Six Tips to Protect Your Organization Against Payments Fraud

25-01-2023 | treasuryXL | Kyriba | LinkedIn |

By Bea Saldivar, Global Payment, ERP and Treasury Advisor
Andrew Deichler, Content Manager, Strategic Marketing

Source

 

The Threat of Impersonation

Payments fraud in 2021 was as bad, if not worse, than the year before, according to the 2022 AFP Payments Fraud and Control Survey. But even though business email compromise (BEC) scams dropped substantially last year, many organizations are still falling prey to them and incurring significant losses.

At the heart of BEC scams and more recent developments like deepfake fraud is impersonation. Cybercriminals use social engineering tactics to develop profiles on company employees or routine vendors, which they then impersonate to dupe unsuspecting people into making critical mistakes.

To identify an impersonator, it’s helpful to know the telltale signs. More than likely, the payment request will be urgent and will attempt to exploit unique circumstances, such as a specific time when employees are out of the office. Additionally, if your organization is making a lot of payments to contractors for a project, fraudsters might attempt to exploit that.

For example, Philabundance, a Philadelphia food bank lost about $1 million due to a successful BEC scam. The food bank was in the process of building a $12 million community kitchen. The accounts payment (AP) team received an invoice from what they thought was a construction company supplier and made a payment.

The Government of Carrabus County, N.C., also found itself victimized by a vendor BEC scam. The county intended to send money to a contractor it had been working with for the construction of a new high school. Through a series of emails that began in late 2018, the fraudsters made requests to update bank information. The county didn’t do its due diligence and ultimately sent more than $2.5 million to the fraudulent account. While over $776,000 was ultimately recovered, about $1.7 million remains unaccounted for.

Common Fraud Myths

When it comes to payments fraud, many treasury and finance departments still get lulled into thinking they are more protected than they are. Organizations may assume that their procedures are infallible or that any lost funds will be reimbursed, but they quickly get a wake-up call when a successful attack happens. The following myths are common.

“We have an approval process in place.” Even the companies with the strictest policies in place can still have a breakdown in processes. Employee ID/password combinations can be stolen. Regional treasury/shared service centers may require fewer numbers of approvals due to limited in-country staff. And companies with multiple ERP systems might have different approval processes—a scenario that is ripe for fraud.

“My bank will cover me.” There is no obligation for a bank to cover any client for payments fraud, unless the bank itself has been breached, like in a bank employee scheme. The bank may still reimburse corporate clients on a case-by-case basis, but don’t bet on it.

“We have cyber insurance.” Many companies assume that if they purchase cyber insurance, that they are covered in the event of a loss. However, if an organization can’t prove that it took all the right steps to protect itself, it’s very likely that the insurance policy won’t cover the loss. Many plans don’t cover BEC scams, for example, because they involve an employee making an error. There have been several legal cases where insurance firms have refused payment and the courts sided with the insurers. Furthermore, even if cyber insurance does agree to pay out, you might still have to pay a high deductible. For some plans, that cost can be tens of thousands of dollars.

What Can You Do?

Fortunately, there are many ways to protect your payments and your data. The following tips can help.

Embrace the cloud. Organizations should embrace cloud technology to secure payments and systems. IT teams know that payments data and connectivity are more secure when hosted externally. However, not all cloud solutions are alike. Solutions like Kyriba Enterprise Security ensure that treasury, payments, and risk data meet internal security policies and international security requirements while providing 24/7, global support.

Align all departments. Your internal IT department, as well as any key areas that touch payment processing areas such as treasury, accounts payable, shared services, etc. all should be aligned with your security policies. With more and more companies allowing remote work, companies must ensure that all employees are using effective protections such as strong passwords, policy controls, multifactor authentication, IP filtering, single sign-on and data encryption.

Automate payment processes and standardize controls. Automation allows organizations to standardize the payment journey from the initial request to the receipt of the payment. Risk lies in the exceptions to a standardized process, i.e., payments made outside of this typical format that provide fraudsters with opportunities. Again, these are usually one-time, urgent payment requests that can come in for things like mergers and acquisitions, legal settlements, emergency payroll, etc.

