Consumer Brands, Retail and Healthcare (CBRH): Global e-commerce Cash and FX Management

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Consumer Brands, Retail and Healthcare (CBRH): Global e-commerce Cash and FX Management

CBRH treasuries have already made considerable progress in streamlining their payment processes through initiatives such as payment factories. Now many are turning their attention to an altogether tougher challenge in the form of collections, and more specifically global e-commerce collections. Hans Van Den Bosch, Global Sector Head Consumer Brands, Retail and Healthcare, Global Liquidity and Cash Management and Gregory Edwards, Global Head, Transactional FX at HSBC examine some of the possible challenges and solutions when dealing with diverse payment and clearing systems and multiple currencies. One of the obvious differences between payments and collections is that in most cases commercial leverage enables treasury to be more prescriptive when it comes to choosing and implementing new processes. By contrast, irrespective of whether CBRH treasuries are dealing with B2C or B2B relationships, collection methods tend to depend more on the customer’s preferences.

This is challenging enough when dealing in just a few countries, but in the context of e-commerce, the difficulties multiply. This is especially important now, because in addition to established specialist e-commerce retailers, two other categories of entity are increasing their online activity. Bricks and mortar retailers have appreciated that they need an e-commerce presence, while consumer brand companies have started to open their own direct to consumer online sales channels alongside sales via multi-line retailer relationships. A further complication is that the challenges associated with B2C and B2B transactions are not identical across the CBRH sector. For instance, electronification of collections in the B2B healthcare sector is impeded by the established preference of many customers for paying by cheque.

CollectionsPayment infrastructure: diversity and change

From a global perspective, cards still dominate for online customer remittances. However, payment wallets are starting to have an impact, even though some of these still rely on cards as the

underlying settlement method. A fairly recent innovation, which could fulfil this role instead, as well as supporting completely new online payment methods, is the real-time settlement system. As the name implies, these settle payments on a real time rather than batch basis, but many of them also have far larger free form information fields than legacy systems. This feature opens the door to the efficient large scale capture of information in addition to payment data, such as the items a customer purchased. Coupling this functionality with the opportunity to reduce costs in comparison with cards, makes for a potentially compelling proposition, especially as a growing number of countries around the globe are implementing real-time settlement systems.

This is particularly significant today, as the traditional roadmap for corporate development has been replaced. Historically, a business would grow in its immediate location, then elsewhere in its country and then finally start a gradual expansion into other countries – a process that could take years if not decades. In an e-commerce environment, a common expectation is to go from zero to global coverage in perhaps less than a year, which is an unprecedented pace in terms of both geographical reach and FX needs. Historically, many banks have struggled to support clients wishing to achieve this with their collections, especially if those collections were low value and high volume. While it might be technically possible to accomplish this with a card-based approach, the costs could be prohibitive.

1In that the retailer’s credit risk will be with the bank, not the fintech.

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Under these circumstances, partnering with a transaction bank that has the largest possible physical network makes considerable sense.

It is also important to be clear that while cards, wallets and real-time payments may compete and substitute each other, they can still co-exist perfectly well in a fully evolved e-commerce society. In fact, a key task for treasury is managing that co-existence as efficiently as possible, especially as the interaction among these methods may change over time. For instance, cards may be used to fund wallets today, but wallet providers are also looking at alternative sources of funding, such as real-time direct debits or on-demand top-ups.

The role of fintechs

While a bank such as this can offer the necessary underlying infrastructure to support economically-priced transaction settlement, CBRH treasuries need to be able to provide as many e-commerce payment options as customers require. That will be as many options as needed to remove any customer-perceived barriers to buying from the company online.

This is an area where financial technology companies (fintechs) have a role to play, as third party providers of new payment service types. Nevertheless, some banks regard fintechs as business threats to be resisted, rather than as potential partners. By contrast, HSBC’s approach here is very much collaborative, as the combination of our global network infrastructure and best of breed e-commerce payment solutions is clearly in clients’ best interests.

