Risk Management

A solution to the challenge of foreign currency receipts

Published: Jan 2017

David J. Cooper, Head of the FX4Cash™ Product Specialist Team in Asia, Deutsche Bank

Managing receivables has always been a challenging piece of the Accounts Payables/Accounts Receivables jigsaw and when those receipts are in foreign currency, the problems are only compounded. In this article, Deutsche Bank’s David J. Cooper, Head of the FX4Cash™ Product Specialist Team in Asia, discusses the opportunities for companies to address the issue and explains how Deutsche Bank has developed a solution to respond to the foreign currency receivables conundrum.

David J. Cooper

Head of the FX4Cash™ Product Specialist Team in Asia

Where is the market today?

Recent bouts of volatility in the currency markets, fuelled in part by the Brexit vote and then the US presidential election result, is increasing the importance of prudent FX management among corporate treasury departments of all shapes and sizes. This is supported by the findings from Treasury Today’s recent Voice of Corporate Treasury Study. When asked “What are you going to be prioritising over the next 12/18 months?” the findings from the universe, comprising over 350 corporates, revealed the number one area rated as very important was foreign exchange risk management/hedging. Furthermore, when asked to select from a list, currency volatility was cited as presenting the greatest risk by a clear margin.

The challenges corporate treasurers often face around transparency and control of foreign currency receipts further underline these risks as a focal point. When not being actively managed, corporates’ FX receipts are typically processed by financial institutions utilising standard/board FX rates. Details including conversion rate, remitter and original amount are not known upfront, as the corporate is generally notified of the execution only after their account has been credited.

In an attempt to manage unhedged FX receipts, corporates typically take one of the two approaches, both of which have operational and commercial disadvantages:

  • Approach one: clients hold multiple currency accounts in which they accumulate receipts.

  • Approach two: clients ask their bank(s) to contact them for every foreign currency receipt which requires conversion in order to agree upon an FX rate.

As David J. Cooper, Head of the FX4Cash™ Product Specialist Team, Deutsche Bank in Asia remarks, “If clients have taken the first approach and manage FX receipts via multi-currency accounts, they could be holding unhedged FX exposure in non-core currencies, with balances only utilised on an ad-hoc basis. Furthermore, they face potential non-FX related costs and/or risks associated with managing multi-currency accounts, including operational, reconciliation and audit costs, as well as bank fees.”

And for corporates following the second approach, the manually intensive process is both expensive and inefficient. The human element prevents immediate execution and exposes the client to FX risk on applicable receipts. Additionally, the process still lacks timely transparency of the flows, potentially impacting liquidity planning for their liabilities.

Innovating to meet market needs and challenges

It goes nearly without saying that banks and other service providers have been alert to many of the challenges faced by corporates. Spending a significant amount of time listening to clients and observing market trends, Deutsche Bank has paid particular focus to local currency invoicing, expansion of shared services centres (SSCs) and their growing demand for pan-regional solutions, as well as the rise of intra-Asian trade.

“This dialogue and analysis highlighted a market gap wherein a fully comprehensive foreign currency receipts offering was not available for the corporate client base,” says Cooper. “Acknowledging the positive impact a solution could make for our clients, we focused on this opportunity area for investment.”

Diagram 1: Transparency and control to meet your needs

Diagram 1: Transparency and control to meet your needs

Source: Deutsche Bank

In doing so, Deutsche Bank developed a solution to effectively manage clients’ foreign currency receipts, without the need to hold currency accounts except in the core functional currency. Clients can issue a single settlement instruction to all their payors and direct all receipts to the required account.

Clients can engage with Deutsche Bank in two different ways:

  1. Instructing Deutsche Bank to manage their foreign currency receipts through pre-defined conversion rules.

  2. Interacting via the FX Payments App (on Deutsche Bank’s Autobahn App Market) to manage foreign currency receipts.

Providing enhanced visibility and control over their foreign currency receipts, the solution allows clients to decide what receivables get converted, how they get converted (automatically or manually), when they get converted, and where they are credited to.

In giving optionality around these decision points, clients can determine their own level of engagement throughout the life-cycle of their FX receipts process. This flexibility is an integral piece of the bank’s product strategy when it comes to providing self-service capabilities across a growing spectrum of cash and treasury management services.

