different sources in real-time, helping them make quicker and more informed FX decisions.
“Banks building their own platforms and then incorporating ‘best in breed’ technology into them is the expectation of the corporate,” Eaddy added.
Improved technology will also aid improvements in pricing transparency, some speakers suggested. Stoddart insisted that bank FX fees should be visible to all clients. He argued that it was time for “a grown-up conversation” between banks and their clients about pricing, where banks are more transparent about what charges are based on, whether it relates to return on capital requirements or operational costs.
However, he also predicted that current pricing structures would eventually become “obsolete”.
“I can see an ecosystem further down the way whereby we move to a subscription model – that is a few years ahead,” he said, explaining how clients could be charged a monthly fee depending on what services they use.
Other speakers played down the importance of pricing transparency.
“When it comes to the issue of pricing transparency and hidden costs [it is] a little bit over valued. When we look at FX and where the value of FX hedging is coming from, the element of pricing doesn’t make that much of a difference. The wrong decision at the wrong time – that’s what it is all about,” Jaekel said, highlighting the importance of speedy decision-making as a greater priority for today’s treasurer.
Despite the variety of new technological offerings, speakers also recognised that for many treasurers the trusty spreadsheet will remain a much-used tool for the foreseeable future.
“Spreadsheets won’t go away. We allow information to be downloaded into spreadsheets,” said Eaddy. “What is really important is that not one system alone will solve all the problems.”
The full webinar can be viewed on demand here