Changing the Rules of the Game: A New Dawn for FX Risk Management

4th March 2020

From micro-hedging to leveraging data analytics, technology is radically changing the way treasurers manage foreign exchange (FX) risk. Philippe Gelis, CEO and Co-Founder, Kantox, discusses the true value of automating FX hedging, explains the role of analytics in improving hedge execution, and comments on what makes fintech-bank partnerships a success for all involved, not least the corporate treasurer.

Eleanor Hill (EH): How is evolving technology assisting treasurers to better manage their FX risk?

Philippe Gelis (PG): The fourth industrial revolution is driving a fundamental shift in corporate treasury – away from manual processes, towards automation. This new way of working can be seen across payments and cash management, as well as FX risk management. Some corporates are currently very early on in their automation journey, others are far more advanced. But wherever a corporate is on the automation spectrum, there are always further benefits and insights to be gleaned, so I see this being the direction of travel for the foreseeable future. Automation is certainly not just a buzzword, it is the new normal for treasury.

EH: How does Kantox’s offering reflect the shift towards automation – and how are corporate treasurers benefiting?

PG: The heart of Kantox’s offering is the ability to automate FX hedging and execution. Our Dynamic Hedging solution enables corporate treasurers to completely automate hedging processes, hedge small or large transactions in bulk, and streamline FX workflows.

A practical example of where this has been extremely useful for treasurers was the day of the Brexit referendum results. Corporates running our automated hedging solution had their risk fully under control when they arrived at their offices that morning, as their hedges were executed overnight. Those without such a solution in place were immediately faced with trying to estimate their FX exposure and hedge in bulk as quickly as they could, knowing that the market was continually falling. One treasurer lost close to €2m as a result of having manual processes in place.

These benefits are the tip of the iceberg, however. On top of automation, we can add analytics to provide actionable data and insight around the performance of the execution. The analytics’ interface that Kantox has built, Dynamic Hedging Analytics, is a live, data-rich dashboard that goes far beyond what any treasury function could achieve in Excel – offering at-a-glance overviews of hedged and unhedged exposures, as well as the ability to dig much deeper. The more in-depth functionalities can be leveraged to significantly improve the execution rules that companies are using on a daily basis. For example, the analytics might highlight that it would be beneficial for a client to execute hedges more often, but in smaller amounts.

EH: This brings us to the topic of micro-hedging – something that Kantox often talks about. Why might treasurers want to consider this?

PG: First, it’s important to remember that hedging strategies are not ‘one size fits all’. What works for one company in one sector cannot always be applied with the same results in another. With that in mind, micro-hedging is essentially a currency management strategy that consists of hedging each transaction as it occurs. Unlike other strategies whereby users take protective action after reaching a certain nominal threshold, micro-hedging protects against individual exposures immediately, regardless of the underlying value of the receivable or payable.

Companies operating a micro-hedging strategy use tools such as forward and spot transactions to immediately lock in the exchange rate. This then enables them to protect expected foreign currency cash flows from exchange rate volatility, locking in margins and improving forecasts in the process. In essence, it is real-time hedging on an item-by-item basis. This strategy can be particularly beneficial for companies with low-value but high-volume FX transactions, such as e-commerce firms or travel agencies.

To make the workflow around this easier for corporates, our Dynamic Hedging solution facilitates straight-through processing of micro-hedges. Not only does this remove a significant amount of manual processes, thereby freeing up treasury to spend more time on strategic tasks, the automated solution also provides greater visibility over FX exposures – with the added benefit of the analytics that I mentioned earlier.

EH: In the past year, Kantox has made the headlines for some interesting partnerships with banks. What is the strategy behind this?

PG: Yes, we’ve certainly been busy! We have entered into agreements with BNP Paribas, Citi, and Silicon Valley Bank – all of which are strong in FX, but acknowledge that building plug-and-play technology is quite challenging. Through these partnerships, the banks can offer their corporate clients the benefit of Kantox’s technology expertise and track record, while keeping the existing relationship intact from a liquidity standpoint.

