“Risk” is an emotive word. Often considered a negative, it needn’t be so. Take the currency markets for example. Market volatility is unpredictable but risk is a two-way street. In theory, you have as much chance of a currency appreciating in value as you do of it depreciating. Risk is the certainty. Therefore, how you manage it should be your focus. In the world of foreign exchange and payments, there are a number of easy to use tools that can help.
At the outset of any assignment you or your company will have carried out a cost projection. If the assignee is travelling cross-border in to a different currency zone, the envisaged costs will have been worked out at the prevailing exchange rate between the home and host countries at the time the projection is being completed. Whatever the length of the assignment the exchange rate will be in a state of flux throughout. If the most important thing for you is to eliminate risk, consider a hedging strategy such as a Forward contract. This ‘buy now pay later’ solution enables you to lock in to today’s exchange rate for use on a future payment date. From a budgetary perspective, this could give you the assurance you crave that the cost of an assignment will reflect the projection.
If adverse currency fluctuations keep you up at night there are other ways to protect yourself. Knowing the impact that some events can have, you might opt for a market order; a solution that provides a flexible way to make the most of volatility, whichever way the market moves. Orders are ‘live’ whenever the market is trading meaning that you are covered outside of office hours. In the case of last year’s Referendum, the pound’s steep fall commenced in the early hours of the morning as results came in from around the country. The drop was so severe that the cost to buy $10,000 increased by £1,127 in the days that followed the vote to Leave. This move was negative for some but provided opportunities to others. Ensuring risk is controlled is all-important. In this instance, a ‘Stop Loss’ order would have protected the downside risk for sterling sellers.
In the world of mobility there are also elements of risk around the disbursement of payments. Money transfers for expenses or payroll are inevitably time sensitive. In countries where the banking system is relatively sophisticated these should not prove too much of a problem. However, if your footprint encroaches in to more exotic territories they can cause headaches. There is no hard and fast rule, although the more exotic the jurisdiction, the greater the potential for inconsistencies. Markets where currency controls are in place, such as Taiwan and Korea, are more likely to require longer payment timescales. What would the impact be to your business if your assignee is left unable to move in to his/her new house because the landlord has not received payment for the rent? Ask yourself the same question if a number of expatriate staff have not received their salary because of delays caused by the banking system?
Speed is by no means the only element of risk associated with payments. Compliancy risk, especially around the funding of local tax authorities, is a common pain point. Worryingly, inaccuracies here can carry financial punishment. Operational and criminal risk also require close monitoring. However, as with the currency markets, there are always ways to help minimise the impact of risk. If timely delivery of funds is your key objective, we would recommend you use the local payments infrastructure wherever possible. This will increase reliability and reduce cost in comparison to cross-border payments. Sanction screening all new beneficiaries will minimize the chance that a payment may be delayed by an inquisitive compliance department. Those who wish for further peace of mind can carry out penny tests to new beneficiaries so that they know the channel works and how long the funds will take to settle for future payments.
To discuss your approach to risk management, contact us on +44 (0)1494 484 183 or via email at firstname.lastname@example.org