Currency Just Became Treasury’s Newest Superpower

For years, the cross-border payments industry has worked toward the goal of making money move like information. FinTechs and banks have attacked that friction, and compared with the primitives they replaced, they have largely solved how value crosses a border.

But a payment can cross a border almost instantly and still leave a corporate treasury team deciding when to convert it, where to hold it, how much liquidity to maintain and whether the resulting foreign exchange exposure needs to be hedged. Corporate treasury teams care more about the currency in which the obligation ultimately settles.

Moving money across a border and deciding what currency that money should become are not the same thing. For corporate treasury, the next frontier of cross-border payments is, as a result, becoming less about speed and more about currency optionality and the infrastructure emerging around global commerce designed to provide it.

See also: As Cross-Border Payments Splinter, Firms See Interoperability As Way Out

The Cross-Border Payment Rail Is Separating From the Obligation Currency

The important development in global commerce isn’t another payments API or another faster corridor. It is the gradual construction of an abstraction layer between how a business gets paid and how it ultimately wants to hold or distribute that value.

Cross-border payments news from Monday (Aug. 17) underscores that shift. Afriex, which processes more than $600 million in annual payment volume, announced a sponsor and settlement banking partnership with Global Innovations Bank intended to strengthen the infrastructure behind its B2B payments API. The arrangement provides businesses moving money across more than 35 countries with expanded settlement capabilities.

In other news this month, China’s UnionPay International is reportedly planning to connect Chinese payment apps to Brazil’s instant payment system, Pix, offering a view into a future where national instant payment systems are starting to behave like international card networks.

The PYMNTS Intelligence report “The Cross-Border Opportunity: How Payments Innovation Can Help SMBs Go Global” found in May that while traditional banks remain the dominant provider for international payments, FinTech companies are steadily expanding their role by combining faster digital experiences with services designed for businesses navigating global trade. Rather than replacing banks, many small- to medium-sized businesses (SMBs) appear to be building a broader payments tool kit as international commerce becomes more common.

Historically, accepting a foreign currency often created a chain of downstream treasury consequences. Someone needed to maintain an account in that currency, manage the balance, determine when to convert it and decide whether the resulting exposure should be hedged. Today, payments providers, banks and FX platforms are attempting to absorb pieces of that complexity.

The result could be a fundamentally different cross-border model. The buyer pays in the currency that works for the buyer, the supplier invoices in the currency that works commercially, and treasury chooses separately how and when the economic value ultimately settles.

“The Cross-Border Opportunity” report also found that 57% of SMBs in the United States buy goods or inputs from overseas suppliers.

Read also: Corporate Cash Is Global in Theory, Trapped in Practice

Faster Payments Don’t Eliminate FX Requirements for Corporate Finance

While policymakers have spent years working to improve cross-border payments, the Financial Stability Board said in July that cross-border transactions remain dependent on FX markets, an important dependency sitting outside the scope of the international cross-border payments roadmap.

The constraint becomes especially visible in markets where currencies are difficult to exchange, such as East African economies. Businesses in these nations continue to lose sums because persistent currency convertibility problems force regional traders and banks to rely on the U.S. dollar even for commerce occurring within the region.

That is the difference between payment friction and currency friction, and a payment network can potentially eliminate the first without solving the second. If a company needs separate pools of dollars, euros, pounds and pesos to ensure suppliers can be paid when obligations come due, some amount of cash inevitably sits idle as a precaution against uncertain flows.

In a perfect world, a business receiving a currency that also has expenses denominated in that currency, for example, may be able to use those receipts rather than automatically converting them into dollars and later buying back their own native currency again. The result is less a faster payment system than a currency-routing system.

See also: Banks Make Their Move in Cross-Border Payments

The first generation of innovation attacked the movement of money. The next is beginning to attack the currency architecture around the movement. The opportunity ahead isn’t simply shaving several basis points from an FX conversion. It is potentially reducing the amount of liquidity a company must pre-position around the world.

Banks are already moving in this direction.

Bank of America, for example, announced plans in June to connect corporate clients to real-time payment systems, including Mexico’s SPEI, the United Kingdom’s Faster Payment System and India’s Unified Payments Interface, with beneficiaries receiving money in local currency. The bank separately offers FX receivables capabilities that automatically convert incoming foreign currency payments, reducing the need for companies to maintain numerous currency accounts.

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