Sterling for some, a pounding for others: Managing international payments post-Brexit

Following Brexit the pound has been anything but stable – a godsend for some but a nightmare for others. With this in mind we’ve taken a closer look at how treasury teams can manage their payments when dealing with the plummeting pound.

In 2016, little hogged the headlines quite like Brexit. A four to one outside shot that came true, Britain’s decision to leave the EU sent the pound reeling and the blows have continued to rain down since. Political musical chairs in Number 10 rocked the currency as Cameron was replaced by May while the Bank of England’s tactics to shore up the economy caused investors to sell, sell, sell. Having recently hit a 31-year record low, the pound now sits at approximately £1.22 to the dollar – and with Article 50 still yet to be invoked the future of the pound hangs on a shoe string.

For treasury teams executing cross-border money transfer, sterling’s fall from grace is either an opportunity or a worry. UK firms focused on exports that earn profit abroad and US companies will all feel a boost in profits with favorable exchange rates. On the other side of the coin, so to speak, UK based firms exposed to sterling, such as those regularly paying for goods or services from abroad, will feel a significant squeeze in regards to their international transactions. With these contrasting fortunes in mind, there are a number of FX payment best practices that financial controllers on both sides can implement to minimize the risks and maximize the rewards associated with a weak pound.

1. Hedge risk by using forward contracts: Considering the negative short-term impact on sterling witnessed since June 23rd, financial controllers should first consider utilizing forward contracts. Locking in a determined purchase at a favorable rate and hedging your payments can, depending on a firm’s position on sterling, prove profitable or prudent. Take a US company involved in buying goods from the UK. Almost overnight what the dollar could buy you in Britain increased significantly. A company in this position could look towards hedging by utilizing forward contracts to lock in the pound at, for example, £1.22 to the dollar. This way, even if sterling rebounds, the company can still benefit from a favorable exchange rate. 

2. Transparency in exchange rates: Alongside forward contracts, rates transparency is also an important consideration. While it may have been acceptable not to second-guess the exchange rate from a traditional payments provider previously – today’s volatile pound means corporates cannot afford to trade at sub-optimal or opaque rates. Treasurers and other corporate finance professionals need to investigate the exchange rates they're being offered and a clear view of the fees involved, such as lifting fees charged by intermediaries.

3. Payment provider's global reach: The weak pound isn’t necessarily doom and gloom for all. For UK exporters, the sterling fall has increased the competitiveness of their prices and presented opportunities to expand operations and explore new markets. In this situation, a financial controller should take the time to reassess their provider, and make sure that it offers a competitive solution when it comes to new uncharted territories and currencies.  

The weakened pound not only benefits UK exporters, the rest of the world now has a chance to take advantage of a low sterling rate to increase their imports of UK products and services. A country based in the US for example should also evaluate their provider and assess whether it has a strong presence in the UK and the US. If it doesn’t, then the lifting fees and associated inefficiencies could very well eat into any potential profit.  

4. The advantage of multi-currency accounts: Finally, in a situation where a currency has continued to fall over a prolonged period, corporates can't afford to lose time. Therefore, having the ability to manage multi-currency accounts in one place becomes a competitive advantage as it simplifies FX payments processes and practices, reducing time and potentially cost.

Ultimately, sterling volatility is unlikely to fall away until Article 50 is invoked before the end of March 2017 and until then it will continue to be acutely sensitive to political and economic announcements, such as the Chancellor’s Autumn Statement in November. Treasury teams that take the necessary steps around risk exposure and having full insight into how market events affect their payments processes, will be the ones best placed to seize the opportunity or avoid the risks of a lack luster pound.