The following is a guest post by Convera CEO Patrick Gauthier.
The list of challenges facing companies trading internationally is ever-mounting.
Geopolitical tensions are leading to shifts in global trade flows. At the same time, companies are being forced to respond to a growing list of internal and external pressures, from record highs in inflation to the need to transition to a low-carbon business model.
Several significant economies may tip into recession this year due to inflation and high interest rates. In 2022, 39 of the world’s major central banks raised interest rates 219 times, the highest number of hikes over a one-year period since 2001 and a complete shift from the 102 interest rate cuts delivered through COVID-19.
In parallel, the global regulatory environment continues to grow more complex.
These factors present challenges and opportunities for companies and the service providers they rely on to do business. The payments industry plays a pivotal role in facilitating international trade.
Transactions bogged down
Yet, many transactions are still bogged down with overly onerous processes and extended timelines, which exposes firms to sudden shifts in exchange rates and the costs of doing business globally.
The onus on the payments industry is to drive practical solutions for businesses – especially SMEs – to help them mitigate risk and protect their bottom line.
The long tail of the COVID supply crunch, coupled with geopolitical challenges, has resulted in a complete shift in how companies view operational risk on a global scale.
Diversifying supply chains means navigating new regulatory environments and foreign exchange regimes. Convera’s latest global trade report points to the impact of international trade maps being redrawn, particularly as trade corridors are impacted due to geopolitical issues and carbon reduction goals.
It’s been an exceptionally choppy period for businesses dependent on foreign exchange, too, due to the high level of volatility experienced over the past 12 months.
Exchange collapsed
Last year, the Euro/U.S. Dollar exchange rate collapsed below parity — a 20-year low — due to the energy crisis prompted by the Russia-Ukraine war.
Businesses experienced currency fluctuations not seen since the global financial crisis in 2009. We know these fluctuations have a significant impact on profit margins.
With this volatile backdrop, companies trading internationally want to future-proof their payments and their ability to deliver for shareholders.
At Convera, this plays out in hedging transaction volumes, which increased by 53.5% between 2019 and 2022, with the most significant rise occurring between 2021 and 2022, a year-on-year increase of nearly 30%.
This uptick in demand for risk solutions coincided with the start of the fastest global monetary policy tightening cycle on record.
The potential for economic recessions in the next 12-18 months leading to another turnaround in interest rates – this time rate cuts – to stimulate growth could pose further challenges for international businesses.
Interest rate cuts coming
Looking at U.S., EU, and UK expectations over the next 24 months to May 2025, market data suggests we will see nine interest rate cuts, starting with the U.S. later this year.
Fluctuations in exchange rates can cause unpredictable swings in the value of assets and liabilities denominated in foreign currencies or inputs costs, making it challenging to forecast and set profit margins.
In the 2023 survey by The European Association of Corporate Treasurers, cash flow forecasting has been rated as the number one challenge facing treasury leaders.
To help businesses respond, there’s a need for accelerated modernization and technologies that ease or remove global trade frictions.
B2B organizations expect more visibility, transparency, and efficiency, as well as payments to be settled faster, cheaper, and more securely.
Demand for automated solutions rising
These trends are already well underway: over the last five years, Convera has seen demand for its automated payment solutions increases significantly, with the share of payment volumes processed programmatically increasing globally from 36.8% in 2019 to 49.1% by 2023.
Products and technologies facilitating smoother B2B transactions will be pivotal in driving healthy global trade.
A more complex global regulatory environment governing business trade and payments presents new challenges, but several critical trends emerge.
Businesses want more choice and control in how and when they pay. A robust payments system is no longer an operational requirement; it’s a differentiated and strategic imperative.
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Speed is of enormous concern, and the velocity of money needs to accelerate. Data moves around the world instantaneously; it’s time money caught up. Real-time payments (RTPs) will provide tremendous opportunities to drive business growth.
RTPs dramatically change the settlement cycle so that it not only completely changes the flow of money and, therefore, the economics of a payment network but also impact risk management. RTPs present a huge opportunity to modernize how payment networks operate.
Improved interoperability
A lot has been achieved in recent years. Improvements in cross-border payment solutions were boosted by the introduction of SWIFT’s global payments innovation (gpi) in 2017, which improved interoperability by providing an enhanced common standard for cross-border payments.
It has helped boost transparency, enable faster payments, and improve integration across payment systems and networks.
However, as the U.S. prepares to launch its domestic real-time payments initiative, FedNow, similar to the EU’s Single Euro Payments Area (SEPA), business demand for innovation in international payments is still outpacing the global regulatory framework, which supports the complex processing of compliance checks.
Consumer payment methods like mobile wallets have also raised business expectations for international payment experiences.
Several global institutions, such as the Financial Stability Board (FSB) and the Bank for International Settlements (BIS), are actively promoting the development of real-time payments for international transactions.
CBDCs will force innovation
This will be all the more important as central banks develop their own Central Bank Digital Currencies (CBDCs). Multilateral interoperability will be needed to connect CBDCs and existing payment systems globally, to allow digital currency transactions to move instantly across borders with little friction.
Today, business interoperability remains a crucial challenge as businesses often need to work with multiple banks and payment systems in different countries and currencies.
These global processes and connections can be very complex and lead to unexpected risks – whether at the front end with customers, in the middle with compliance operations, or at the back end with regulators.
With new emerging economies and shifting avenues of trade, geopolitical tensions, demographic declines, and reserve currencies in question, businesses face incredibly complex challenges.
Simplifying payments can not only help navigate these challenges but can boost cross-border trade, improve treasury management and mitigate fraud. The prevailing business climate has been characterized by uncertainty and volatility.
For those of us in payments, these existential challenges should motivate the drive for innovation and change.
