Approaching international payment strategies in today’s unpredictable markets. 

SPEAKER 1: Thank you for joining us today. Please note that this event is being recorded. If you object to this recording, you must disconnect. A replay of the event will be available. With that, I'll turn it over to Chris. 
CHRIS BRAUN: Great, thank you. Good afternoon and thank you for joining. My name is Chris Braun. I'm the head of the Foreign Exchange group at U.S. Bank. I'll be serving as moderator to today's panel discussion on approaching international payment strategies in today's unpredictable markets. Joining me for today's discussion are Mary Henehan and Adam Towers. Mary Henehan is co-head of the Foreign Exchange sales team at U.S. Bank. Along with her fellow co-head, Mary manages a team of approximately 25 FX sales specialists who work with companies large and small to help them understand and manage their foreign currency exposures. 
Adam Towers is head of U.S. Bank's Treasury Management Global Solutions. He leads a team of product managers and technical sales specialists focused on supporting businesses with their cross-border payment needs. As advertised, the focus of today's discussion is on international payment strategies. And I really cannot think of a more appropriate time for today's discussion. 
Let's step back for a moment and just think about this past year and even just the past six months. We've had to contend with the continuation of a global pandemic, supply chain disruptions from a multitude of factors, including China's COVID zero policy, labor shortages around the world, and the war in Ukraine. We've seen surging commodity prices and levels of inflation that we haven't seen in 40 years, as noted in yesterday's CPI report which showed CPI in the US, or Consumer Price Index, up 9.1%. 
And many central banks around the world have aggressively been raising rates for the first time in years. Just yesterday we saw the Bank of Canada surprised markets by raising rates a full 100 basis points, more than the 75 basis points markets were anticipating. Each of these factors is triggering fears of recession, and contributing to heightened levels of volatility across financial markets. 
And one of the most acute places that this is showing up is within the currency markets, where just this week alone, we've seen the euro reach parity with the US dollar. This is something that hasn't happened in 20 years. The great British pound, now trading just below 118 for 100, I'm sorry, $1.18 per pound, is approaching the lowest levels we've seen in the past 40 years. We have to get below $1.16 to officially be at 40-year lows with the pound. And the Japanese yen continues to weaken, now at a 24-year low versus the dollar. 
So today's discussion is intended to highlight the importance of developing or refining, if you have one already in place, your international payment strategy for these particularly turbulent times. This means, number one, understanding the real costs of fluctuating foreign exchange rates when sending or receiving international payments. It means discussing how a Treasury management platform can provide visibility and control of your cash balances. And three, it can mean reviewing the advantages of invoicing in local currency versus invoicing in US dollars. 
So Mary and Adam are here to answer the questions we hear most often from our clients, in addition to the ones that you have submitted when you registered for today's event. As a reminder, if you want to ask a question of our panelists, please enter them into the chat. And with that, we'll get started. Mary, the first question goes to you. What have been the biggest considerations for companies doing business internationally this year? 
MARY HENEHAN: Great question, Chris. The reality is that conducting business across borders always comes with challenges that require a company to consider many factors. Among them first are generally how they're going to contend with language barriers or cultural considerations, maybe government and central bank policies or regulations. And after that, the shift goes to operating factors, whether a company is exporting or importing or has operations in-country or not. There are several important considerations they must face to ensure they're operating as effectively as possible. 
I think among those are how they'll make or receive payments. Are there payment terms offered at the time of invoice? What currency they'll pay a foreign supplier in, or what currency they'll invoice a customer in, or how they'll contend with economic impacts to their organization that are caused by currency market volatility. 
I think, Chris, you said it all so well. This has been a year of extremes to be sure. Market influences have created new or enhanced sensitivities for companies this year. Economic uncertainty has increased. Supply chain factors continue to evolve. The US dollar strength continues to grow, which you said super-well. Inflationary pressures and subsequent increases in interest rates have created challenges. 
And certainly Russia's invasion of Ukraine and COVID considerations globally have contributed to just overall increased geopolitical worries. So all that's kind of a long-winded answer to your question, Chris. The reality is that today's market conditions have driven or even forced companies to reevaluate how they have operated historically. 
Many of the customers we are talking to have had to adjust their invoice practices, or the currency they settle in, to be sure they're operating as effectively, efficiently, and competitively as they possibly can. We've even seen customers review their AP processes to evaluate longstanding payment templates they have for paying suppliers they pay on a repetitive basis, realizing that they're paying out more dollars than maybe they even anticipated initially. 
