How can you succeed when 95% of your turnover is exposed to foreign exchange risks?

25 October 2019

That is the challenge for destination management companies (DMCs) operating in France and in Europe.

According to the World Tourism Organisation (UNWTO), the year-on-year increase in arrivals of international tourists stood at 6% in 2018, and 4% in the first quarter of 2019. Destination management companies (DMCs), partners for French and European tour operators and travel agencies, naturally profit from this favourable situation, but their activity remains highly exposed to foreign exchange risk. We raised this issue with Léa Haran, account manager at iBanFirst, specialised in tourism.

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Destination management companies, or DMCs, present in host countries and specialising in these destinations, organise leisure or business stays on behalf of their tour operator and travel agency customers. A detailed knowledge of these countries and the service providers, together with expertise in the subject, allow them to meet travellers’ expectations in terms of customisation and the requirements of tour operators with regard to prices.

DMCs: groups found in several continents

Léa Haran reveals that some of her “international DMC customers make 85% of their turnover in France and 95% in the eurozone, although the euro is not their consolidation currency. It is therefore vital for them to cover their foreign exchange risk, the main threat to their margins. However, this is not the only difficulty facing financial directors, treasurers or accountants for these companies, for which an international installation, sometimes across several continents, leads to multi-currency accounting and requires the reconciliation of inter-subsidiary flows.”

“These groups, with a legal entity in Europe, but headquarters abroad and several subsidiaries in different countries, were not satisfied with the quality of execution of payments, random delays and opaque tariffs imposed by the traditional banks in the country of their activities”, continues Léa Haran. “Their bank sometimes needed 3 to 5 days to initiate a payment in a foreign currency. Furthermore, they received no support in terms of foreign exchange coverage and, as they had no direct access to the trading rooms of their banks, neither did they have access to real-time exchange rates. However, thanks to European directives PSD1 and PSD2, these companies then had an alternative to the banks in the shape of fintechs.”

PSD2, the end of the banks’ monopoly, effective on 14 September

“The two European Union directives on payments, PSD1 in 2009 and PSD2 in 2018, broke the banks’ monopoly on bank accounts and payments, introducing the status of payment institution, then account information service provider (AISP) and payment initiation service provider (PISP). The foreign exchange operations traditionally carried out by banks and brokers can now be offered by approved PSPs. iBanFirst, she adds, is therefore regulated by the National Bank of Belgium as a payment institution authorised to perform its activities throughout the European Union, and has AISP and PISP status thanks to PSD2”. Certain provisions of DSP2 will also come into force on 14 September, even if the European banking authority granted a delay for the players in the sector at the end of June.

Simplifying international payments

But how does the offer of a payment service provider (PSP) such as iBanFirst differ from that of the traditional banks? “The iBanFirst solution makes life easier for companies when it comes to international payments. It provides an exceptional payment experience, which banks cannot match due to their historical infrastructure, and provides a set of financial services which meet the daily operational requirements of small and intermediate-sized enterprises. The financial teams can make and receive payments, whatever the currency, cover their foreign exchange risks and fund their international development. Our customers receive more competitive exchange rates, since iBanFirst consults several partners before giving a price. They also receive truly personalised foreign exchange coverage support”.
But more specifically, what does this change for DMCs?

An offer particularly suited to DMCs

“During money transfers in foreign currencies between countries and banks, a poor quality service leads to delays in receiving payments, and complicates the reconciliation of accounts. Our DMC customers appreciate the ergonomics of the secure iBanFirst platform, which allows them to open registered and segregated accounts in 30 currencies with just a few clicks, and to initiate payments in foreign currencies instantly from the web interface. They can synchronise accounts opened in nearly 70 banks, and obtain a unified view of these different accounts. Their centralising account in euros simplifies the handling of foreign currencies and avoids the need for their French customers to pay international transfer fees, states Léa Haran. Our DMC customers can convert their euros to local currencies and transfer these currencies to their domestic accounts. Furthermore, the platform is integrated into their planning software (ERP) and treasury management software (TMS)”.
However, although ergonomics, quality of execution of payments in foreign currencies and competitive exchange rates allow time and money to be saved, the volatility of the currencies remains a major risk for international companies such as DMCs. What does iBanFirst offer in terms of foreign exchange risk coverage?
 

Technology, expertise and quality of financial products

“At iBanFirst, an account manager deals with just 10 or so customers, and calls them in the event of market movements likely to affect their activity”, Léa Haran tells us. “We support our customers to manage their exposure to foreign exchange risk in order to secure their margins. First of all, we review their positions and maturity dates. We then estimate their required coverage, partial or total, based on their target price and sale price. Our offer combines technology, quality and diversity of the financial products (fixed forward[1], flexible forward[2] and dynamic[3] forward exchange contracts) and expertise in terms of foreign exchange payments. By using iBanFirst to simplify their international payments, our DMC customers have discovered a complete range of financial services and expertise allowing them to refine their foreign exchange coverage strategy.”

Management of foreign exchange risk was traditionally the responsibility of the trading rooms of international banks, to which SMEs did not have access. iBanFirst is contributing to the democratisation of these financial products to the benefit of all companies and, like other fintechs, represents a driving force for progress for the good of the economy.


[1 ]Forward exchange allows a company to set the exchange rate for a collection or an invoice. It can thus be protected against a rise in the purchased currency, and secure their trade margin.
[2] Flexible forward exchange constitutes a currency reserve which can be used over a period of up to 24 months. It is particularly suited to the payment of invoices in foreign currencies for which the exact amounts and/or due dates are not known.
[3] Dynamic forward exchange neutralises foreign exchange risk, like a forward or flexible forward contract, while allowing the customer to benefit from any favourable movement in the foreign exchange market, between the date the contract is put in place and the coverage maturity date.