Magazine article Business Credit

The Impact of Bank Technology on Foreign Exchange: How Technological Solutions Help Corporations Handle Global Payment Transactions

Magazine article Business Credit

The Impact of Bank Technology on Foreign Exchange: How Technological Solutions Help Corporations Handle Global Payment Transactions

Article excerpt

The foreign exchange market is the largest market in the world. Money changes hands quickly - through explosive moves or a steady flow - for an astounding daily average of over $1 trillion per day.

Globalization in the business world has created a marketplace where even small transactions, across borders, trigger the exchange of currency. Foreign exchange has become an integral part of a broad range of business transactions for a steadily increasing number of corporations in most industry sectors. These companies need to exchange currency when they make payments for raw materials, labor, legal services, distribution or when they need to repatriate profits.

Such companies, challenged with the task of managing foreign currency transactions efficiently, securely and cost-effectively, turn to their bank's foreign exchange trading desk for help. And to handle the increasing volume, volatility and hectic pace of foreign exchange, banks are developing and deploying sophisticated technology.

Here's an example of how technology has revolutionized the way companies transact their foreign exchange business.

Not too many years ago, the accounts payable payments process was labor-intensive and time-consuming. Executing deals and providing settlement instructions was both slow and error prone. A company's corporate trader would determine its foreign currency needs based on the numerous payments that the company must make to its various suppliers, and then call one or more banks' foreign exchange trading desks to obtain rates for the aggregate amounts required in each currency. After the trades were completed over the phone, the corporation would confirm each trade with the bank's foreign exchange back office, and then provide settlement instructions, via fax or phone, which specified where the bank must deliver the currency.

No longer. The process of executing foreign exchange for accounts payable payments has been redefined by technology, making the process faster and more efficient, and reducing errors. Businesses now utilize automated dealing and settlement systems to complete the process entirely over a PC, with no need to phone or fax any of the information to the bank. Businesses implement these systems for use by the accounts payable staff, installing a bank-provided software product on the local area network (LAN) so that it is accessed directly from the staffs desktop. The staff accesses the software to input payment instructions for the foreign currency accounts payable payments.

In this environment, the corporation inputs the detailed delivery instructions, with the ability to view the details onscreen. Accounts payable payments repeatedly involve payments that are made to the same vendor on a regular basis. For these repetitive payments, the delivery instructions are saved as a template, eliminating re-keying each time that vendor needs to be paid.

Further enhancing the process is the software's ability to aggregate payment instructions before a trade is executed to purchase the required currency. For example, if the corporation has the need to execute 10 payments in Japanese Yen, it will input the delivery instructions, and the software product will then total the 10 amounts. The corporation can contract one trade for the purchase of the total Japanese Yen needed to make the payments. It is advantageous for corporations to aggregate currency amounts before trading, because the general consensus regarding the prices quoted by banks to corporate customers is that the larger the amounts, the lower the spread on the rate quote. …

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