Enable real-time screening, alerts, and notifications. The rise of same-day and real-time payment systems has increased the need for real-time responses to fraud attempts. Modern fraud detection software uses artificial intelligence (AI) and machine learning to screen payments against historical payment data, pinpointing any anomalies.

Implement fraud prevention workflows. Modern payments fraud modules support fully automated, end-to-end workflows for the resolution of outstanding suspicious payments. Users can determine how each detected payment should be managed, enforcing the separation of duties between the initiator, approver, and reviewer of a detected payment.

Know your vendors. Vendors can be a major liability for your company. In some cases, vendors are granted access to their customer’s network credentials. If that vendor’s security protocols are lacking, they can become an unknowing backdoor into that customer’s systems. This is what happened in the infamous Target breach in 2013. Therefore, it is imperative to have a detailed information security questionnaire that can provide confidence in the governance and risk programs that a vendor has in place. Additionally, with vendor BEC scams proliferating, organizations need to make sure that requests for payment instruction changes are verified directly with the vendor before any transactions are completed.

Safeguarding Your Payments

To mitigate the risk and safeguard your payments, organizations must have a unified solution that connects ERPs, internal and external systems that allows for a secure, end-to-end payment journey. Furthermore, when exceptions occur, protocols can’t be abandoned no matter how urgent the request. Any departments that touch payments need to understand that one slip up can be catastrophic, not only leading to loss of funds, loss of job and reputational risk for the whole organization.

Kyriba is here to help you protect your organization against payments fraud. Learn more here.

How to get into FinTech? A Career Guide for 2024

19-01-2023 | Pieter de Kiewit | treasuryXL | LinkedIn | If you are interested in learning about FinTech and how to get into the industry, there are a few things you may want to consider. With my focus on corporate treasury, we are in close contact with various Fintech companies who ask us on a regular basis to support them in their recruitment. We learned these companies have specific requirements.

Read more

Live Expert-Led Session | Your Currency Management Toolkit for 2023

17-01-2023 | treasuryXL | LinkedIn | Join Kantox and treasuryXL in this expert-led conversation on the future of currency management as we uncover the key treasury priorities and opportunities for the new year.

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Hedging Strategies 101: Layered Hedging

16-01-2023 | treasuryXL | Kantox | LinkedIn |

Avoid the cliff and protect your cash flows! When volatility is at an all-time high, the right currency hedging strategy can set you apart. And save your business from an uncertain future. Transform your FX risk with a layered hedging strategy that will help you withstand unexpected changes in FX markets and protect your margins.

When implementing an FX hedging program, finance professionals responsible for risk management must be aware of the ins and outs of their business. This will be the starting point to uncover potential gaps in the hedging strategy and also opportunities to implement the program that fits perfectly.

Let’s understand how a layered hedging program works and how it could fit with your FX strategy.

Why is a layered hedging strategy important?

Layered hedging programs allow CFOs and Treasurers to handle the related problems of FX markets volatility, shifting interest rate differentials, and less-than-stellar cash flow visibility.

The goal of a layered hedging program is to smooth out the hedge rate over time to lower the variability of company cash flows. Additionally, a layered hedging program that is created from scratch can deal with the problem of forecasting accuracy.

Instead of ‘protecting’ an FX rate, layered hedging programs build the hedge rate in advance. And because hedges are applied in layers, in a progressive manner, you do not need a 100% accurate forecast at all.

Who can benefit from a layered hedging program?

Not all hedging programs are the same, as they tackle different goals for managing FX risk. Before you implement a layered hedging program and start dedicating time and resources, you need to think about certain conditions. These relate to your current business model -including pricing structure, the FX exposure you want to hedge, cash flows, etc.- and your company’s specific needs when it comes to FX hedging.

This type of hedging program is best suited for firms that need or desire to keep steady prices not only for one individual campaign/budget period, but for a set of campaign/budget periods linked together. In layered hedging:

(a) Prices are usually not FX-driven, meaning that the FX rate plays no role in pricing strategy.

