In today’s increasingly globalised and digital economy, cross-border operations are fast becoming the mainstay for many businesses.
Business is no longer restricted by borders on a map, with many firms now operating internationally with staff, suppliers and buyers scattered across the globe.
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And while internationality opens up access to new markets, increased competitive advantage and improved supply chain flexibility, it also makes companies, and crucially, their bottom lines more vulnerable to currency swings.
In recent times, geopolitics have been the driving force for currency volatility. Since Donald Trump returned to the White House for a second term, tariffs and trade wars have driven the news agenda and currency valuations.
While the dollar surged in early February due to Trump’s proposed tariffs, the tide is now turning. Delayed tariffs on Canada and Mexico have caused dollar slumps while the euro soars thanks to Germany’s fiscal reforms and investors’ anticipation of weaker US economic growth should Trump pursue his trade war.
No currency is immune to these swings, with the Japanese yen and Swiss franc also gaining against the dollar.
With currency volatility now a constant factor in global markets, many corporations are feeling the effects on their bottom lines. Tech giant Apple has warned it expects unfavourable currency moves to shave off 2.5 per cent of its first-quarter revenue, and Microsoft is anticipating similar hits to its margins.
While intense currency swings will create challenges for all businesses, it’s small and medium-sized enterprises (SMEs) that will feel them the hardest. In these uncertain times, it’s vital they put protections in place to safeguard their bottom lines.
FX hedging: the strongest armour
Businesses can’t control trade wars and currency swings, but they can mitigate their financial risk through proactive hedging.
Even the most basic of hedging tools, like forwards and simple options, allow businesses to lock in rates, ultimately providing breathing room to weather currency volatility storms and protect their bottom lines.
While hedging has long been seen as an afterthought for businesses and a strategic measure only brought out in times of dire need, it is by far the simplest and safest way for businesses to defend themselves against what’s around the corner. While tariffs and events such as rate decisions exist beyond the control of SMEs, the knock-on effect they have on the balance sheet is profound.
Air Canada is leading the charge on this front, having recently announced it was hedging 70 percent of its USD cash flow in a bid to protect against the headwinds of Trump’s tariffs. Many other corporates are following suit, with the USD’s surge driving a strong uptick in hedging.
In short, when it comes to FX volatility, hedging is the best armour available. But it’s not just about management. For SME’s, hedging secures stability, ensures accurate forecasting and maintains competitiveness.
Moving away from headache-inducing traditional banks
Banks have long been the go-to for businesses seeking help when it comes to currency risk. However, this is not to say that the service offered by banks is something to be lauded.
Large corporates are often the winners when it comes to FX, with banks offering hugely favourable rates thanks to the high volume of FX activity that these businesses undertake.
Meanwhile, SMEs remain squeezed thanks to the many hidden costs of FX. Rarely are these communicated transparently, with additional costs lurking in spreads and high fees – sometimes up to 3% – buried in the fine print.
Many smaller businesses also find FX management to be an operational headache, with many transacting through their banks using manual methods such as phone calls. There are often multiple intermediaries creating a paper trail nightmare with slow and inefficient communication channels.
When working with banks, SMEs quickly discover nothing is simple. With an individual account needed for each currency, transactions operate in silos, clouding real-time cash flow from CFOs’ view.
This not only hampers the effectiveness of risk management in times of volatility but also invariably leads to additional costs and a spider web of transactions.
A brighter fintech future
Having been repeatedly let down when it comes to FX, SMEs are crying out for comprehensive and holistic systems that offer the whole package of FX management, without having to pay through the nose.
Thankfully, the landscape is beginning to change, with many banks leaving the space and others failing to ride the wave of new technologies. Fintechs have begun to fill this gap in the market, with 92% of SMEs having conversations about how digital account solutions can help solve the issues faced when working with banks.
FX trade processes have undergone something of a renaissance and SMEs are now able to forget the costly FX terminals thanks to tools that allow for real-time rates without hidden fees or spreads. This is essential for fully transparent pricing, enabling CFOs to see the full transparent cost of their FX operations.
Meanwhile, the ability for SMEs to create customised blotters has allowed for mark-to-mark updates in real-time.
The headache of managing multiple bank accounts is also becoming a thing of the past due to the creation of multi-currency IBANs. Historically, to manage their FX operations, had to pay a bank to convert incoming and outgoing transactions into each local currency, with each of these currencies then held in separate accounts.
Now, using digital wallets that can hold multiple currencies, SMEs can now organise and store funds ready for rapid payments or currency exchange. This ensures reduced foreign exchange costs and improved cash flow visibility.
Surviving the storm
As tariff and global trade wars turn up the heat and currency swings continue to dominate the headlines, it will be SMEs who feel hits the most.
To weather these storms, treasurers should look to adopt an FX-first strategy, incorporating hedging into their day-to-day business activities.
The result? Better cash flow forecasting and a better handle on out-of-control currency swings.
Beyond hedging, businesses must have seamless access to multiple currencies without the burden of managing multiple accounts. They need solutions which enable companies to send, receive, and hold funds in various currencies efficiently, helping them navigate shifting trade conditions with greater flexibility.
At a time when trade barriers can extend inventory cycles and tie up working capital, fast and cost-effective cross-border payments are critical to maintaining liquidity and reinvesting in growth.
The result? Better cash flow forecasting and a better handle on out-of-control currency swings.
Laurent Descout is co-founder and CEO at Neo
