Key considerations for expanding your business internationally
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As commerce becomes increasingly integrated on a global scale, many companies are setting their sights beyond domestic shores. Facilitated in part by digital advancements, capital, goods, labor and services are flowing more freely across borders than ever before.
Handling overseas financial transactions, like managing currency exposures, pricing, foreign bank services and overseas counterparty risks, can be challenging for a company’s treasury staff. With that in mind, here are some key considerations when expanding your company’s global footprint.
Managing Foreign Exchange Risk
In the face of rising interest rates, high inflation and volatile prices, many executives consider foreign exchange (FX) risk among their top concerns. Some companies with global supplier networks prefer to conduct international transactions in their home currency to try to remove FX risk. However, in many cases, businesses can benefit from transacting in foreign currency.
FX volatility risk between two currencies will always exist, so companies won’t eliminate it by transacting only in USD. They simply pass the burden of that risk onto their foreign suppliers, who can charge a premium to protect themselves from currency market shifts between invoice and payment dates. In addition, their suppliers’ banks may also apply a sales premium.
Companies may be able to reduce supplier costs by paying in local currency. Also, beneficiary accounts usually receive faster credit posting for payments made in their local currency. In exchange for removing the cost of conversion and lowering supplier risk burden, companies may be able to negotiate favorable payment terms. For transparency and efficiency, companies can manage FX risk using an integrated system to accelerate and automate transactions.
Finally, companies that plan to convert foreign currency from overseas revenues into USD can use hedging instruments to lock in pricing and avoid fluctuations. Many variables and events can affect the currency markets, so having the right tools in place to align assets and liabilities from FX risk can go a long way in protecting the balance sheet and can make the difference between meeting or missing earnings projections.
Cross-Border Payments: A Network of Networks
Combining the right tools and capabilities can yield more opportunities for CFOs to improve risk management and automate the complexity of FX. The treasury operations of multinational companies can be complicated, as jurisdictions have different legal, tax and regulatory landscapes. To mitigate potential losses and maintain financial stability, it is critical to know where your capital is at all times.
In the past, processing international payments could be complicated and slow. While fintech solutions have improved payment options, many new systems are “closed loop,” meaning they’re not connected to bank accounts and lack integration—key requirements for global cross-border payments. An international payment infrastructure needs to be a network of networks.
Therefore, traditional payment infrastructure is still the best option for global business-to-business payments. The cross-border wire system is designed as an open-loop system that links numerous closed-loop, country-specific systems. It’s complex but powerful—connecting most of the world’s banks and moving more than $5 trillion in payments every day.
A company can achieve a global reach by connecting to the underlying global banking infrastructure. However, traditional payment infrastructure is undergoing significant transformation, with improvements aimed at extending the advantages of the closed-loop fintech experience to the broader cross-border payment industry.
The Best of Both Worlds
Ongoing digital transformation has permanently altered business and consumer expectations. Companies that can mitigate cross-border transaction friction will be better positioned to compete, which has led to a growing need for companies to have full access to in-country payment capabilities and closed-loop technologies.
Mexico is a prime example of the need for local and global banking capabilities. Its 24/7 market, with niche local payment capabilities, helps multinational companies lower costs and develop local supplier relationships. However, due to the peso’s volatility, implementing an FX hedging and risk management strategy will help determine how much cash to hold onshore versus converting to a more liquid base currency (like USD).
Managing payments to Mexico requires a global account structure and cash pooling that can drive FX and liquidity costs. By combining multiple technologies—including local and cross-border payments, automated sweeps and locked-in FX margins—treasurers can automate specific business processes to optimize liquidity, reduce FX costs and free up treasury resources for more strategic objectives.
Establishing a multinational footprint is an exciting development for companies but should not be taken lightly. With careful planning and a strong international strategy, finance and treasury executives can successfully navigate challenges and reap the benefits of international expansion.