(b) The impact of the ‘cliff’ -a sharp adverse fluctuation in currency rates between periods-, cannot be passed on to customers at the onset of a new period.

(c) The exposure to hedge is a rolling cash flow forecast for a set of periods linked together.

Unlike other cash flow hedging programs, like static hedging where prices are either frequently updated or updated at the onset of a new budget period, pricing does not act as a hedging mechanism in layered hedging programs. And that puts cash flows at risk, so a solution must be found elsewhere.

In comes the star of layered hedging, smoothing the rate.

Smoothing the hedge rate over time

The secret of achieving a smooth hedge rate over time is to create commonality between trade dates for a given value date. Take, for example, a 12-month layered hedging program. The value date of October is hedged in 12 different months, from October in the previous year down to September.

Next, the value date of November is hedged in the same manner, starting in November of the previous year down to October. And so on and so forth. Note that the two value dates -October and November- share eleven out of twelve trade dates with the same spot rate. That’s the concept of the mechanically created commonality that lies at the heart of layered hedging programs.

However, the process of ‘layering the hedges’ is not as simple as it may seem at first glance. There are some common challenges that Treasurers and CFOs face when manually performing FX risk management activities.

Common challenges in layered hedging

Before crafting the optimal layered hedging program for your business, there are three common challenges that need to be considered. These are crucial to the success of the FX hedging strategy. And they relate to the configuration of the program, the intrinsic constraints of the business, and the level of automation currently available to the team. Let’s take a closer look.

  • Configurations. Depending on risk managers’ secondary objectives, there are many possible configurations for a layered hedging program. Some of these configurations regard:

(1) The degree to which the hedge rate is smoothed, for example by adjusting the programs’ length.

(2) The optimisation of forward points. For example, hedge execution can be delayed if forward points are ‘unfavourable’.

(3) The distance between the average hedge rate and the spot rate.

  • Constraints. Each treasury team may face its own set of constraints, some examples include:

(1) The degree of forecast accuracy.

(2) Possible limitations imposed by liquidity providers who might not let a firm trade forward contracts that expire, say, more than two years out.

  • Automation. Needless to say, a manually executed layered hedging program can be pretty demanding, especially if many currency pairs are involved. We’ve seen companies running such programs with the help of enormous spreadsheets. This only creates two different operational risks:

(1) Spreadsheet risk, including data input errors, copy & paste errors, formatting and formula errors.

(2) Key person risk, as only a handful of individuals understand the formulas that underpin the ‘monster’ spreadsheets.

Eliminating the uncertainty

Layered hedging programs are a powerful FX risk management tool to face the trifecta of problems created by a highly volatile scenario. These hurdles include currency risk —including the risk of a cliff, as we saw recently with the GBP-USD exchange rate—, shifting interest rate differentials, and less-than-stellar cash flow visibility.

Now that you know the ins and outs of layered hedging, you can start transforming your FX risk management workflow. And forget about the challenges that may come when facing uncertainty. That’s a pretty powerful advantage in a scenario of pandemics, inflation and war!

Optimal hedging strategy with Currency Management Automation

If you want to leave behind the challenges of manual work when it comes to currency risk, consider implementing automation software.

Kantox is the only solution that streamlines the currency management process through powerful automation of the entire FX workflow. This enables businesses to reduce currency risk, protect profit margins and price more competitively.

3 Ways Liquidity Planning Technology Improves Cash Flow Forecasting Results

03-01-2023 | treasuryXL | Kyriba | LinkedIn |

The treasurer and CFO are today more closely linked to strategic financial objectives for the CEO, ensuring finance teams provide informed guidance on navigating risks and opportunities. This year, a revolutionary practice area and innovative technology is transforming the value of short and long-term cash flow forecasting with more certainty and analytics, empowering finance with a strategic liquidity planning toolset.

By Brian Blihovde
Senior Direct, Product Marketing

Source

The treasurer and CFO are today more closely linked to strategic financial objectives for the CEO, ensuring finance teams provide informed guidance on navigating risks and opportunities. This year, a revolutionary practice area and innovative technology is transforming the value of short and long-term cash flow forecasting with more certainty and analytics, empowering finance with a strategic liquidity planning toolset.

