As a growing number of businesses around the world aim to find — and sell to — customers internationally, foreign exchange (FX) is becoming an increasingly important and common topic of conversation.
Payoneer Chief Revenue Officer Robert Clarkson told PYMNTS that FX is becoming a focal point for businesses as they recognize the opportunities and controls it can provide on a daily basis.
“Every company that we work with is talking about their FX strategy,” Clarkson said.
With companies rapidly expanding their digital reach around the world, and supply chain issues increasing the time between when an order is placed and when it is billed for, companies are increasingly focused on lowering risks associated with FX, he noted.
FX in Cross-Border Context
Clarkson explained that the revenue of businesses operating in a foreign market is constantly under attack from the exchange rates between their buying and selling currencies. Small- to medium-sized businesses (SMBs) often lack the necessary tools and expertise that larger organizations use to recognize fluctuations and mitigate FX effects.
Given the ceaseless trading fluctuations of 164 currencies around the world, Clarkson said it is a very difficult regimen to monitor and make sense of, including the unpredictable geopolitical impacts that can roil rates, including political issues, climate and natural calamities, economic data or simply shifts in supply and demand.
While major currencies like the U.S. dollar, British pound or euro are typically less volatile, Clarkson said 21 countries saw price swings of 10% in their currency exchange last year, while an additional nine nations saw moves of more than 25%. The point is: Short-term currency swings of that magnitude between the time of billing and receiving funds takes an enormous amount of revenue off the table for SMBs.
“It wasn’t that long ago where we saw a $1 trillion bill in Zimbabwe,” Clarkson said. “I don’t know what billing system can mitigate a 1,000x currency acceleration and appreciation, but such challenges occur when you move outside of local markets into emerging markets.”
Another tool that businesses are considering is cryptocurrency, although Clarkson pointed out the wild daily fluctuations make it even tougher to adopt than regular FX. Cryptocurrencies may have a path going forward and certainly mitigate some of the cross-border risks, but there are fluctuations even within that single currency.
See also: Payment Orchestration Helps Conversion Rates — and Merchants’ Margins
Effects of Customer Demand on FX
The pandemic has widened the net for consumerism as consumers now have options to buy from different sellers around the world. While lucrative, this globalization brings along additional challenges to the business models of sellers, especially small ones.
Clarkson explained that services like Payoneer help these SMBs by allowing them to bill and receive funds in currencies other than their domicile currency. Let’s say an independent contractor, programmer or marketer has created an SMB in one country and wishes to outsource to customers around the world. Clarkson said financial service providers like Payoneer help establish the ability to deal in multiple currencies so that businesses can operate from anywhere around the world.
Read also: How Financial Service Providers Can Create Smooth Cryptocurrency Payments to Win Businesses’ Loyalty
Impact of FX on Business Growth
Every challenge is an opportunity for SMBs, and the ability to overcome challenges makes for a competitive market.
“The fact that you can take an economic wind like FX that affects all businesses equally, your ability to either mitigate or understand and maneuver around the particular challenges makes you more successful,” said Clarkson.
Businesses are setting up processes to ensure they can bill in and hold multiple currencies, as well as offset some of the risk associated with FX. Large global organizations have an entire treasury function and FX department to stay ahead of currency risks, while SMBs are turning to strategic partners to help navigate FX hurdles.
“There are a lot of tools available for adoption for SMBs to be able to understand, recognize and mitigate [the risks associated with exchange rates]. FX will become a central function to organizations, even if they’re outsourcing that recognition and resolution to companies like Payoneer,” said Clarkson.
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