00;00;02;07 - 00;00;34;14
Unknown
How should corporate treasures manage the FX risk in business-to-business transactions? What is the future of B2B payments? Welcome to CurrencyCast! My name is Agustin Mackinlay, I'm the Senior Financial Writer at Kantox and your host. In this episode, we have the pleasure to welcome Enrico Camerinelli, a Senior Research Analyst specialising in supply chain finance and B2B payments. He's also the author of the book Measuring the Value of The Supply Chain.
00;00;34;16 - 00;01;00;24
Unknown
Enrico, a very warm welcome to you and thank you for joining us today on CurrencyCast. And thank you for the opportunity of having me in your interesting podcast. Alright Enrico, can you start by introducing yourself to our audience, please? Sure. I'm Enrico Camerinelli, I'm based out of Italy and I'm a strategic advisor and Senior Research Analyst with Datos Insights, an international global research and advisory company.
00;01;00;27 - 00;01;25;25
Unknown
And as you Agustin said, my areas of courage are mostly in the business-to-business space. I have a corporate background, and so that's why I bring my experience to the table. Well, that's great, Enrico. It's great to be speaking to an expert in foreign exchange risk management in the context of B2B transactions. As you know, it's a major area of interest to us at Kantox.
00;01;25;27 - 00;01;55;26
Unknown
So you've just published a report or authored a report on B2B multi-currency processing methods. Can you tell us a little bit more about this report, Enrico? Yes, the notion of business-to-business multi-currency is quite important. I have to say that I got inspiration after following Agustin one of your podcasts. And so I started wondering if I am a banker, how can I better serve as my corporate customer?
00;01;55;26 - 00;02;26;19
Unknown
And if I'm a corporate user, how can it best execute my, you know, currency conversion processes? And so I just wanted to see what the market offers out there. So I would say under the perspective that, and I think we'll be touching this later on, that when we look at FX conversion to simplify, it’ss not just a one-off, it's not just the event of turning a currency into another, but this is part of a longer journey.
00;02;26;21 - 00;02;50;08
Unknown
And so I wanted to help our bank- and corporate clients to understand what are the options out there in terms of technology solutions, but also in terms of practices. And what needs to be done in order to better execute this very important part of a crucial business. Right. I think we're on the same page here on, you know, at Kantox we like to discuss the whole
00;02;50;10 - 00;03;25;29
Unknown
foreign exchange workflow, all the way from pricing with an FX rate to the assessment of the exposure to be hedged, the trade phase itself. And then as you mentioned, the conversion. And even then maybe the swap executions and all of the reporting and accounting, so it's an entire process that needs to be managed. Enrico: tell us what's at stake when we discuss the foreign exchange risk in business-to-business transactions?
00;03;26;02 - 00;03;59;11
Unknown
One of the biggest risks is not realising that, again, you know, FX is an overarching flow. It's a long journey. So the biggest risk is just focusing or thinking of someone you know can take care of that while the big portion, you know, the big things stay somewhere else. So if FX risk is not properly managed, especially in business-to-business transactions, what you have is two counterparts that are very complex, you have many personas on both sides of the business.
00;03;59;13 - 00;04;16;23
Unknown
The biggest risk is not making the best use of your liquidity. And when I speak to corporate treasurers, you know, they tell me that nobody loses his or her job if they don't make that extra basis point. But they definitely risk losing their job if they don't make the best use of the liquidity of the company.
00;04;16;29 - 00;04;38;17
Unknown
And so making sure that you don't keep idle currency or idle cash unutilised. So keeping too high-security buffers, for instance, can be a big risk because that is, you know, a cost for the company. And the other thing, and I do believe that this is also something we will be touching upon later, so I don't want to cover everything
00;04;38;17 - 00;05;04;13
Unknown
now, is the risk of missing the opportunity to better negotiate with clients and suppliers, so with your business-to-business counterparts. And again, as I said before, and I am even more convinced of this is that the big risk is that considering FX, as I've been hearing many times, like an unavoidable pain, you know, sort of a cost of doing business would force us
00;05;04;13 - 00;05;35;29
and this is where the risk comes in, to just seeking for the least costs of doing the least cost basis analysis or looking for solutions that are cheap without, you know, considering that the risk is that just looking at the small portion or having that limited view of what B2B FX is, is missing the big picture. So it's not so much about technology, it's not so much about new FX, say, the techniques, but it's rather missing the big picture. And that is the biggest risk if not doing it well.