So and companies who are hedging their currency exposure have re-evaluated their hedge programs as well. Many have or are adopting changes in their hedge horizons as the interest rate environment has changed so dramatically. 
CHRIS BRAUN: Yeah, absolutely. Great answer, Mary, thank you. Adam, let's turn to you. For a company who maintains bank accounts outside of the US, is there an efficient way that they can get visibility and control of the funds in a single banking platform? 
ADAM TOWERS: Thanks, Chris. As you mentioned, businesses today are experiencing a number of challenges at the same time, from uncertainty, increased costs, supply chain challenges. To manage international cash flows in this environment, there's a few factors to consider that we'll talk about today. 
And first and foremost is visibility. It's very important, as cash flows change, that you understand your cash positions and manage those changes accordingly. This can be particularly difficult for businesses that have multiple accounts with multiple banks, potentially in different countries and currencies. 
One of the key solutions you should consider is a Treasury Management System, a TMS. There are different flavors available in the marketplace. But they broadly fit into two categories, those offered by banks and those offered by fintechs and software providers. Solutions offered by banks tend to be fast set-up and integrated with your broader banking suite. Fintech solutions tend to be feature-rich, and the good ones have ready-to-go integrations with banks and payment providers. 
So when we're talking about TMS, there's a few key features to consider. The first one is, will you be able to easily view all your positions from all your banks in one place. And, honestly, how difficult is it to integrate all your banks? The second is, can you initiate payments from all your accounts from one place? The third, can you easily move money between your accounts. 
And the fourth is around value-added features. What value-added features are available? For example, netting, target balancing, cash flow forecasting, risk management, all of these are features that can be available on your TMS. An example of a bank's platform is U.S. Bank's single point platform, where we have multi-bank and global cash position dashboards. 
Businesses with accounts around the world use single point to easily connect their banks to view intraday statements, previous day statements, and analyze cash positions in multiple currencies and make payments, all from one single experience. 
CHRIS BRAUN: OK, great, great answer, Adam. This is certainly a theme that we hear from our clients a lot, that simplifying their workflows and providing better solutions is really, really important to them these days. Great answer. Mary, let's go back to you and talk about the strength of the dollar a little bit, which has been a huge theme this year. How does the strength of the dollar impact a US company that's exporting abroad, and if you can provide an example, that would be helpful. 
MARY HENEHAN: Thanks, the simplest answer is that a stronger dollar will make the cost of US goods more expensive to foreign customers. As the US dollar rises or gets stronger against foreign currencies, the amount of local currency a foreign customer has to give up to buy a dollar increases, which is what drives up the cost for a foreign customer. I think as an example, and I don't want to oversimplify here, but currencies trade in pairs, where one US dollar is equal to a certain amount of foreign currency, and that value is constantly changing. 
This is just like a stock, Apple stock for example, where one share of Apple is equal to about $145 today, I think, where Apple and the dollar in that example are the pair. So in thinking about the impact of the dollar's recent strength, take the example of the dollar versus the Japanese yen currency pair. In recent past, in fact, not too long ago, February of 2021, I think, the Japanese yen traded at 105. So 105 yen could buy one US dollar. 
And as the US dollar has significantly risen and gotten stronger today, and by extension the yen significantly weaker, the purchase of $1 would cost a Japanese customer today 139 yen. We hit a high just above there, in fact, this morning, which as Chris said earlier, is near a 30-year high for the dollar against the Japanese yen, which is incredible. But to put this change in value in perspective, the purchase of, say, 100,000 US dollars has changed in value dramatically, and results in an increase in cost for a Japanese customer who's buying that 100,000 US of about 3.4 million yen, which is the equivalent at today's rates of about 24,000, almost 25,000 US dollars. So nearly a 25% change in cost, and that's just remarkable. 
So if you're a US exporter and selling your products or services to a customer in Japan and you're invoicing them in dollars, you're passing that currency risk to your customer. So I've really talked predominantly here about the impact to a Japanese customer. But if you consider what the impact is as a US importer, that impact really depends on how you're operating. 
With the rising cost of the dollar, your goods, US goods, will be more expensive to foreign customers without question. If you have the ability to invoice in dollars, and you set and keep that price at a dollar equivalent, you'll still earn the same. You're still going to get the same amount of dollars, provided your customers can now afford, in the yen example, to pay you 139 yen, or give up 139 yen, versus that 105 they would have gotten not all too long ago. 
