International

The B2B Marketplace Fix For FX In Emerging Markets

VertoFX-eyes-online-B2B-currency-market

Cross-border trade brings with it inefficiencies in cross-currency transactions, especially for firms in emerging markets.  Liquidity and transparency are lacking for so called “exotic” currencies. Fresh off a seed funding round, VertoFX Co-Founder Anthony Oduwole tells Karen Webster why an online marketplace model helps kill the pain points, and cuts out the correspondent banking middleman.

In B2B, cross border payments are about much more than dollars and cents.

We mean that literally.

The greenback and the hard currencies of developed economies (think Great Britain, Germany or Japan)  take center stage and the lion’s share of headlines about currency movements.

But consider the fact that trade is global, and that, increasingly, supply chains are global too. This means that companies looking to pay suppliers abroad must transact in currencies less familiar — and certainly less liquid — than those tied to developed nations.

That can be a logistical challenge for businesses making payments in currencies deemed exotic, defined as belonging to emerging economies in, say Africa, Asia and the Middle East.

International payments can be an expensive proposition where liquidity is scarce, and spreads and FX fees are high.

Against that backdrop, London-based VertoFX, which also has a unit operating out of Lagos, Nigeria, said last month that it raised $2.1 million in a seed round, led by Accelerated Digital Ventures to expand its online marketplace geared toward helping banks and firms make payments across dozens of exotic currencies.

The company has said that it will use the funding round to expand its platform beyond beta testing, hire staff and gain licenses in select countries internationally,

In an interview with Karen Webster, VertoFX Co-Founder Anthony Oduwole illuminated pain points that cause friction along supply chains that have links in emerging markets.

The two year old company has its genesis, said Oduwole, in a bit of personal experience from his own family history in Nigeria — as he said he’d watched family members call upon other relatives in far flung countries to buy goods locally in say, Germany, on their behalf, and send them back home.

That ad hoc system might work well for a $200 or $500 purchase, he told Webster, but it works less well for a business, where personal accounts are not an efficient means of conducting business, and where transactions can reach onto the tens of thousands of dollars.

He said that another impetus to form VertoFX came a few years ago when inflation drove the dollar to be worth several hundred Nigerian naira from a previous rate of 150 naira to the dollar. As a result, the central bank curbed the number of dollars in circulation in an effort to staunch inflation. When the local banks did not have as many dollars in reserve (because they get dollars from the central bank), Nigerian firms were unable to swap currencies to pay suppliers.

“It’s a layer of bureaucracy and inefficiency,” he said of the process, especially for the end clients who may not have deep banking relationships or technology in place to gain access to foreign currencies, locally sourced, to do business with suppliers in Germany or China.

In the best case scenario using the existing cross border infrastructure, said Oduwole — and it’s hardly ideal — is that an executive will go to a local bank and ask that their local currency be swapped for $100,000 USD, because they want to pay a supplier. The bank will take that currency swap request, bundle it with scores of others from other business clients and send them to the central bank.

Of the millions of dollars of requests that might be satisfied, continued Oduwole, funds are likely to be doled out by the local bank to larger or more established key corporate clients.

Those corporates may take certain amounts of business (and currency swaps) every week — so, as Oduwole illustrated, of a $10 million batch of dollars, $9.5 million may have already been allocated, to the detriment of smaller firms vying for the relatively paltry amount left over.

With the resulting liquidity crunch, those companies may have to wait a month to get the currencies they need to do business internationally, said Oduwole. That can create huge bottlenecks and lost revenues, with a detrimental ripple effect on the local economy, especially when overseas suppliers want to be paid before they ship goods. The impact can be profound on a smaller firm’s fortunes, where a month’s wait for currency can translate to several months long wait for goods to arrive. And for a retailer, for example, the wait may mean that what’s is new in stock could be out of fashion as soon as it’s (finally) available.

The Trust Factor

Beyond the liquidity issues that come from this inefficient batch approach, Oduwole said there is another issue that causes friction in international supply chains, tied to the correspondent banking relationship.

Simply put, a local bank in an African country may not have a deep relationship with Citibank in New York. Those banks may use Barclays in the U.K. as a middleman to transact. It all adds fees and time to the process — an transparency is never optimal, as it takes two to five days to settle transactions.

VertoFX’s model, he said, seeks to bring “businesses together from around the world.” A business in the U.S. can transact with a business in Nairobi without involving other players in the transaction.

He said that on VertoFX’s platform, firms can create buy or sell orders, or bid on existing buy/sell orders for foreign currencies.

“You don’t have to go through that pain point of going through Wells Fargo or dealing with foreign exchange rates,” he said, elaborating that “you go on there [on the platform] and there are multiple players you can trade with.”

Platform participants get access to exchange rates, and can negotiate their own exchange rates, and upon agreeing, are required to send the exact funds via individual client accounts to Verto (held in turn in escrow accounts) for settlement once an offer has been accepted.  Settlement occurs within hours, and not days. The trust factor that bedevils offline trade, where one party waits for the other to transact first, is eliminated, he said.

At present, the company is an authorized payment institution regulated by the United Kingdom by the Financial Conduct Authority (FCA), and the firm has also been setting up local settlement accounts in other countries.

With a roadmap of continued rollouts into developing nations beyond the 19 currencies currently available and the ability to settle in 120 countries, he said VertoFX seeks to serve, for example, the local merchant in Ghana who transacts on his mobile phone for trading.

That merchant may not be well versed in the intricacies of buying or selling currencies, but wants to transact for his business the same way he might use AirTel to send money to family members.

“We remove all of the infrastructure pain points,” he told Webster, “that have nothing to do with  businesses” seeking to make international payments.

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