00;05;36;01 - 00;06;08;24
Unknown
Right. So, again, I think we're on the same page. And it’s very interesting that you make that connection between, foreign exchange risk management and liquidity management. We'll come back to that in a couple of minutes. Enrico, when you analyse FX risk in the context of transactional risk, do you mostly consider the time lapse between the moment a firm order is agreed upon and the settlement, or maybe perhaps between the moment the invoice is issued and the settlement?
00;06;08;24 - 00;06;32;20
Unknown
Or do you consider both? You know what, this is where I really hope that people, how can I say, trust in my good faith. So even though this is a session organised by Kantox, I'm referring to the Kantox model moving from pre-trade to execution to confirmation down to nothing and settlement and reconciliation,
00;06;32;21 - 00;06;54;09
as a real workflow, I would say that it really should lead. And I make this clear also in that report you were mentioning before, that you might have as a Treasurer the need of just looking at one leg of this longer journey. But at the end of the day, you need to have the full picture.
00;06;54;09 - 00;07;18;29
Unknown
And so also when coming to optimising your FX conversion cycle, making sure that you have all the things in place, you must still be working with your Excel spreadsheets, doing something that you know is inefficient. But just because you are optimising one of the most one of those sort of stacks that you feel as a tracker being most important for your specific needs.
00;07;19;02 - 00;07;45;19
Unknown
So I would say when it comes to transaction risk, if you look at the big picture, remembering that the forest is made of trees and so making sure that you're looking at the right trees and not chopping the wrong one, right. Right. Yes. Really interesting. Now, Enrico the other day we had the opportunity to discuss the foreign exchange headwinds faced by two global companies, very successful ones, Netflix and Swatch.
00;07;45;21 - 00;08;27;02
Unknown
And then we moved to maybe away from the transactional risk and we considered the forecasted exposure. And in the case of Netflix, they want to, they consider their exposure to currency risk in the shape of rolling forecasts for budgets across a number of periods. Whereas Swatch is more interested in a particular campaign period, the particular budget period. Do you see differences in the way currency risk should be managed in the context of those different types of forecasted exposures?
00;08;27;05 - 00;08;50;29
Unknown
You know, the answer is usually the answer that I hate, but I have to use now is, you know, “it depends”. I mean, rather than “it depends”, I would say it's important that whatever technology, whatever approach is taken is made there with the understanding and with the acknowledgment that, you know, long-term cash flow exposures require a different type of FX risk management.
00;08;51;01 - 00;09;21;21
Unknown
So what really matters is considering, some would say key points that will avoid making mistakes or making the wrong steps, whichever than the particular technique is used. One, for instance, is the cash flow hedging. So you want to stabilise your financial performance and so you want to make sure that you have a proper hedging strategy. But the hedging techniques, are not a one, as you know, they're not the one solution for all.
00;09;21;23 - 00;09;55;13
Unknown
It must be based on the nature and especially on the duration of the exposure of the cash flow. So you have to be adaptive. In order to do this as a treasurer or somebody who works in this, following these processes, then you want to make sure that you have the proper metrics or measurement system. So being able to identify the underlying exposures from your forecasts, the cash flow forecast, making sure you know how to analyse them and determine the value of risk or other metrics for the exposure of FX.
00;09;55;16 - 00;10;25;03
Unknown
And then when it comes to being able to handle, to analyse and to measure and to decide what are the hedging techniques you want to use for the particular duration of nature of exposure, the conundrum now is, should I, especially if I'm a multinational organisation, should I centralise, should I decentralise? What I see in general is that you need to have a centralised policy, common rules.
00;10;25;06 - 00;10;50;13
Unknown
You also might want to centralise funds and this is why you need to have a proper system that allows you to distribute the funds properly. But the more you're able to at least centralise the logic, the policies, the rules of engagement, you can then apply your multi currency notional pooling or optimise the use of intercompany positions. And in order again to release idle cash and optimise your exposures.