If they can't afford that, you're going to see a slowdown in sales in Japan and probably a significant one. The other is if you invoice and accept payment in yen, you're exposed to the currency movements. Sticking with the same example here of dollar/yen, as the dollar has strengthened and the yen is now at 139, you're converting your yen revenues to less dollars. 
But in that case, you're absorbing the currency risk or taking on the responsibility for the currency risk. But you can manage it. You've got visibility to it and some control. 
CHRIS BRAUN: Great answer, Mary. I think it's incredible, given the moves we've seen in markets, just how impactful it is from a competitive standpoint in various markets around the world right now. So let's talk about that a little further. Given that is the case, are there benefits to paying for imported goods in the supplier's local currency? And Adam, why don't you take that one. 
ADAM TOWERS: Sure, thanks, Chris. So, yes, there are benefits of paying in foreign currency. So by paying a foreign supplier in their own currency, there are several things to consider. First of all is cost. Paying a foreign supplier in US dollars almost always shifts the currency exposure to your supplier. Unless they have a need for dollars, they're carrying currency risk. To contend with this currency risk, most suppliers will build a cushion or padding into the pricing on their invoice. 
This is generally a hidden cost in the invoice we've seen range between 2% and 10%. And by adding this cushion, the supplier gets some protection against adverse change in the exchange rate that might occur from the time that they price you to the time they ultimately get paid and convert back to US dollars in their own currency. So in this situation, the buyer is paying more, whether or not the rate goes up or down. 
By paying a supplier in their own currency, you should be able to negotiate better terms, better pricing, as they'll no longer have to contend with currency risk. And you can take control of the cost of goods, something that you don't have when you're paying in US dollars. The other fact to consider is when you pay with US dollars abroad to an account that is not in US dollars, the payment may be converted to the foreign currency at a rate that is not previously known by you or your supplier. We've seen many scenarios where sending US dollars means that the amount that arrives in foreign currency may not be what your supplier expected. 
Further cost implications, so the next implication we should talk about is invoice terms. So if you pay your supplier in their local currency, your supplier is no longer carrying currency risk and may therefore be open to longer payment terms. So when paying your supplier in local currency, you should consider negotiating better payment terms from your supplier. 
Finally, there's the relationship implications. Trading relationships generally improve when the supplier doesn't have to contend with the currency risk. And it's easier to do business with you. 
So in summary, when you pay your suppliers in their local currency, you can decrease the cost to you, either by avoiding the risk cushion or better controlling the amount that's delivered. You could potentially negotiate longer payment terms. And you can improve the relationship with your suppliers. 
If you're considering this change or have questions about currency risk, do not hesitate to reach out to your banking and foreign exchange providers. 
CHRIS BRAUN: Yeah, I think that's right on, Adam. But I think oftentimes companies wrestle with how do you have that conversation with your supplier. So if we've been paying foreign suppliers in dollars since the inception of the relationship, how would you recommend that we have that conversation about transitioning to their local currency, and what points of resistance would you expect to hear from that supplier when we would approach them on switching to paying in their local currency? And let's send that one to Mary. 
MARY HENEHAN: All right, thanks, Chris. Asking your supplier for dual currency invoices is common practice for companies who are considering their options when it comes to making payments for goods purchased. Most suppliers are well aware of currency risks and the impacts of currency market volatility and are quite accustomed to the practice of providing dual currency invoices. It's a really easy way for you to get visibility to what you might be paying as a premium for the flexibility of being able to pay in dollars. 
I think if a supplier is resistant to providing you dual currency invoices, there are probably a few things that might be behind their reluctance, that you can be prepared to discuss. Suppliers who are allowing you to pay in dollars are almost always padding that invoice. Adam mentioned this earlier. We find that padding can be anywhere from 2 to 10%, and in some currencies that pad can be larger than 10%, maybe even up as high as 15%. And they're adding that padding to create some protection for themselves in the event the exchange rate may change adversely during the terms of their payment terms to you. 
So they benefit from that practice when an adverse move doesn't occur, of course, and may be reluctant to make a change immediately if they don't want to give up the subsequent increase in profit margin that they're experiencing. That's certainly true today with the strength of the dollar, I think. So they might also be hedging their currency risk, which could be another issue. They're reluctant to provide you a dual currency invoice. 