Modern technology solutions are driving value across cash flow forecasting and strategic planning through inclusion of more information from different sources, using artificial intelligence (AI), machine learning and flexible scenario analysis. These user interfaces, reporting and analytics provide finance with better identification of free cash flow targets, improve EBITDA, and deliver views and analysis of total working capital levels.

Creating Engagement and Clarity in Liquidity Decisions

New technology solutions for liquidity management planning create forecasts and analyses on actuals and planned cash flows to include liquidity instruments from debt to working capital programs. When the combination of cash, planned or committed financial flows (AP, AR, treasury) are used as an integrative planning tool with analytics, decision-making for the CFO is more accurate and based on today’s and tomorrow’s reality. Forecasted transactions originating from purchase requisitions, orders and finally invoices are a much better source of forecasted flows than spreadsheet estimates.

Liquidity planning tools and features created as part of an advanced solution gives finance the ability to see exact components of working capital and cash flow forecasts further out to deliver clarity on whether debt or other sources of liquidity will be too expensive. Identification of the mix of liquidity needed and the availability of planned sources or uses further helps the treasurer plan the intersection of borrowing levels, cash flows and confidence parameters for various scenarios and comparisons. The ability to quickly adjust parameters within a planned liquidity model with established, accurate cash management baselines, makes the job easier and faster for not only treasury and FP&A, but gives the CFO quick strike decisioning on the planned mix of cash and debt to fund operations or strategic decisions.

Achieving Optimal Levels of Liquidity

Global economic volatility continues to impact multinationals across a variety of indices and continued strategies by central banks to slow inflation with interest rate increases translates into significantly increased costs of borrowing. For finance organizations that provide liquidity as a net short-term borrower, it is extremely important treasurers can assess the mix of debt and the most advantageous debt instruments, or working capital programs, available. Treasury teams can directly impact greater overall financial performance by optimizing the cost of liquidity and keeping the right levels of available debt and free cash for investments. Modern liquidity planning solutions create better long-range views of available debt vehicles in cadence with cash and other programs to help prescribe the correct mix of long and short-term borrowing. Identifying where short-term debt has carrying costs over other sources of liquidity while also reducing the number of overall debt instruments (facilities or other lines) reduces costs that affect net earnings. Liquidity tools that incorporate the complete set of debt vehicles coupled with cash and forecasted flows create more ability to lessen reliance on borrowing, reducing and optimizing debt levels – all significant contributors to a stronger EBITDA.

Expanding C-Suite Confidence with Future Analytics

In a recent cash forecasting webinar, 90% of attendees stated that they “lose confidence in their forecasts within three months.” Regardless of a static or rolling forecast scenario, lack of confidence in your firm’s future cash and liquidity levels hinders the ability to fund longer-term, accurate strategic decisions without having more of a backup in the form of higher credit limits available to shore up potential liquidity shortfalls.

The new cash forecasting features and capabilities available in new liquidity planning tools are creating better capabilities to manage longer-term liquidity questions:

As the economy continues to spiral, uncertainty will bring down the values of organizations who are incapable of managing the rate at which volatility impacts EBITDA – a consequence of legacy thinking and systems. CFOs and treasurers who are taking a new tact in leveraging liquidity across the enterprise, are finding success in minimizing impacts to their income statement and have an unobstructed vision for how they can unlock near and long-term growth.

 

A guide to conditional FX orders

27-12-2022 | treasuryXL | Kantox | LinkedIn |

In this article, we look closely at conditional FX orders, a powerful tool when executing your hedging strategy, and the unique role it plays in currency management — especially when it comes to delaying the execution of hedges.

Conditional orders: a brief definition

A conditional FX order is an order to execute a spot or a forward transaction to buy or sell one currency against another—but only when a predetermined limit is reached.

Conditional orders include stop-loss (SL) and take-profit (TP) orders. While SL orders are aimed at avoiding losses beyond a certain limit, PT orders are designed to take advantage of favourable moves in currency markets.

