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How is your business generating new customer demand? For many, the answer lies in expanding into new markets, with 45% of finance leaders reporting this as a key strategic priority (Source: Growth Ignition Index Report).
Expanding into new markets allows you to raise awareness of your products and services amongst a previously untapped customer base, offering significant growth potential.
However, market expansion also comes with many unique challenges and considerations. Cross-border payments in particular can cause a headache for businesses looking to trade in new markets, with exchange rate risk a notable challenge.
In this article, we explore the role of centralised banking in minimising exchange rate risk and simplifying payment management.
What is exchange rate risk?
Exchange rate risk refers to the potential losses that your business can experience when completing transactions that involve more than one currency.
Fluctuating exchange rates can mean that you end up spending more than expected if the exchange rate between currencies changes in the time between the transaction being agreed and settled.
We know that settling invoices can be a long process for businesses. The Growth Ignition Index Report found that fewer than a quarter of businesses can process an invoice in under 24 hours. In fact, 40% of the businesses surveyed reported that it took them over four days to settle an invoice. This extended window for invoice settlement leaves businesses exposed and especially vulnerable to exchange rate fluctuations.
Exchange rate risk can not only directly impact your revenue and profit margins, it can also add uncertainty to cash flow predictions, making finding the right mitigation strategies for your business critical.
How do companies reduce exchange rate risk?
There are several different strategies employed by businesses to reduce exchange rate risk. For example, on the supplier side, businesses may choose to invoice in their native currency, meaning they are guaranteed to receive a set amount, whilst the payee assumes the risk of fluctuating exchange rates.
If not invoicing in native currencies, decreasing payment windows is another strategy that can provide some assurances for both suppliers and payees. By decreasing the window in which the exchange rate can fluctuate, the time in which currencies may change is minimised.
However, it is important to note that shorter payment windows require your business to be equipped to settle invoices quickly, which as explored in The Growth Ignition Index Report, can be a challenge for many finance teams.
Centralised banking provides an alternative solution to help mitigate exchange rate risk. Conferma’s centralised banking network allows you to issue virtual cards using any of your global banking partners from one platform. This means that you can utilise in-region banks to make business payments in the local currency, whether you need to pay suppliers, book corporate travel, or manage employee expenses.
Understanding how Conferma can assist with exchange rate risk
Conferma is partnered with 80+ issuers globally. Many of our customers work with multiple banks and our centralised platform allows them to access all of these banking partners in one place to issue virtual cards, capture business spending, and reduce misuse.
As summarised by Dr. Carl Jones, GBTA Advisory Board Member, in episode three of The Payments Insider Podcast, “One of the benefits, and the value, that a more international system can bring, and mitigate … is currency exposure. If you’re doing a lot of cross-border trade, there’s a risk there of currency changes … so, making sure you’ve factored that into your business case, that you’ve got methodology to try and mitigate and overcome that.”
“Can you just expand on what you currently have in your markets that you do operate in? Which just makes that scale a much easier step forward rather than trying to bring in a brand new system and brand new set of processes.”
For existing virtual card customers, the same API connection can be leveraged to onboard new card accounts with new banking partners, allowing your virtual card account to grow with your business.
To get started, book a demo with our specialists and learn more about how virtual card payments can support your business.