So they might be hedging the currency with their bank and therefore aren't in a position to change your pricing immediately and may have to wait, obviously, until their hedge cycle changes. I mentioned earlier the strength of the dollar has created great benefit, in fact, tremendously so, particularly this year. If you remember the previous example of dollar/yen, the dollar/yen currency pair, which is trading now at 139 yen to the dollar, where it was 105 not too long ago, Japanese suppliers who were billing US customers in dollars, are converting their dollar revenues and receiving considerably more yen for every dollar they sell, assuming they haven't improved your prices and given the benefit of the stronger dollar to you. I'm not hearing that a lot from the customers that we serve here at U.S. Bank. 
So if they're hesitant, asking why is a fair question, especially in the face of the dollar's strength. And if they aren't in a position to change your pricing now, it's fair to ask them when they might be willing or in a position to do so. 
CHRIS BRAUN: Great, thanks, Mary. Adam, during periods of change everyone is asked to do more with less. What tips or tools should a company consider to save time managing their payments? 
ADAM TOWERS: There are a range of time-saving tools that business customers should consider. It varies based on the number of payments you do and the amount of work that it takes to manage your payments. Here are a few things to consider. So international payments can be complicated, between Swift codes and managing country-specific information. 
If you only make a few international payments every now and again, then it's really important that you use an online platform that simplifies that experience and takes the guesswork out of international payments. I'll plug our single point platform again. For example, our single point platform collects the right information for every beneficiary country that you're making payments to and doesn't just provide you a list of free text fields with a large help document. 
The next thing to consider if you're doing more recurring payments, then you should consider using templates and batch processing. Templates allow you to have multiple employees double check the payment information and make sure that it's accurate, and do that once and store that information for repeated use. This allows you to ensure the information is accurate and avoid manual entry errors. Where this feature is coupled with batch processing, you can easily and efficiently make payments to multiple repeat suppliers with minimal effort. 
And my last tip is to the customers that do large payment runs. Consider using an ERP integration. Even if those large payment runs are a mix of domestic payments and international payments, this can be of value. This can be the most technically complex option and involves integrating your bank into your ERP, so that you can send payment runs directly to your bank. Once set up, entire payment runs can be done with a single click from your ERP. 
CHRIS BRAUN: So Adam, let's stick with you for a moment. But what if I as a customer don't use U.S. Bank's Treasury Management Platform, but I do hold a US dollar DDA at U.S. Bank. Can I still instruct a foreign customer to remit payment to my dollar DDA in a foreign currency? 
ADAM TOWERS: You can. If you have a US dollar DDA and your customer is paying you in foreign currency, most banks should be able to accept that payment. If your goals are to speed up the payment or to reduce the cost of your inbound payments, then focusing on your customer's payment experience is one of the tools that can help. For example, as mentioned earlier, if your goal is about making it easier for your customer to pay you, then allowing them to pay in their local currency reduces your customer's need to manage any currency exposures. If you pre-negotiated any rates, then you can leverage those rates to reduce the overall cost of your payment. 
Then the other tool that I like for inbound payments is using virtual accounts for in-country receivables. These capabilities allow you to improve the cross-border payment experience and make it feel like a local payment experience. Your customers can pay you locally in their local payment rails, and it can make reconciliation easy for you. 
CHRIS BRAUN: Great. Thanks, Adam. Mary, companies who do business in a currency different from their parent or home currency expose themselves to currency risk. What's the most common way that they manage these currency exposures? 
MARY HENEHAN: It's a great question. Invoicing a customer in their local currency could be helpful to them. It takes the burden of currency conversion off their plate. But it could be helpful to you, too, by way of increasing sales, as your terms are friendlier to a foreign customer. The same is true if you're paying a foreign supplier in their home currency, as they don't have the responsibility of converting a dollar receivable to their own currency. And there are benefits in that to you as well, as you gain control of your costs, which we've talked a little bit about here today. 
As I mentioned earlier, doing business in a currency that's different than your home currency puts the currency conversion responsibility on you, which is an incredibly important and impactful consideration. The protection of profit margin and cost of goods sold become key considerations really quickly. To create protection, there are several things that can be considered. 
You can shorten your payment cycle to reduce the risk of currency movements. Or you can set pricing to contemplate maybe a worst case scenario or worst case potential move within your payment cycle, whether that might be 30 or 60 or 90 days, effectively adding a buffer to your price. But I think in either of those examples, you could make yourself uncompetitive by comparison, which is what generally drives the decision for most companies to hedge currency exposure. 
So talking about hedging for a minute, hedging the currency risk will serve to lock in or fix the exchange rate at which you'll buy or sell a foreign currency against the dollar or another currency in the future. Doing so creates predictability and stability of cash flow and balance sheet exposures and ensures the protection of profit margin and cost of goods sold. There are many types of hedge structures that a company can use to mitigate currency risk. 
