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  • Writer's pictureOfir Bronhaim

Embedded FX Solutions: the silver bullets for supply chains' cross-currency risk

Updated: May 26


2022 brought an influx of FX volatility at rates not seen in decades, and 2023 continues this trend. Freight forwarders are particularly vulnerable to multi-currency fluctuations: they operate in an industry with modest margins and uncertain market conditions. They typically have little other than lower rates to win the intense competition. Against this backdrop, smart tools that eliminate cross-currency risk can boost profitability and create certainty. Let's look at the challenge - and the opportunity at hand.


Why flimsy static FX markups are insufficient protection


As a buffer against FX volatility, supply chain companies typically add a static markup of 2%-3% to their customers' local currency payments. But as it turns out, this one-size-fits-all solution doesn't cut it. A typical ocean freight order can take weeks or even months from quote approval and shipment through to customs clearance and payment. This extended shipment translates into high FX exposure. Based on the data of 68K global supply chain transactions made in major global shipping lanes in the first quarter of 2023, there's more than a 70% chance that FX exposure would be higher than 3.2% - surpassing the static FX markup.


Here are some examples:

  • For shipments sent from Hong Kong to Europe (Hong Kong Dollar to Euro), the average exchange rate fluctuation was 3.1%.

  • For transatlantic shipments (Euro to US Dollar), the average exchange rate fluctuation was 3.3%.

  • For transpacific shipments (US Dollar to Chinese Yuan traded offshore), the average exchange rate fluctuation was 3.1%.

When actual FX exposure is higher than the standard 3% markup, profit margins are scant - and in some cases, absent.

Let's see what options are available to mitigate this risk.



embedded FX solution for Freight Forwarders


Can FX risk mitigation strategies restore profitability?


Common cross-currency solutions don't cut it


Faced with FX risk, freight forwarders have to actively protect their financials. Traditional strategies include currency diversification, dynamic pricing, nurturing favorable business relationships and currency hedging through brokers and banks.

While these strategies can be effective, their downsides outrun their upsides: they're inaccessible for SMEs, require complex and costly coordination, and entail regulatory constraints and management.

Powered by advanced technology, a more effective FX solution is now available.


How embedded FX solutions tip the scale


Eliminating cross-currency exposure, embedded FX solutions are integrated into supply chain platforms and lock in the exchange rate - for however long the payment is deferred. These innovative tools, based on big-data analysis and machine learning techniques, are accessible to businesses of all shapes and sizes, eliminate the complex broker and bank management, and, most importantly, cut down hedging expenses and boost profitability. Let's zoom in on how they work.


How do embedded FX solutions work?


Once the embedded FX solution's API is integrated into the logistics company's platform, it automatically facilitates effective and tailor-made cross-currency protection.


When the client submits a request for a quote for an overseas shipment, the embedded FX solution’s API automatically generates in real-time a quote to display to the client in their local currency. Based on unique risk models and big data analysis, this quote is specific and optimized for the client's attributes: currency pairs, estimated shipment duration and risk of currency fluctuations during this period. The freight forwarder can choose whether to automatically display this quote back to the client as is or add a markup - as befits their pricing strategy. Once the client makes the booking, the exchange rate is locked. The payment amount is then set - free from FX fluctuations from shipment booking until payment throughout the entire transit. In many cases, the embedded cross-currency solution offers cargo insurance that covers shipments from any potential losses caused by FX volatility through reimbursement or credit for future shipments.


Embedded FX solutions protects the bottom line


Embedded FX solutions are powerful for three reasons: first, they save costs - instead of the standard 3% markup, hedging costs are just 0.5%-1%. Second, they’re effective no matter the shipment duration - once the exchange rate is automatically locked, the projected payment time bears no impact on the payment amount. Third, they’re exhaustive and complete: as all the FX risk is borne by the FX solution provider, even if currency shifts exceed the hedging cost, the freight forwarder is 100% covered and doesn't have to shell out another dime.



Static markups vs. Grain FX solution


With embedded hedging, freight forwarders can avoid static markups, enabling them to set competitive prices without risking their earnings. They can also stand out from the competition with the ability to charge customers in their local currency while getting paid in their functional currency - risk-free. Lastly, specific FX solution providers - like Grain - offer a revenue-share model that lets supply chain platforms benefit from a costless additional income stream.



 


Learn more about how Grain can help you mitigate the risks of FX volatility.








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