00;10;50;15 - 00;11;37;06
Unknown
So this centralisation, so at least centralise the logic of the rules and decentralise the execution, is also related again in what are, according to my reserves, the best practices. Is also having a risk management policy that instead of being widespread, each department unit follows its own. Even though I do appreciate that you might have regional or domestic or some also national regulatory requirements that are necessary. But you need to have sort of a governance, central governance, and then you can deploy and adapt locally as much as you can, or as much as necessary, but always making sure they have that sort
00;11;37;06 - 00;12;16;10
Unknown
of centralised rules of engagement established by your central treasury. Right. You know, we are also fans in general of the FX centralisation. But as you mentioned in the context of the wider trend towards more efficient cash management. Enrico, to go back a little bit to the Netflix-Swatch comparison there. I was really interested in the example of Netflix having to deal with currencies with different interest rate differentials to their functional currency.
00;12;16;16 - 00;12;45;03
Unknown
And of course, as you will know, for any currency manager, to be able to manage those differences between spot and forward rates, either in hedging or in pricing, is such a vital element. In the case of Netflix, if they sell series in euros like Class Act about the life and times of Bernard Tapie, they will have favourable forward points.
00;12;45;03 - 00;13;18;09
Unknown
In other words, the euro trades at a forward premium against the dollar. But if they sell other series in Brazilian reais, then they will have those forward premiums against their or they would be unfavourable. The question is beyond the technical aspects, do you think that treasurers should take more advantage of all those opportunities either for pricing purposes or hedging purposes?
00;13;18;09 - 00;13;50;04
Unknown
Do you think there's sufficient awareness of all the possibilities of managing this relationship? I think that this actually is where the treasurers can really take advantage of their, I would say, what is called technical skills and knowledge in something that tends to be quite obscure to those who are not on a daily basis looking at these FX conversion strategies and policies and techniques.
00;13;50;06 - 00;14;19;18
Unknown
We know that corporate treasurers expect to be more sort of working to be more strategic in their advice within their organisations. And so if, you know, the treasurers want to move away from their sort of inner cubicle and make sure that they can contribute to the benefit of their organisation, as I said before, you know, nobody is looking how much you are saving in terms of basis points.
00;14;19;18 - 00;14;55;07
Unknown
Of course, that's a nice to have, but rather, you know, are you helping as a treasurer to make the best use of our cash and especially if we have limited cash, access to cash, where can we find it before we go and, you know, and borrow money? So in these strategies of favourable versus unfavourable forward points, what I'm mostly interested in is the commercial opportunities of FX-based pricing that allows or that treasurers should take advantage of, in order really to have that role within the organisation.
00;14;55;09 - 00;15;23;11
Unknown
So in order to help the company improve its commercial relationship, and when I say commercial is with their clients, but also with the suppliers, because it's always a negotiation and there's always money involved. So first of all, making sure to have a solid and reliable forecasting system, we always have to go back to the basics of forecasting. And of course the Treasurer also can contribute in providing the necessary information and sort of tools to improve that.
00;15;23;14 - 00;15;53;25
Unknown
Once that forecasting is in place, I remember when I was working on the corporate side, I was working on a logistics supply chain and we had still, you know, those operate mostly in highly complex manufacturing, very deep organisations. That's something which is called the S&OP sales and operation planning. So it's, you know, salespeople sitting next to manufacturing, production people sitting next to those who are in procurement and each one marketing and each one has their own budget and forecast.
00;15;54;03 - 00;16;22;08
Unknown
And you have to harmonise them. So because at the end of the day, you know, you either need money or you know where the money is coming from. So once you have this in place, evaluate the opportunities that FX pricing opens in the market dynamics of your counterparts. Because again, you might strike a better deal with your suppliers and with the customers if you are ready to pay or to receive money in the local currency of the client.
00;16;22;11 - 00;16;48;13
Unknown
And just to say how important FX pricing is, I wrote a few years ago, as you said at the beginning during your kind presentation, that one of my areas of coverage is supply chain finance. And I wrote a report where basically I was making the point that FX so that the practice of FX normally you would not consider it as part of a supply chain finance program.
00;16;48;15 - 00;17;19;17
Unknown
A bank that has a SCS program would not include FX within the portfolio of solutions, but in reality FX and all the tools and the practices is quite instrumental in making a successful supply chain finance program and schemes. Because, you know, you can have the best solution to discount on invoice or to allow your suppliers to be paid on time or even before the invoice expiration date.