Note two time-related aspects of conditional orders in forward markets:

(a) The tenor of the underlying forward contract is specified (it could be one month, six months, or a year)

(b) The validity of the order is specified too (it can be valid for two weeks, six months, or set on a  good-until-cancelled basis).

Conditional orders are usually set on an OCO basis: one-cancels-the-other, automatically to avoid the same exposure being hedged twice in the event of extraordinary market volatility. 

Note, too, that in the event of extraordinary market volatility, conditional orders can be executed at less favourable levels than desired. This limitation exists not only in FX but in all financial markets. 

A powerful tool for risk managers

The primary purpose of conditional orders is to provide a safety net around an FX rate that the treasury team wishes to defend.

It can be the rate used in setting prices —aka the campaign/budget rate—or a ‘worst case scenario’ FX rate.  

Say that you wish to defend the rate of EUR-USD = 1 on a spot basis while the market is trading at 1.08. In this case, it is prudent to set three SL orders, each covering a third of the exposure, at 1.02, 1.00 and 0.98, respectively.

Assuming that the three levels are hit, you are mathematically assured to defend your budget or worst-case scenario FX rate.

Time is on your side

In hedging programs designed to protect a budget FX rate, the ‘buffer’ set between the market rate towards the start of the campaign and the rate to be defended with SL orders provides risk managers with a critical resource: time. 

As long as the SL orders are not executed, the passing of time means that hedge execution is delayed while FX risk remains fully under control. This brings the following four systematic advantages:

(a) More time to update cash flow forecasts

(b) More savings in terms of the cost of carry when forward points are unfavourable

(c) No cash immediately needed for collateral requirements

(d) More netting opportunities

And it’s not over yet! With luck, your TP conditional orders can be hit as well. 

Backtesting conditional orders

We recently conducted a backtest of a hedging program designed to protect the budget rate of a UK-based exporter selling into emerging markets. Over a four-year period (2017-2020), the firm would have outperformed its budget rate in three of those years while equalling it in the remaining year. In one year alone, overperformance reached 5.8%.

Delaying hedge execution with risk under control allowed the treasury team to hedge on the back of firm commitments, providing a better hedge rate than the stop-loss orders. So there you have it: when managing currency risk, consider using conditional orders. Time will be on your side. And you’ll sleep well at night! 

P.S. If you’re drafting your upcoming budget, download our Budget Hedging report and find out how to use conditional orders.

Conditional orders

Three Reasons to Add Real-time Payments to Your B2B Payments Mix

15-12-2022 | treasuryXL | Kyriba | LinkedIn |

If you are reading this, you are likely already exposed to the hype surrounding real-time payments. Whether you believe in the hype or not, it is inevitable that real-time payments will become ubiquitous globally in the near term.

By Rishi Munjal
VP, Product Strategy, Payments

Source

The last two decades have shown that countries with a strong mandate for real-time payments tend to have robust adoption. For example, emerging economies like India and Brazil that have implemented central bank mandates are outpacing developed nations like the U.S in terms of customer adoption.

In 2017, The Clearing House launched the RTP® network, the U.S.’s first real-time payment infrastructure. However, the adoption of real-time payments in general remains low, currently representing 0.9% transaction volume and 0.5% spend, according to the ACI Prime Time for Real-Time report. Specifically, for B2B payments the adoption is even lower. In this blog, I will explore three simple reasons a corporation should consider real-time payments as part of its payment mix. I will stay away from industry-specific use cases, as these were covered in my previous blog.

1. Rebalance your payment mix towards lower-cost and comparable payment types.

While finance organizations strive to keep the costs of operations low, they often only consider direct costs of payments. This practice creates a distorted comparison that can become a reason for inaction. Thus, it is important to measure both direct costs (e.g., provider fees, card interchange, etc.) and indirect costs (e.g., labor, technology, and support costs).

Using industry benchmarks provides a good starting point. The 2022 AFP Payments Cost Benchmarking Survey indicates that the median cost range for sending and receiving RTP® is comparable to ACH and cheaper than wires. Replacing qualifying volume of wires with RTP® can save tens of thousands of dollars, if not more, on an annual basis. You can realize these cost savings without giving up on irrevocability—a key benefit of wires. Kyriba clients’ success stories show tangible cost and productivity gains from such a strategy. If you are receiving card payments, you can save on interchange, which can be as high as 2.5%. With real-time payments, you get instant access to good funds and avoid chargebacks.

