According to PwC’s 2016 edition of its annual global CEO Survey,1 one of the biggest issues for today's business decision makers is keeping up to date with the pace at which technology evolves. The survey revealed that 77 percent of CEOs said technological advances are likely to transform stakeholder expectations of their businesses in the next five years.
At the forefront of innovation in the financial services industry are disruptive technologies such as blockchain, Bitcoin’s underlying architecture. Despite the closure of many Bitcoin exchanges, the technology behind the virtual currency has the potential to revolutionise the international payments industry by enabling low-cost money transfers in seconds instead of hours or days.
Bitcoin has the ability to register all international payments in a very efficient manner on a public ledger known as a blockchain, which is then used to validate the currency transactions. The technology has caught the attention of some of the world’s largest banks, who have begun working together in a blockchain consortium dubbed R3. R3’s main aim is the design of a safe lower-cost alternative to the way banks currently settle currency transactions with each other, and other aspects of international payments.
For decades, traditional international payment methods have relied on the correspondent-banking model, where up to four banks can be involved in the transfer of a single currency. Not only is this method expensive, as each bank takes a fee, but there is a high risk of important information about the payment being lost. As payment messages are transferred across banks and across borders, certain details can often get truncated or go missing. If companies are dealing with many different suppliers from around the world, this can lead to a lack of auditability and visibility.
If the R3 project is successful in gaining greater efficiencies and reducing the cost of settling customer transactions, then critical mass may follow, delivering faster and cheaper B2B international payments.
Accounting Software Can Integrate with P2P Platforms for International Payments
Peer-to-peer (P2P) international payment providers are also able to bypass the correspondent-banking model by matching a currency seller with a buyer of the same currency – even though the parties may be situated in different locations. P2P payment practices are gaining acceptance because these international payment methods feature much lower fees, or in some cases no fees at all.
A spate of recent partnerships between P2P payment providers and cloud-based accounting software firms demonstrate the technology's potential to see wider adoption amongst the business community. These electronic international payment solutions aim at improving the efficiency of foreign currency transactions and hold supplier data so that invoices can be settled in just a few clicks – making reconciliation for importers easier.
This type of seamless integration across international payment platforms, made possible through cloud-based services, is removing some of the barriers associated with local and international trade. Innovation like this can remove some of the administrative burdens involved with international trade, making life straightforward for finance departments.
Trade Management Tools
By enabling goods to flow more smoothly across borders, emerging trade management tools can automate certain aspects of the import-export process. For instance, payment platforms are beginning to target international payments in the supply chain by offering a uniform network for billing, executing transactions and monitoring vendor payments.
It is important to note that while there are operational benefits of an integrated trade management platform, the risks around foreign currency conversion still need to be managed. For an importer to reduce settlement risk and increase profitability, negotiating an open account with a supplier can be important. If an importer cannot negotiate open accounts with suppliers, then innovation may be needed to help businesses better manage the balance between their cash flow and payment terms to suppliers.
Other popular methods of managing currency risk are forward exchange contracts and FX option contracts. These FX international payment tools help protect profit margins against adverse movements in exchange rates. Companies should weigh their alternatives when considering how best to manage their exposure to currency-related risks.
The emergence of potentially disruptive technologies such as Bitcoin and P2P payments is revolutionising age-old business practices. These innovations have the ability to make international payments faster and cheaper, but the need to maximise cash flow and control risk will always be challenging. The likelihood of success will depend on valuable personal relationships with foreign exchange experts to assist business decision-makers along the way.