00;17;19;20 - 00;17;43;25
Unknown
But what if they want to get paid in euro and you are a US dollar company? Or vice-versa. And so when the recommendation I’m making to two banks that come to me and say and ask what kind of features do we should we have in our supply chain finance proposition, and also when we speak to sort of those who provide supply chain finance platforms are the fintech vendors.
00;17;44;02 - 00;18;02;21
Unknown
You know, I tell them, do you have an FX capability there? And the typical answer would be, well, we have FX, but it's, you know, resident somewhere else. And I tell them, you know, you should bring that within the, you know, the overall picture of the overall portfolio because that would augment the value of what you're offering.
00;18;02;23 - 00;18;32;02
Unknown
And so the possibility of having, you know, proper tools that allow you to anticipate or to decide whether it's favourable or unfavourable. Again, it’s something that certainly can help in the immediacy of the particular need. Because at the end of the day, you need to cash in or cash out a currency which is not yours with all the inherent risks. But also making sure that that is not only a transactional, as you were of course anticipating before, is not to be seen only as a transactional level, but also as a complementary
00;18;32;02 - 00;18;53;17
decision support system, as I like to call it. When maybe you as an organisation want to endeavour in supply chain finance or trade finance propositions where the component of the difference of currency is natural. Because especially if you, you know, trading with clients or suppliers, most likely there will be trading in a different currency. All right.
00;18;53;21 - 00;19;26;23
Unknown
Yes, you touched on so many points there, pricing, removing the silos mainly between teams, the commercial and the finance team and then, of course, communication skills right on the part of treasuries to be able to explain all of that. We would like to say that they need to explain to commercial teams why it is important, for example, to price with a forward rate in the event of, say, selling in a currency that trades at a forward discount in order not to lose money.
00;19;26;23 - 00;19;57;06
Unknown
Right. Or if the contrary happens, if you sell in a currency that trades at the forward premium, maybe you should hedge and take advantage of those forward points and lower your prices and become more competitive. And I think you're raising this issue is the importance of communications within the finance team, and especially in the Treasury, towards the rest of the organisation. Enrico, what about a topic that is also really interesting to us?
00;19;57;06 - 00;20;35;01
Unknown
I'm sure you will have so important things to say about this and to put it in context, a couple of hours before our discussion, we were talking to a former senior treasurer at IBM and he was recalling former times when forcing customers to buy their products in U.S. dollars right at the time of the Asian currency crisis.
00;20;35;01 - 00;21;08;02
Unknown
Then one day they faced a tremendous devaluation in the Indonesian Rupiah. And what it meant to them is an enormous loss. Right. Because then you have an element of credit risk in your accounts receivable. So how do you use currency management to be able to sell in the currencies of your customers and avoid these episodes of enhanced credit risk in your receivables?
00;21;08;04 - 00;21;35;12
Unknown
Yeah, well, you know, sometimes the problems are unavoidable. So you know it's if problems hit the fan, you know you will get them in your face. But the point is, you know, the immediate answer would be as more as you can have on time or I wouldn't call it real time because real time as to be done at the millisecond.
00;21;35;14 - 00;22;06;27
Unknown
I would rather say an on demand solution that allows you, based on your needs, based on your strategies, allows you to give the best information that can help you make a decision. So again, looking at the long cycle, the fact that Indonesian Rupiah crashed, you know, it's not something that I mean, it happens overnight, but that might be some signs of it somewhere, you know, before it happened.
00;22;06;29 - 00;22;51;29
Unknown
And so again, considering the big picture where the information, the measurement, when you know that you're operating in, say, potentially say risky countries in terms of, you know, currency fluctuations, there are also those intangible elements that must be taken into consideration. This is where the real value of the treasurer comes ashore. Because that's where the treasurer is able to detect those feeble signs, you know, those elements that are, you know, presumably not connected, but they do have a solid, you know, a solid thread with the decision to be taken.
00;22;51;29 - 00;23;18;07
Unknown
Of course, the more you have a system that allows you not only to be capable from an operational perspective, but also is able to collect, to detect and analyse. I don’t want to get into the artificial intelligence, you know, conundrum, because I think that those things can also be done with the more, let's say, basic technology. But the possibility of collecting the relevant data and being able to analyse them.