Median cost range to pay and get paid

Source: AFP® Payments Cost Benchmarking Survey, 2022

2. Improve cash visibility and liquidity.

Complementing real-time payments with real-time balance and transaction reporting improves cash visibility. This can be especially important if you make a lot of contingent payments. This includes business activities that are dependent on treasury receiving funds. For example, treasury may want to wait until certain funds have been received before releasing a particular payment. Cash visibility can be beneficial if you are being charged intraday credit or your bank does not permit intraday overdrafts.

Wider businesses may also benefit by triggering business activities based on contingent payments. For example, a supply chain team may want to hold on to a shipment until payment is received, accelerating their logistics process. In scenarios that need cash advance or cash-on-delivery, the buyer can make a real-time payment after inspecting the goods. Both parties win. The buyer reduces operational risk, and the seller reduces inventory and improves their working capital position.

With real-time payments, you are no longer beholden to the cut-off times, weekends and holidays. This means that payments can be made as late as possible. So, companies can meet emergency payments to meet any shortfall, and keep lower precautionary balances.

3. Speed up payment digitization and get the most value from your investments in modernization.

Payment processes are complex, and digitizing payments takes time. There are multiple reasons for this. Payment processes for large organizations often involve many roles; initiating, authorizing, and reconciling payments are typically handled by different parties, thereby drawing things out. Approval workflows can also be very complex, involving globally distributed teams. Technology teams may still have direct ownership of managing payment formats and bank connectivity.

When it comes to payment digitization, the U.S. has been behind other countries. Paper checks still account for 42% of payments disbursed by organizations, according to AFP research. The ubiquity of checks, inertia, and in some cases, tradition, continue to hold U.S. B2B payments back.

During the COVID-19 pandemic, payment digitization became even more essential. And since B2B payments are moving away from paper checks, then it only makes sense to complete those transactions as quickly and cheaply as possible.

Real-time payments leverage modern technology, especially APIs, as they transmit data instantly without the need for file downloads. By complementing real-time payments with automated bank account validation and payment policy screening corporates can set aside suspicious transactions for review while all other payments travel seamlessly. The value of payments modernization, including embracing real-time payments, lies in the endless possibilities it will bring to your future business growth.

Conclusion

Don’t dismiss real-time payments simply because they are new. Kyriba offers the most comprehensive coverage of real-time payments globally and we have taken an API-first approach, allowing CFOs and treasurers to inject real-time data-driven decision making into all financial operations. Whether you are an existing customer seeking to introduce real-time payments into your payment mix or a prospective customer seeking to digitize payments and treasury operations, we are ready to assist you in your journey. Contact us today.

Status of Real-time Payments Globally

Status of Raal-time Payments Globally

Source: Prime Time for Real-Time ACT Worldwide,2022

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Footnotes:

  1. Calculated total cost for issuing a paper check on a per Item Basis (in-house or outsourced)
  2. Calculated total cost for receiving a paper check on a per item basis
  3. Initiating and receiving ACH transaction (internal and external costs)
  4. The median transaction cost for initiating and receiving RTP payments on a per item basis
  5. Calculated cost for sending and receiving wire payments on a per-item basis
  6. Total calculated cost for outgoing payments made (including personnel, IT technology, compliance, audit, etc.) via a card (procurement, T&E, and virtual) per transaction
  7. The internal median cost range for receiving credit card transactions (including personnel, IT technology, file connectivity, encryption, audit, PCI DSS compliance, etc.)
  8. The external median cost range for receiving credit card transactions (including issuer/acquirer/processor interchange, assessment, monthly fees, etc.)

How to use pricing to create an effective hedging program

12-12-2022 | treasuryXL | Kantox | LinkedIn |

In this article, we explore the links between pricing and creating an effective currency hedging strategy. We reveal how a simple PEG framework —Pricing, Exposure, Goals— can allow CFOs and treasurers to correctly define their FX goals, the type of exposure they need to collect and process, and the best hedging program for their business.