This approach also makes a great deal of sense from a fintech’s perspective. The sheer diversity and separate evolution of country payment systems would present them with a major obstacle when trying to create completely new end to end e-commerce payment solutions. By contrast, when partnering with a global bank, in addition to substantial intellectual property, they also obtain a shortcut to a huge amount of information regarding individual country payment systems and regulation. Plus of course they have a far more compelling proposition for the corporate client in terms of both functionality and risk.1

By partnering with the right bank, fintechs (and by implication also CBRH companies) benefit in a variety of other ways, such as immediate access

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to knowledge of local business practices in multiple markets, plus the ability to link multiple payment types. In this context it is important to appreciate that collections are predominantly dictated by how the domestic market works. For example, in Asia, cash on delivery is still an important part of e-commerce business. Therefore, any banking partner needs to be able to bridge the various collection modes: not just electronic, but also non-electronic, such as cheques and cash. This also connects with the crucial need to remove all possible barriers to potential customers doing business with CBRH companies online.

In addition to the actual payment, a further important angle on this multichannel bank support relates to transaction data. As the number of payment options off ered to consumers grows, so does the challenge of dealing with the associated data needed to reconcile the transaction, plus any additional data that may contain valuable business intelligence. This is of paramount importance and is one of the areas in which HSBC partners with fi ntechs to help them deliver a high quality consolidated data feed that can be fed to e-commerce companies’ ERP systems.

Pragmatic strategy

While the support of a suitable bank/fi ntech partnership can help CBRH treasuries deal with many of their e-commerce challenges, the choice of strategy is ultimately down to the treasury. In this context it makes sense to prioritise by focusing in the fi rst instance on a few key markets. For instance, for consumer brand companies India would be a logical early choice as it is a market with massive and still growing potential.

While each country may diff er in terms of popular payment types, business practice and regulation, it is still possible to derive valuable generic learning regarding implementation and integration that can be re-used in other markets later. In the meantime, constant monitoring of potential markets has much to recommend it, and again this where a suitable banking partner can help by sharing relevant local news and expertise. For example, value limits on new payment types tend to increase over time, with contactless payments in the UK being a good example. If most of a CBRH company’s products are priced above the current value limit for a payment type, it doesn’t make much sense to implement it immediately. However, over time the value limit may rise above the product price and implementation may become worthwhile.

This more pragmatic approach should yield appreciable benefi ts over time, as opposed to trying to implement numerous markets and all their associated payment types immediately. The temptation, after reading high level media coverage of fi ntechs as third party payment providers, is to assume (wrongly) that they can already deliver every payment type a CBRH treasury needs globally.

In the fi rst instance, focusing on a few key markets to build experience and reduce e-commerce transaction costs, is a logical approach. Depending upon individual preference, the next step might be to optimise the fl ow of additional transaction data that contains valuable business intelligence in those key markets. Alternatively, it may be preferable to move on to implementing additional markets at the minimum e-commerce transaction cost fi rst.

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FX

Risk management

The corollary to international e-commerce collections management is FX risk management. A CBRH treasury may ultimately fi nd itself having to handle potentially dozens of currencies as a result of corporate e-commerce activity.

The specifi c ways in which treasuries deal with the FX element of e-commerce collections vary enormously, but probably fall into three generic categories:

• Ignore: the focus is on growth at all cost. A collection solution will be rolled out but not include any consideration of FX, because overall sales growth is the primary objective, not net revenue per customer.

• Binary: the treasury either always collects in local currency and manages the FX translation risk itself, or always insists on customers paying in its functional currency.

• Sophisticated: the company prices in local currency to maximise potential customer acceptance, but adjusts that local pricing periodically in order to mitigate its FX risks. This helps to drive the perception among customers that the company’s products are local, while at the same time enabling the vendor to manage the FX component much more accurately.

In the long term, the sophisticated approach appears attractive, as it could enable the treasury to maximise profi t while minimising risk.

However, for some companies, maximising profi t may not be the primary objective (at least initially). Instead, it may be more concerned with making the e-commerce experience for the consumer as easy as possible and increasing sales by giving the consumer certainty and familiarity.

