how to demystify cross-border payments in travel
TRANSCRIPT
K
Kristin Mollison
Technical Product
Manager
WEX Inc.
Noel Goddard
Founder
FTT Global
Your panelists
Kristin Mollison, WEX Inc.Noel Goddard, FTT Global Ltd.
Demystifying cross-border payments in travel
Cross Border Payments
• Two elements
1. Switching from one currency to another currency (FX)
2. Making the payment from one party to another in a different geography
Agenda
• The Basics of Foreign Exchange• What is an “exchange rate”
• Who sets the rates
• How does the FX “market” work
• Risk in a Multi-Currency World• Why is multi-currency becoming so risky these days
• What is the impact of Central Banks on your business
• Opportunities in Cross-Currency and Cross-Border Deals• How to capture Foreign Exchange Profits and retain it
• Managing Cross-border charges and reducing costs
What is an “Exchange Rate”
1.52
“ I will take your 1 Great British Pound and in return, you will receive 1.52 United States Dollars from me”
What is an “Exchange Rate”
1.52
If an apple in the UK costs £1 GBP, the exact same apple should cost you $1.52 US Dollars in the US*
What is an “Exchange Rate”
1.52
The relative value of a “Share” of UK Plc. against the relative value of a “Stock” in USA Inc.
What is an Exchange Rate
1.52
If a holiday in the US costs $15,200 USD then it should also cost £10,000 if purchased from the UK !!
Who sets the Exchange Rate?
I want to sell 10,000 GBPand will accept USD 15,200 for them ?
I want to buy 10,000 GBPand will pay USD 15,200 for them ?
AGREED….THE DEAL IS DONE
AT
1.52
The FX Market
• No central marketplace and no single source of pricing
• Every FX deal is between two people or entities alone
• The rate you receive will always depend on:
• What rate the person you buy from paid or thinks they will have to pay
• What their margin expectation is
Risk in Multi-Currency
• The lack of a central market place introduces both Risks and Opportunity
• Why is currency risk much greater than a week ago, a month ago or 2 decades ago ?
• How can this risk be mitigated and turned into a profit opportunity ?
What is the Purpose of Currency ?
Who is the real Market Trader ?
Who needs the other more?
Case Study – Swiss National Bank
• 2010 – The global economy is in deep recession and many Hedge Funds are seeking “Safe Havens” for their billions (usually US Dollar and Gold) and selling EUR.
• 2011 - The US Dollar is under pressure of weakening due to QE (Quantitative Easing), so the funds start buying CHF and selling EUR instead
• SNB warns them to desist as the increase in value of CHF against the EUR is killing exports and tourism.
• SNB acts and tells the market that they will sell CHF against the EUR without limit to hold the EUR.CHF rate at 1.20
• The Hedge Funds set up Algorithmic Trading models to continually test the floor and SNB do likewise to constantly buy at 1.20
Case Study – Swiss National Bank
• 2013 – Many retail gamblers enter the EUR.CHF deal to also capture free profits from this artificial intervention
• 2014 – SNB is now holding 45% of the value of GDP in EUR denominated products (cash, bonds, etc.)
• 2014 – European Central Bank considers 1.1Trn of QE and Greece election risks destabilizing the EUR
• 2015 – SNB takes snap decision to pull the 1.20 policy and instead charge 0.75% negative interest on those holding CHF
• Speculators are caught unawares and algorithmic models all have similar instructions to act and protect losses …
How to protect yourself
• Understand the currency risks and exposure in your business today (the risks may have been hidden by luck/low volatility)
• Do not be the company holding one currency (EUR) and needing to buy another currency (CHF) when the movement comes
• As soon as you have any exposure, pass the risk on to someone else, ideally immediately but soon as possible
• Don’t assume that “it will be OK, the rate will recover at some point”
Seize currency opportunities
• Once you have the risks under control, multi-currency pricing delivers significant revenue opportunities, without risk.
• If you control the presentation of pricing to the customer, you should be capturing the FX Revenues, rather than passing it to a 3rd party to manage, price and control.
• In traditional models, this would also mean either absorbing currency risk or giving away the majority of the revenue to protect the 3rd Party.
• With real-time management of currency risk, the potential exists to capture all the revenue, deliver a better service to customers and still outsource the risk to a 3rd party.
You Control the Exchange Rate
I want to sell you a holiday normally priced at $14,900 USD…
I want to buy a holiday for 10,000 GBP please…
You Control the Exchange Rate
I will sell you the holiday at 10,000 GBP (The rate of exchange is 1.52 therefore generating 300USD or 2% of FX Revenue).
I get the holiday I wanted at the price in GBP that I wanted without FX Risk
WEX Solutions
By booking the transaction via WEX Virtual Platform, I have booked the 10,000 GBP and the WEX solution has automatically sold the GBP 10,000 and I will receive 15,200 USD, locking in my 300 USD of FX Revenue.
Virtual Payments – FX Fees
CAD $
USD $
MXN $
BRL R$
GBP £
EUR €
SEK kr
NOK kr
CHF
ZAR R
HKD $
THB ฿
MYR RMSGD $
AUD $
NZD $
AED
DKK kr
JPY ¥
PLN
Virtual Payments – FX Fees
CAD $
USD $
MXN $
BRL R$
GBP £
EUR €
SEK kr
NOK kr
CHF
ZAR R
HKD $
THB ฿
MYR RMSGD $
AUD $
NZD $
AED
DKK kr
Payer
Merchant
Domestic
FX = 0 bps
JPY ¥
Virtual Payments – FX Fees
CAD $
USD $
MXN $
BRL R$
GBP £
EUR €
SEK kr
NOK kr
CHF
ZAR R
HKD $
THB ฿
MYR RMSGD $
AUD $
NZD $
AED
DKK kr
Payer
Merchant
Non-Domestic
FX = 20 bps
JPY ¥
Virtual Payments – FX Fees
CAD $
USD $
MXN $
BRL R$
GBP £
EUR €
SEK kr
NOK kr
CHF
ZAR R
HKD $
THB ฿
MYR RMSGD $
AUD $
NZD $
AED
DKK kr
Payer
Merchant
Intra-SEPA
FX = 10 bps
JPY ¥
Virtual Payments - CB and FX Fees Summary
• Cross Border Fees
– Issuing country vs. Merchant country
– Can be reduced by issuing from multiple countries
• FX Fees
– Virtual Card Billing Currency vs Merchant Currency
– Can be reduced by issuing in multiple currencies
Thank you!
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