Pricing as a hedging mechanism

Transactional currency risk, it is often said, occurs between the moment an FX-denominated transaction is agreed upon and the moment it is settled in cash.

That’s OK, but what if the transaction was priced well before it was agreed, which is a realistic description of how things really work?

That’s why at Kantox, we developed the concept of pricing risk. pricing risk is the risk that between the moment an FX-driven price is set and the moment a transaction is agreed upon, a shift in the FX rate might impact budgeted profit margins.

Closely related to this is the idea that pricing is itself a hedging mechanism. Why? Because you can remove pricing risk by frequently updating your prices.

And that brings us to the topic of pricing parameters and hedging. 

Dynamic pricing

Let us start with dynamic pricing. There is a growing list of industries where dynamic pricing is becoming the norm: travel, chemical traders, hospitality, railways, entertainment, insurance, online advertisement, retail and even shipping.

This trend reflects the fall in transaction costs made possible by the availability of real-time data and the rise of geolocation services and payment apps.

Meanwhile, algorithms take into account supply and demand conditions, competitor pricing and other variables.

Two things need to be considered when it comes to dynamic pricing:

(a) prices are ‘FX-driven’; that is, an FX rate is systematically part of the pricing formula;

(b) prices are frequently updated, therefore leveraging the full capacity of pricing to act as a hedging mechanism. 

Other pricing models

Despite its growing popularity, dynamic pricing is not the only pricing mechanism out there. We can single out at least two other very significant models: 

1. Steady prices for individual campaigns/periods. Some businesses, like catalogue-based tour operators, keep prices stable for an entire campaign/budget period and set new prices at the start of the following period. Things to consider here:

(a) Prices are also FX-driven, just like in dynamic pricing.

(b) The pricing impact of the ‘cliff’, or a sharp FX rate fluctuation between two campaign/budget periods, is fully passed on to customers at the onset of a new period. Here too, pricing acts as a hedging mechanism, but not to the extent it does in dynamic pricing.

2. Steady prices for a set of campaigns/periods. Some firms need or simply desire to keep prices steady not only for one individual campaign/budget period but for a set of campaign/budget periods linked together. Things to consider:

(a) Prices are not FX-driven: the FX rate plays no role in pricing;

(b) The pricing impact of the ‘cliff’ cannot be passed on to customers at the onset of a new period. Pricing, quite obviously, is not a hedging mechanism in this case.

Putting it all together: the PEG framework: Pricing-Exposure-Goals

The PEG or Pricing – Exposure – Goals framework provides actionable clarity when discussing pricing and currency hedging in the context of cash flow hedging programs:

For firms with frequently updated FX-driven prices, the goal is to protect the dynamic pricing rate in all their transactions. The exposure to hedge is the company’s firm sales/purchase orders. The right program is a micro-hedging program for firm commitments.

For companies that keep steady prices during individual campaign/budget periods, the goal is to protect the campaign/budget rate. The exposure to hedge is the forecasted revenues and expenditures for that particular campaign. The right program is a combination of a static hedging program, conditional orders and a micro-hedging program for firm commitments. 

Finally, for firms that keep steady prices across a set of campaign/budget periods linked together, the goal is to smooth out the hedge rate over time. The exposure to hedge is a rolling forecast for a set of periods linked together. The right program is a layered hedging program. 

Currency Management Automation solutions allow you to reach all your goals, whatever the pricing parameters of your business.

Why you need to automate swap execution

22-11-2022 | treasuryXL | Kantox | LinkedIn |

Do you struggle with having a perfect match between your currency hedging position and the cash settlement of the underlying commercial exposure? We’ll let you in on a secret: most treasurers and finance teams do. But how can you simplify this time-consuming and resource-intensive task? In this article, we show why you need to automate swap execution and how you can do it.

We reveal why this is an essential issue for treasurers, how it’s typically handled, and why automated swap execution can help finance teams play a more strategic role in the business. 