Providing a strategic solution

Deutsche Bank offers this solution through its FX4Cash™ Receivables platform, which functions as follows in response to the what, how, when and where decision points:

What gets converted
  • Clients can receive in up to 35 currencies (subject to market). The funds are converted and credited to a currency and an account of their choice.

  • Clients can also choose to accumulate receipts and book a single FX trade against them. For example, companies in the travel industry might receive multiple small receipts in foreign currency. With this capability, the platform allows them to accumulate and execute larger conversions.

How they get converted
  • Clients can choose to auto-convert below a certain threshold amount, at real time rates.

  • Clients can manage large value payments (above a pre-defined amount) themselves; choosing to either override conversion rules and settle in the same currency or convert to the currency of their choice.

When they get converted
  • Payments can be converted immediately upon receipt, the client can choose to defer the FX conversion (subject to local regulations) to meet future payment needs, or as mentioned above, receipts can be aggregated to book larger, single FX trades.

  • Email alerts can be issued at various stages in the process, including reminder alerts for receivables pending action.

Where they get credited
  • Funds can be converted and credited to the client’s account with Deutsche Bank.

  • Alternately, the client can choose to route funds to their preferred cash management bank post-conversion, subject to local market regulations and restrictions.

Providing corporate clients with additional transparency, a variety of reporting options are available. The solution offers standard reporting, dedicated reporting and online dashboard visibility – at summary and transactional level. Real-time and/or execution rates are evidenced per transaction by a date and time stamp.

Integration of cash management and FX capabilities to include receivables has meant we are able to engage with our clients across a number of facets of their business – helping to cross-functionally identify, analyse and draw upon areas of opportunity within their payment flows.

Some impressive benefits

By integrating their cash management and foreign exchange capabilities to deliver this targeted solution, Deutsche Bank is able to offer their client base a number of benefits:

  • Expansion into new markets:

    Clients have the opportunity to expand their reach by offering invoicing in local currencies and being able to manage the flows efficiently.

  • Enhanced control:

    By consolidating multi-currency flows clients can exercise greater control around which foreign currency positions are being held or get converted respectively.

  • Efficiency and account rationalisation:

    Clients can consolidate accounts, enabling them to minimise reconciliation efforts, fees and idle balances. Additionally, clients can use Deutsche Bank to manage their foreign currency receivables while retaining flexibility over their overall cash management portfolio.

  • Transparency to reduce risk:

    Dashboards, reporting options and alerts provide full visibility throughout the life cycle of the transaction, including payment and FX conversion details.

Cooper concludes, “Looking beyond current volatility, we expect that the forecasted growth of intra-Asian trade will magnify the need for corporates to manage their FX exposures more prudently, as volumes and potentially the number of currencies to manage both increase.”

The FX4Cash™ product suite is built upon a flexible, resilient platform to meet the unique needs of the bank’s diverse client base. Through integration with Deutsche Bank’s existing client access channels, extensive reach to global payment and clearing systems, as well as leading FX trading infrastructure, it provides its clients with a one stop solution for cross-border currency payments and receipts worldwide.

In a bid to help corporate treasurers meet their strategic objectives with regards to foreign exchange risk, Deutsche Bank continues to build upon the strong FX4Cash™ foundation with this comprehensive new foreign currency receipts product offering.

Disclaimer

This article is for information purposes only and is designed to serve as a general overview regarding the services of Deutsche Bank AG, any of its branches and affiliates. The general description in article relates to services offered by Global Transaction Banking of Deutsche Bank AG, any of its branches and affiliates to customers as of January 2017, which may be subject to change in the future. This article and the general description of the services are in their nature only illustrative, do neither explicitly nor implicitly make an offer and therefore do not contain or cannot result in any contractual or non-contractual obligation or liability of Deutsche Bank AG, any of its branches or affiliates.

Deutsche Bank AG is authorised under German Banking Law (competent authorities: European Central Bank and German Federal Financial Supervisory Authority (BaFin)) and, in the United Kingdom, by the Prudential Regulation Authority. It is subject to supervision by the European Central Bank and the BaFin, and to limited supervision in the United Kingdom by the Prudential Regulation Authority and the Financial Conduct Authority. Details about the extent of our authorisation and supervision by these authorities are available on request. This communication has been approved and/or communicated by Deutsche Bank Group. Products or services referenced in this communication are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. For more information: www.db.com

Copyright © January 2017 Deutsche Bank AG. All rights reserved.

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