How corporate cards mitigate FX risk

By:
Paul Golden
Published on:

In addition to facilitating more efficient payments, corporate cards can also help treasurers reduce their FX costs.

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While much has been said about the liquidity, treasury data and risk-management benefits of commercial cards as a source of supply chain financing and cash management – as opposed to merely being used for expenses – the FX benefits should not be understated.

Whenever a business makes a payment in a non-functional currency – any currency that is not the main currency used by the business – it is automatically exposed to risk and fluctuations in exchange rates.

Businesses are realizing that traditional methods of paying international suppliers on invoice with short payment terms and in foreign currency are slow, time-consuming and do nothing to maximize cash flow.

melissa-Gargagliano
  Mel Gargagliano,
BAML

That is the view of Alan Gillies, sales vice-president at American Express (Amex) global corporate payments, who explains that one way of maintaining good relationships with suppliers whilst minimizing the complexities of FX is to set up a foreign-exchange international payments account that allows funds to be sent and received online.

This solution also manages currency fluctuations as users can receive rate alerts via email or text message when a specific rate for their chosen currency is available, or lock in exchange rates with forward contracts.

Corporate card programmes that help companies transact, settle and report in the currencies in which they operate are now available in all major currencies, adds Mel Gargagliano, head of commercial cards global transaction services EMEA at Bank of America Merrill Lynch (BAML).

She says that while Sepa has been a great enabler in removing much of the complexity associated with cross-border trade in the eurozone, global organizations continue to remain exposed to FX fluctuations.

Gargagliano adds that rather than focusing purely on the vendor that offers the highest rebate, strategic procurement teams should partner with their treasury counterparts to ensure their payment provider not only has a robust card programme but can offer a comprehensive suite of financial solutions and services.

Amex’s Gillies observes that as payables solutions proliferate, businesses are also are shifting international transactions onto corporate cards and using their virtual account numbers for procuring goods and services overseas, driving more cross-border transactions.

"By charging payments to a corporate card, suppliers get paid quickly while companies can get up to 58 calendar days’ interest-free credit, which puts them in a much stronger position to get preferential exchange rates as well as early payment discounts," he says.

Using a card-based solution, the customer would simply define the amount to be paid and schedule the payment
Maria Parpou, Barclaycard

According to Peter Sorenti, vice-president, product management EMEA at First Data, with a larger number of organizations purchasing goods and services overseas it is becoming more important cards that are embedded within purchase order and procurement processes are issued in the core currencies of GBP, USD and EUR.

"Cards issued in these currencies help drive down the cost of currency-conversion fees and the higher rates of exchange applied by the schemes – the payment networks, such as Visa and MasterCard," he says.

"For currencies outside of the core three, USD cards are usually issued as this is the most stable currency in the market and therefore provides a reduced level of FX financial impact from fluctuating exchange rates."

The segregation of spend by currency also improves account reconciliation as all purchase orders/invoices, transactions, and billing and settlement is performed in the single currency, with no need to account for fluctuating exchange rates, adds Sorenti.

Consolidating spending

Corporate cards in themselves do not mitigate against FX costs when transacting outside of home markets, but consolidating spend on a card-based programme and minimizing the use of foreign currency can help give greater visibility of spend, minimize cash reimbursements/breakage and streamline expense processing, explains Maria Parpou, head of product global commercial payments at Barclaycard.

"For example, customer organizations receiving invoices from suppliers in currencies other than their own will need to establish a mechanism for paying those invoices in those currencies and to those terms," she says.

"Using a card-based solution, the customer would simply define the amount to be paid and schedule the payment. All of the FX and settlement with the supplier is done behind the scenes, and the transaction would appear on the customer’s statement in their currency and with FX detailed."

Corporate cards can also help to reduce complexity for finance managers by simplifying the management and hedging of multiple currency accounts through billing all expenses in a single currency, concludes Caroline Haywood, UK managing director AirPlus International.