Understanding how changes in foreign exchange rates impact the global payments business

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A Guide to Currency Fluctuations

Understanding how changes in foreign exchange rates impact the global payments business.

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Exchange Rate Systems

Currencies are valued against each other using two primary systems: fixed and floating.

linkFixed Exchange Rate

A currency's value is pegged or fixed to another currency (like the US Dollar or Euro) or a standard like gold. This provides stability.

• add_circlePro: Makes cash forecasting easier and more predictable for businesses.
• remove_circleCon: Changing a peg can create significant economic turmoil and uncertainty.

Example Countries: Hong Kong (pegged to USD), Senegal (pegged to EUR).

wavesFloating Exchange Rate

The exchange rate is determined by market forces like supply and demand, political stability, and economic performance. Most major economies use this system.

• add_circlePro: Reflects a country's true economic condition and allows for automatic adjustments.
• remove_circleCon: Can lead to instability and unpredictability in the payment process.

Example Countries: USA (US Dollar), United Kingdom (British Pound), Japan (Yen).

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Impact on Cash Forecasting

For global companies, currency fluctuations add a major layer of complexity to managing cash flow.

The Core Problem: FX Risk

When a company operates in multiple countries, it deals with multiple currencies. The value of cash held in a foreign currency can change daily, making it difficult to answer a key question: "How much of our home currency will we need for future foreign payments?"

A Treasurer's Questions:

• Are my contracts in a stable foreign currency?
• Do I need to convert funds to cover a shortage in another currency?
• Will I need more or less of my base currency for a payment than I did last month?

Uncertainty in forecasting is always undesirable, even if a fluctuation results in an unexpected gain.

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Impact on Returned Payments

When a cross-currency payment is returned, the remitter rarely gets the exact original amount back.

The Fluctuation Effect

The exchange rate applied when a payment is made is almost always different from the rate available when it's returned. The remitter, not the payment provider, bears this risk.

Example Scenario:

• Initial Payment: You send £10,000 when the rate is $1.52/£. Cost: $15,200.
• Payment Returned: The payment is returned a week later when the rate is now $1.65/£. You receive: $16,500 (A gain of $1,300).
• Alternate Scenario: If the rate had dropped to $1.30/£, you would receive: $13,000 (A loss of $2,200).

This demonstrates how returned payments can lead to unintended, and often unwelcome, financial gains or losses.