Setting the scene

Treasurers know that it is practically impossible to have a perfect match between the firm’s currency hedging position and the cash settlement of the underlying commercial exposure. That’s especially the case if those hedges were taken long before. This is why swapping is so essential.

Let us briefly see an example. If you have a ‘long’ USD forward position with a given value date and you need, say, 10% of that amount in cash right now, a swap agreement allows you to perform that adjustment.

With the ‘near leg’ of the swap, you buy the required amount of USD in the spot market while simultaneously selling —with the ‘far leg’ of the swap— the same amount of USD at the value date of the forward contract. And that’s how you adjust your firm’s hedging position.

Pain points: a resource-intensive activity

Swapping can be extremely time-consuming and resource-intensive, particularly if many transactions, currencies and liquidity providers are involved. We recently saw how a large European food producer was struggling mightily with manual swap execution, a dreadful situation faced by many, if not most, companies.

Among the most common pain points, we can cite the following three:

  • Operational risk. Many tasks are manually executed: retrieving incoming payments, selecting liquidity providers and confirming trades. The entire workflow relies on emails that circulate back and forth with spreadsheets carrying potential data input errors, copy & paste errors, formatting errors, and formula errors.
  • Lack of traceability. Lack of proper traceability hinders the process of assessing hedging performance, as swap legs are manually traced back to the corresponding forward contracts.
  • Risk of unethical behaviour. Understood as the risk that early mistakes that are not immediately reported may lead to severe losses down the road, it is prevalent throughout.

Traceability and automated swap execution

Traceability is when each element along the journey from FX-denominated entry to position to operation to payment has its own unique reference number. But how can we apply this concept to solve the problem of manual swap execution?

The answer is automated swap execution, a solution that is embedded in Currency Management Automation software. It relies on the perfect end-to-end traceability between the different ‘legs’ of a swap agreement and the original forward contract. Meanwhile, FX gains/losses and swap points are automatically calculated. It’s dead simple!

Swap automation is a powerful tool for the treasury team. At the company level, it opens the way to:

  • According to recent surveys, increasing the efficiency of treasury operations is the No. 1 expectation in tech for CFOs.
  • Using more currencies in the business to take advantage of the profit-margin enhancing possibilities of ‘embracing currencies’.
  • Taking a concrete step toward the ‘digital treasury’ is a concern voiced by many CFOs and treasurers.

At a personal level, in terms of the daily workload of members of the treasury team, automated swap execution means:

  • More time to concentrate on high-value-adding tasks such as fine-tuning and improving cash flow forecasts.
  • Reduced stress levels.
  • Increased productivity at work.

And that’s no small achievement! 

Currency Impact Report October 2022

15-11-2022 | treasuryXL | Kyriba | LinkedIn |

According to a recent Kyriba report, the earnings of North American firms will suffer a shocking $34 billion fall in Q2 2022 as a result of headwinds. When compared to previous quarters, headwinds rose by 3583% since Q3 2021 and by 134% from the prior quarter.

Source

Currency Impact Report

The average earnings per share (EPS) impact from currency volatility reported by North American companies increased from $0.03 to $0.10.

The USD is at a 20-year high, and when combined with volatility and interest rate changes, many corporations have seen their currency risk double or triple, as well as their hedging expenses double.

Kyriba’s Currency Impact Report (CIR)

Kyriba’s Currency Impact Report (CIR), a comprehensive quarterly report which details the impacts of foreign exchange (FX) exposures among 1,200 multinational companies based in North America and Europe with at least 15 percent of their revenue coming from overseas, sustained $49.09 billion in total impacts to earnings from currency volatility.

The combined pool of corporations reported $11.82 billion in tailwinds and $37.27 billion in headwinds in the second quarter of 2022.

Highlights:

  • The average earnings per share (EPS) impact from currency volatility reported by North American companies in Q2 2022 increased to $0.10.
  • North American companies reported $34.25 billion in headwinds in Q2 2022, a 134% increase compared to the previous quarter, and 3,583% increase since Q3 2021.
  • European companies reported a 68% percent increase in negative currency impacts, with companies reporting $3.02 billion in FX-related headwinds.
Download the Report