00;23;18;14 - 00;23;45;03
Unknown
And that's a real key differentiator. And that is what differentiates, you know, the Treasurer from the rest of his or her corporate colleagues. Because, when it comes to for instance even deciding, again I go back to my times when I was working in operations and we did have a very, you know, sort of clever corporate treasurer colleague who was able to speak, as he said, the business language.
00;23;45;05 - 00;24;14;05
Unknown
And so, you know, I was responsible for finding maybe new suppliers or new suppliers in terms of service, you know, logistics services, for instance, warehouse. Deciding where the next manufacturing plant was to be established or where to put, you know, a new warehouse. And the typical metrics we would use, it was the distance from the clients, the cost of the material.
00;24;14;07 - 00;24;36;17
Unknown
But since it was not my job and I had no understanding, I didn't know that I should have also considered factors like currency risk or currency factors and how to hedge them. And so you need to have that. But of course, as a Treasury, you cannot you cannot go to someone who doesn't have your skills and start speaking about forwards, about points, about, you know, FX.
00;24;36;19 - 00;25;19;13
Unknown
So I would say the role of the business partner of a corporate user, in this case Kantox is on one side to provide the necessary solutions, but also helping that person to speak the business language. Because many times in my experience, the real value is not so much convincing the person you have in front of you that he or she, you know, should be investing in a new solution is helping that person to build the case within the organisation. To explain what are the impact, the positive impacts on other lines of business that are not necessarily rates to finance, but can benefit from a more efficient
00;25;19;13 - 00;25;43;09
way of managing that thing that they don't know what it is, they don't care about it, but they might suffer if it's done wrong. So if you again, if the Indonesian Rupiah crashes and I insisted as a logistics person that I want you to have all my warehouses in Indonesia and I had warning signals but I didn't care because you know, currency is not my business.
00;25;43;09 - 00;26;11;25
Unknown
My business is moving boxes. And if you know that was not properly discussed internally, then something that I would have considered so far away from my responsibility instead drops in my feet and it makes me stumble. It's all about communication and unfortunately, the response, or fortunately, depending on how you see it, the responsibility of the role is on the shoulders of the Treasurer.
00;26;11;28 - 00;26;58;18
Unknown
Right. Look, I agree 100% we call that at Kantox embracing currencies in other words, speaking the language of currencies is you know, it's a little bit like if you go to sell, you're a French company, you want to sell a product and in Poland, you're not going to advertise in French, right, you need to use Polish language. And mostly the way we would handle this would be to embrace currencies, to take ownership of the foreign exchange risk management and avoid this credit risk in receivables problems by selling in the currency of your customers. And also by contracting in the currency of suppliers
00;26;58;20 - 00;27;33;05
Unknown
you would be in a position in certain cases to get extended payment terms. So that means, as you said, the link between foreign exchange risk management and liquidity management is always there. Enrico, let's take a look at the payments space. The business-to-business payments space. I read the other day the impressive annual letter by Stripe and they mention that in 2023 alone,
00;27;33;07 - 00;28;08;20
Unknown
they added support for no less than 50 new payment methods, and that brings the total to over a 100. So yes, that includes B2C, but B2B. So, Enrico we would like you to bring us clarity in this matter. What is happening in the world of B2B payments? Okay. Well, it is a fact and you already alluded to this, that the lines between B2C, so business to consumer, and business to business, B2B, are blurring.
00;28;08;23 - 00;28;47;05
Unknown
What happens also is the B2C user is almost always a B2B user as well. So the experiences, the expectations that you have as a consumer also reflected in your expectations as a business user. The point is that we know what is important that banks and also solution providers are aware of is that the experience of a consumer, even though the same person is then a business counterpart, the expectations of a business user are totally different.
00;28;47;05 - 00;29;28;01
Unknown
First of all, because in a B2C environment you have just to say your counterpart, is the user is a consumer. And so in that case, the customer experience is giving them a nice user interface, a nice set of apps that they can use mostly on a smartphone or a mobile device. When you get into the business, business to business space, as you are saying before, you don't have just a one your counterpart, you have multiple facets of personas, treasury payments, receivables, logistics, marketing, sales, I.T.
00;29;28;03 - 00;29;50;07
Unknown
And each has their own budget, and has their own needs. And so the experience when it comes to the business user is not so much having a fancy user interface, although you know that is nice to have, but rather being able to have that horizontal and end-to-end visibility of all the positions that are for which the person is responsible.
