A company doesn’t have to be a massive, multinational corporation to feel the punch of foreign exchange (FX) volatility. Small and medium-sized firms (SMBs) are more encouraged than ever to expand across borders, whether that be trading internationally or physically traveling to new markets to conduct business.
American Express data recently found that U.S. businesses trading internationally feel they are in a better position because of it, and remain optimistic despite global market uncertainties like trade disputes.
Those uncertainties, however, can increase foreign exchange rate volatility, according to Volopa‘s Managing Director Graham Smith and Director of Business Development Jay Wissema. While businesses of all sizes are perking up to their exposure to FX volatility risk, not everyone is aware of how to address it.
“There have been recent events that have escalated the importance of FX volatility and managing it, whether it’s trade disputes happening internationally at the moment, or Brexit,” Wissema told PYMNTS. “However, I would say many businesses do not fully understand, or have awareness of, the different risk management tools.”
SMBs particularly appear challenged by FX risk mitigation, he noted.
In a 2016 survey from East & Partners, researchers emphasized a suppressed use of more sophisticated FX risk mitigation tools, like options among the small business community. Canadian SMBs were found to use options more than firms in any other market surveyed, but even so, only 29 percent of businesses deploy the tool. Less than half of smaller firms deploy options and forward tools. On the whole, small firms are less likely to use currency management tools. However, solutions like hedging and options aren’t the only tools available for companies to manage cross-border payment risks.
Enter: the prepaid card. Unlike other card products, which charge FX fees and deploy exchange rates at the time of purchase, Smith noted that prepaid cards enable executives to preload multiple currencies onto a single card at a particular exchange rate, offering companies greater control and transparency over their FX exposures.
“What a corporate could do using a prepaid card is, if they watch the markets [and] if the exchange rate is in their favor, then they have the opportunity to go in and exchange their currency, stock up on euros, for example, and they can use that euro balance on the prepaid card,” Smith explained.
Such is one of the cross-border payment offerings from Volopa, linking both consumers and corporates to one prepaid card on which companies can preload several currencies at the exchange rate offered at a single moment in time.
“It’s like having 14 local cards within your wallet on the same card,” Wissema added.
One significant downside to this strategy is that there is always the chance that FX rates will decrease after a purchase of one particular currency has been made and loaded onto the card. However, both Smith and Wissema said that purchasing currency at a rate that is known to be favorable to the business means CEOs and CFOs can not only save money on what might otherwise be more expensive currency rates, but have a clearer picture of spend. Rather than getting hit by currency rates that fluctuate from the beginning to the end of a business trip, and rather than executives finding out what those rates actually were at the end of the trip, prepaid cards offer businesses the chance to know what they will be paying ahead of time.
Wissema acknowledged that Volopa is far from the only FinServ provider offering companies a solution that deploys the prepaid card to mitigate FX volatility risk. Indeed, East & Partners’ 2016 survey found that as more businesses pay attention to that risk, more solutions emerge, creating a fragmented market of foreign exchange and cross-border payment offerings.
“There is an increasing number of FinTech [firms] entering this space, with solutions like the multi-currency card we offer,” noted Wissema. “Others offer types of payment platforms like the Ripples and IBMs of this world.”
According to Smith, business clients need friction associated with cross-border payments to be addressed at multiple points. It may be the friction linked to supplier payments in other markets or the friction that comes with business travelers making expensive payments in another currency. Finance execs need greater control, as well as a payment solution that can be accepted pretty much anywhere, he said.
Otherwise, for businesses that aren’t deploying some type of strategy to mitigate FX volatility risk, exposure compounds the friction linked to international payments, he added.
SMBs, in particular, struggle to fully understand the weight of those risks and challenges, said Wissema. Legacy offerings and service providers can be expensive, so while today’s cross-border FinTech market may be crowding up and fragmenting, education is key to businesses of all sizes understanding that there are options out there to manage FX risk.
“The currency conversion market is in a state of disruption,” Wissema continued. “I think that disruption has already started. We are definitely seeing a shift.”