Harnessing Technology to Control Latin American FX Risk

From devaluation to revenue recognition, FX volatility creates significant challenges for companies operating in Latin America. With the right technology, companies can mitigate these risks and achieve greater control over their pricing strategies, says Rafael Bufacchi, Director of Finance at PrimeiroPay.

Managing FX risk is a considerable challenge for companies doing business in Latin America. The region’s currencies tend to be subject to higher levels of volatility, and several LatAm countries have been affected by larger devaluation in recent months. What’s more, FX volatility has been exacerbated by global uncertainties arising from the Covid-19 pandemic, as well as by a lack of clarity about how individual countries will pull through the crisis.

Against this backdrop, currency volatility is a major issue for companies operating in the region. Many companies can have a currency mismatch between their costs and their revenue: for example, a company selling goods with its costs linked to USD while its receivables in a LatAm country are denominated in the local currency will have a currency mismatch that is directly affected by any currency appreciation or depreciation. This type of mismatch can lead to sizeable currency gains or losses that have a direct impact on the balance sheet and the company’s overall earnings results.

Global companies that sell goods and services in Latin America may also face challenges around revenue recognition. This can occur when there is a delay between a sale and converting the payment received from the domestic currency to the company’s foreign currency of choice, such as USD or EUR. This issue is more significant in countries like Brazil, where the delay between a credit card sale and the money settlement is typically 31 days. It is not uncommon for the USD/BRL exchange rate to vary by as much as 3% in a single day, which means the FX impact of settlement delays can be considerable.

Rafael Bufacchi, Director of Finance at PrimeiroPay

Tech solutions for FX risk

Harnessing technology is essential when it comes to effective strategies for managing LatAm FX risk. The key is having an efficient high-tech tool that makes a clear match between the company’s pricing strategy and the local currency conversion of the sale price. This means companies need a financial tech partner who understands the markets and the best solution for their specific needs and, to obtain an FX match, the solution must provide transparency on the exchange rate for revenue conversion. Typically, this means taking advantage of a PCI-compliant payment platform with a fixed exchange rate solution that reduces their FX exposures and enables them to control their pricing strategies with the same speed that exchange rates change.

The higher a company’s volume of sales, the more complex the task of eliminating FX risk becomes. Without properly automated processes, the risk of operational error arising from incorrect execution will only increase as the business grows, including risk to earnings. Sometimes a strategy may be too complex to execute manually, so having the right tech platform in place is essential for accurate execution.

To help companies overcome these challenges, PrimeiroPay developed a unique, fully automated FX solution in partnership with Citibank. The solution guarantees a fixed rate for 24 hours, thereby providing a single exchange for transactions and removing currency risk on revenues.

A single exchange for transactions

Merchants pay an individual processing fee to access the complete solution and gain visibility over how much foreign currency they will receive for any given transaction. Armed with this information, merchants can factor in exchange rates each day when recalculating prices for their services or goods – meaning they can access the data they need to perfect their pricing strategies. In addition, PrimeiroPay’s team handles foreign exchange negotiations with banks to find the most efficient tax interpretation for customers.

With current market turbulence, more companies are moving away from traditional FX solutions looking for greater transparency and control. PrimeiroPay’s automated FX solutions provide companies with transparency and risk mitigation they need, while enabling them to manage their pricing strategies more effectively.

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