The most frequently used tool, though, is a forward contract. Ease of use is what makes the forward the most widely used tool for mitigating currency risk or hedging. Determining which hedge structure might be the best fit for you, or for best fit for a given exposure, comes down to what you're trying to achieve and what your philosophy toward risk or risk tolerances are. And your FX partners can help with comparative structure analysis, value at risk modeling, or historical back-testing that could really help put you in a position of being able to make an informed decision. 
We've got a webinar that I think Chris will talk about at the conclusion of our conversation today. But we have a webinar coming up that will focus a little bit more intently on risk management. But in the interim, we're always available to help and answer questions with regard to hedging. 
CHRIS BRAUN: OK, Mary, that was a great overview. And it's certainly a topic where we can go really deep with clients in risk management, and a lot of complexity there. But that was a great, great overview. Adam, for you, what are the most commonly utilized tools for making and receiving payments internationally? 
ADAM TOWERS: So there's actually a wide range of tools that customers can choose from. And it really depends on their priorities. And there's a lot of options. So I'll break kind of the tools out into two categories. I think there's a platform and there's the payment rails. So as we think about the platform, from a platform perspective, things to consider are first of all, using an online Treasury platform. 
These can be easy to use, quite fast to get up and running, and works great for a large number of customers. If your priorities are process efficiency, you really care about the throughput of your accounts payable operation, then an AP automation solution may be the way to go. Those platforms tend to focus on making sure that each step, from invoice through to payment reconciliation, are as efficient as possible. 
The next is an ERP integration. And as we mentioned earlier, integrating with your ERP can drive a lot of efficiency at scale. And then we also mentioned earlier, Treasury Management Systems. So, as discussed, in these solutions you can view and manage multiple accounts and multiple bank relationships from one location. 
So then let's talk about payment rails. So it depends on your priorities and what your supplier accepts. For example, factors to consider are cost, speed, trackability, coverage. And let's talk about a few payment methods. So paper, paper still exists. Checks, drawers, cash letters, they still exist. They have largely gone away internationally. But they do still exist. 
The second is international wires. This is one of the largest ways of making cross-border payments. They tend to be fast and trackable. The third international ACH or low value cross-border, like its domestic counterpart, tends to be about making bulk inexpensive payment runs. Next one, cards, so cards are used in cross-border payments, whether it's a virtual card or a credit card. These can be used for travel and expense payments, or B2B payments, particularly if you've focused on extending your payment terms and DPO, Days Payable Outstanding. 
I would be remiss without mentioning the emerging technologies, like cross-border real-time payments, and crypto. These emerging solutions tend to focus on value propositions like speed and cost. But the challenge is that they're still new. So they tend to lack coverage. And not all your suppliers will be able to accept them. 
So there's a number of tools to consider based on your priorities. If you have questions, then consider speaking to your U.S. Bank Treasury Management consultant. 
CHRIS BRAUN: Great. Thanks, Adam, and excellent job, Adam and Mary both. I think this was very, very instructive. I'd like to ask all participants, that if you have a question that you'd like to ask now, please enter that in the chat. Minutes while we wait to see if any questions come in, I just want to highlight a couple of, three things I heard said in the conversation today. 
Number one, I heard that paying foreign suppliers in dollars seems simple, but it can actually be very expensive. And what you might actually be doing is passing the currency risk on to the supplier. Paying them in their local currency is often a less expensive approach and gives you more control over your costs. So I heard that loud and clear. 
Secondly, I heard that there are some really powerful tools available to companies today to help simplify and automate the Treasury processes. And these range from online Treasury platforms like single point, AP automation solutions, ERP integration, and Treasury Management Systems. And really third, and I think most importantly, U.S. Bank has the experts and solutions available to help companies large and small navigate these sorts of issues. So I think those are three key takeaways. 
I am not seeing any questions at this time. So for our participants, if you do have additional questions that have not been answered on today's call and you haven't asked them in the chat, please follow up with your U.S. Bank relationship manager. They're there to help answer your questions or to connect you with an international payments or foreign exchange specialist for further discussion. Also look forward to receiving an email towards the end of August for our next webinar, which is scheduled to be held September 29th, where we will be covering the topics of Swift, interest rate risk hedging, and also how to navigate foreign payments in a time of significant market volatility. 
So thank you for giving us your time and attention today. At this time we're going to end today's call. Again, thank you and at U.S. Bank we're here to help. So please reach out to your RM if we can be helpful. Thank you and goodbye.