00;29;50;09 - 00;30;36;08
Unknown
So this could be and has been somehow a limiting factor in the B2B space that the consumer and B2C was much ahead in terms of solutions, in terms of devices, in terms of tools. While B2B still is very much a focus on point to point connections, file transfers, Excel spreadsheets and something more. But the point is that the business user, first of all, because as a consumer has that experience, but also because the financial institutions and also fintech vendors are constantly informing, educating the market on innovative technologies, on digitalisation, on the user experience.
00;30;36;10 - 00;30;59;17
Unknown
And so the more these corporate users become aware and informed of what technology can provide, also the business space, the more they expect to see tangible results and solutions. So the point now is, you know, and many times I'm telling banks that say we don't want to sell products, we want to sell solutions. I say that's fine.
00;30;59;17 - 00;31;20;14
Unknown
That's a nice statement, but are you ready to speak the same language of your customer? If that customer is operating, let's say in the automotive industry, the way they manage payments, for instance, you know, just most basic B2B transaction is going to be quite different, especially in terms of data that's going to be collected and exceeds that
00;31;20;14 - 00;31;52;28
Unknown
if that same customer is working in the pharmaceutical industry or is working in a real estate industry. So the more you as a bank or as a fintech provider, you want to go and provide a solution to your B2B to your customer that operates in the B2B environment, you must be able especially to understand the business needs and the business problems of that, you know, of your counterpart in order to build I would say an ecosystem of solutions that maybe you need.
00;31;53;03 - 00;32;20;12
Unknown
You need to aggregate also with other partners of yours to bring that solution to the table of your customer. And so the more information is exchanged, the more the expectation rises on the B2B side. All right. Now, I like this idea that you say B2B and B2C are relatively so well related one to the other, especially as the Treasurer is also a consumer.
00;32;20;12 - 00;32;52;19
Unknown
Really interesting point of view. Enrico real quickly, what about instant payments in the business-to-business world? Tell us what's happening. Maybe the differences between the approach in the United States and in Europe (FedNow is the latest innovation) in instant payments. Really quickly, tell us what are the main challenges and what do you see in that space?
00;32;52;21 - 00;33;17;22
Unknown
Yeah, well, I would say, you know, I don't know why the Americans are so good at complicating their lives! Because the best thing they could have done, according to me, and not only for payments, is just look what the Europeans are doing. Not because we are smarter, but just because we have such a more regulated environment that if you see and come and see what the mistakes we have done in the past and how we resolve them, you're better off being fast and quicker.
00;33;17;24 - 00;33;42;21
Unknown
But the situation is that now they in the US have these two sorts of instant payments, the RTP and FedNow. And the main difference I would say is that the RTP is more like a centralised model. So in your account-to-account transactions, you need to settle through a joint account that is held by the Federal Reserve Bank of New York and you can have payments up to 1 million.
00;33;42;21 - 00;34;18;18
Unknown
What about FedNow? The clearing is already done by the Fed and the Fed is more for low-value payments. So I would say this is the major difference.The instant payments in in Europe: the SEPA credit is the instant payments is they cover both euro and non-euroo and especially that you have sort of an execution time has to be within the 10 seconds clocks on the set of sort of, you know, elements that I would say just add the burden of complexity.
00;34;18;20 - 00;34;51;10
Unknown
Right. Well, Enrico Camerinelli, Senior Research Analyst specialising in supply chain finance B2B payments. Thank you very much for joining us today. We've covered a lot of topics. We started out with what's at stake in FX risk management in the context of B2B transactions. We discussed a little bit the alternative in terms of the type of exposure that managers need to deal with.
00;34;51;12 - 00;35;23;11
Unknown
We went on to discuss the B2B payments space. Is there something you would like to add? I would say just to close the picture, I would pay attention to, you know, something that always pops up in conversations these days: embedded banking and banking-as-a-service, because I do believe strongly that FX and FX processing is the best candidate to sort of implement and to build the use cases for whoever is looking at banking-as-a-service propositions.
00;35;23;14 - 00;35;33;01
Unknown
All right. All right. Well, thank you very much for joining us today on CurrencyCast. We'll see you next time. Thank you very much for having me with you today.
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