Of course, for Kantox, we are also gaining exposure to a much broader client base. So where previously our solution might have been more popular among smaller clients, it is now coming to the attention of large corporates, thanks to these bank partnerships. It’s the best of both worlds – and treasurers ultimately benefit from having easy access to a fully automated hedging solution that will help them to improve their treasury processes.

I must add here that we were delighted to win TMI’s 2019 Award for Solution Innovation – FX Risk on the strength of our partnership with BNP Paribas. It’s one thing to believe in a collaboration yourself, it’s another to have it validated by the market.

EH: It was a well-deserved win! Still on the topic of partnerships, you have also announced a tie-up with Voxel Group in the travel industry. How does that work?

PG: Voxel Group is an e-invoicing leader in the travel industry and it provides a platform called baVel to help travel companies create, manage, and pay invoices. Thanks to our partnership, any travel company that processes payments through baVel can access Kantox’s currency management solutions without leaving the platform, resulting in a frictionless user experience. The travel companies can choose the payment method that best suits them for each transaction, which leads to reduced costs and an instant connection to the different payment providers.

It’s quite a niche solution, but Kantox has been working with travel companies for almost a decade now and we have a range of solutions adapted to the specific needs of the industry, so it was a logical move. For the travel companies, it’s enabled them to boost their profitability and increase competitiveness while keeping their FX risk under control. And because the suite of Kantox products is fully integrated with Voxel’s baVel platform, it’s a very simple and smooth user experience.

EH: On that note, how do clients use your technology if they have numerous other systems already in place within their treasury function?

PG: The beauty of Kantox is that it complements technologies such as enterprise resource planners (ERPs) and treasury management systems (TMSs). We are not trying to compete with vendors in that space. What we are doing is offering treasurers a simple way to switch from the ‘old school’ way of managing FX risk, which was very much based on human decision and manual execution, towards real-time automation. Kantox can be integrated with other systems and looks only to enhance their functionality, not replace them.

So, integration isn’t always the biggest question on potential clients’ lips, since our technology is flexible. Arguably, the main challenge is to prove to clients the value of completely automating FX risk management processes and then helping them to look beyond the actual technology towards the benefits of changing the way they operate, manage, and mitigate their FX exposures.

EH: Looking ahead, what partnerships and other developments do you have in the pipeline?

PG: It’s an interesting time for Kantox. Since our successful partnerships with the banks I mentioned earlier have become more widely publicised, other banks have approached us to discuss similar partnerships. If a potential partnership makes sense in terms of the bank’s geography or specialism, we will consider it. But, honestly, our main focus is ensuring that everything works seamlessly – rather than proactively seeking out new partnerships for the sake of it. So, while we are open to approaches, and will consider them carefully, we will continue to focus on the three banks we are currently working with, to consistently deliver the best possible service.

We will also look to increase our presence in the US throughout this year. The partnership with Citi has given us a strong link to the US market, which is a great first step. We were extremely pleased with the initial reception because it can be quite a tough market to crack, especially since competition for talent is high. But we’re excited about the growth opportunities in the US and we will continue to fully explore and understand the local dynamics, expanding our team there when appropriate.

In Europe, meanwhile, the focus will be to keep on growing and scaling the business. We will continue to add more functionalities to the core product suite and ensure that corporate treasurers benefit from the latest technologies to better manage their FX risk – while still maintaining strategic relationships with their partner bank or banks. So, we’re positive about 2020 and look forward to having conversations with new and existing clients and partners to see how we can continue to deliver strong solutions for corporate treasurers. 

Get more treasury management content from TMI here!

Treasury Management International (TMI) is a well-respected and independent voice in the treasury world, renowned globally for its sharp editorial focus and breadth of opinion. With real-life experiences from practitioners, TMI showcases topical, pragmatic solutions and strategic insights providing valuable material for all practitioners, from experienced treasurers and CFOs to those new to the profession.

Discover more at TMI

Call to Action on IFRS 18

10th May 2024Article

Finance and treasury teams should move swiftly to assess the impact of these new requirements on P&L categorisation, disclosure, and KPIs.

Optimising Hedging Cost Management

15th April 2024Article

Avery Dennison cuts FX hedging costs with innovative VaR approach, earning a DACT Award nomination in the process.