The sophisticated approach inevitably involves deciding how frequently local pricing should be adjusted. The general trend in this respect has been to attempt to narrow it down to something that is reasonable from a risk perspective, but that doesn’t annoy or confuse customers with over-frequent FX fl uctuations. Some businesses may just set an arbitrary period of 24 hours or a certain number of days, but current best practice involves attempting to set this in a manner that is customer, business and market specifi c. Current market leaders will attempt to achieve this through detailed analysis of the end to end customer e-commerce journey. This will consider metrics such as the typical time between a customer placing something in their basket and actually checking out.

Ultimately, this is a risk reward trade-off . The CBRH treasury wants to hold the FX rate long enough to enable the customer to assimilate the information and decide to buy, but at the same time doesn’t want to be overly risk-exposed because the rate was held for too long. This can be achieved by using a guaranteed rate service from a suitable bank. In particular, a service that also includes an analytical approach to multi currency pricing will help CBRH treasuries cover all the angles by combining pricing and risk management strategy to achieve the optimal result for their needs.

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Frictionless returns

A common requirement among market leaders is a mechanism for frictionless returns, so that if a customer returns an item that was not priced in company’s functional currency, the customer will receive a credit for exactly the same amount of local currency as they originally paid. If return rates are low, then this is not a major issue as the company will typically be happy to take any FX loss in order to keep their customers happy.

However, for certain online retailers who allow customers to buy multiple items and return those that they do not want (such as clothing companies allowing customers to take multiple sizes of the same garment), this is a much bigger issue. In this case, off ering frictionless returns could be costly because of the much higher volume of returns. As with deciding how long to hold local currency pricing for customers, leading companies resolve this through careful analysis of customer behaviour. They will calculate that a particular type of customer typically returns a certain percentage by value of each consignment and will adjust their hedging strategy accordingly.

Handling currencies received

Perhaps unsurprisingly, treasury strategies for handling foreign currency once it is collected vary widely. Some will opt to translate and repatriate everything, while others might only do this for net amounts once any local currency sales expenses (such as manufacture or marketing) and local taxation are settled. There may also be associated business units in other jurisdictions that may need to be paid a portion for costs such as licensing fees. In general terms, those selling electronic services have more fl exibility here, as they do not have to consider local manufacturing or logistics in this regard, while those selling physical consumer goods do. A further consideration is that in some markets, regulation may restrict the movement of local currency anyway.

Treasury netting strategy can obviously play an important role in minimising risk and maximising return when receiving local currency. Nevertheless, even some sophisticated treasuries suff er leakage in this respect as they do not conduct local netting across business units. Yet again, the reasons for netting or not netting vary widely from company to company, but as a general principle minimising leakage through netting is desirable.

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ConclusionWhile collections and managing the FX risk associated with international collections are a vital part of successful e-commerce, it is worth noting that payments also play a major role, in terms of both payments to merchants and potential payments to customers. Therefore, the availability of a robust, global payment platform with the ability to pay from a single account, provide a competitive FX rate, and execute payments using proxy information (e.g. email address or mobile phone number), can also be an important success factor.

When it comes to collections, a good starting principle for CBRH treasuries looking at global e-commerce is to focus on the most crucial markets fi rst. Then use experience gained from implementing those markets to guide strategy for future implementations (although the

specifi c functional details will almost inevitably be diff erent). In doing so, partnering with a global network bank adds value, especially one that is also willing to collaborate with fi ntechs that can off er lower cost payment alternatives to cards. That is particularly true if they can also cover multiple payment options that serve to reduce barriers to e-commerce sales.

As regards managing the FX implications of e-commerce, implementing the right strategy can drive sales, plus better understanding and control of FX rates, as well as maximising effi ciencies. In conclusion, the current best practice for FX risk management of multicurrency e-commerce, is to off er local currency pricing that is held for a specifi c optimised period. If well-executed this will minimise both barriers to customer participation and FX risks.

Published: October 2017

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