Foreign Exchange Managing a World of Currencies Bill Kelly, Director, Global Payments, Endurance International Group Olann Kerrison, Vice President, FX & Global Payment Products, Worldpay

Overview FX basics The cardholder always pays How to get FX on your side

FX basics

FX basics FX is simply the conversion of one currency to another, and the rate used to convert is based on the interbank FX market Currencies are described using ISO currency codes that reference the country and currency name USD = United States Dollar JPY = Japanese Yen GBP = Great British Pound CHF = Confederation Helvetica Franc RUB = Russian Rouble EUR = just cheating

Why do rates change? Interest rates Inflation Geopolitical risk Economic performance

What about card payments? Rates are set by the card schemes, using a single, daily, global rate The exchange rate applies between the transaction and settlement currencies, and usually passes through USD for billing purposes Complications apply because of the difference between authorisation, capture, clearing and settlement Only certain currencies are available for settlement, which forces FX conversion to take place in many cases

What happens when a cardholder pays non-local? THB USD Shopper Merchant Authorisation USD If the shopper doesn’t pay in his local currency, the FX margin is applied here. Issuers typically apply a mark-up of 3%-5% beyond the scheme conversion. Settlement THB Cardholder currency USD Transaction currency USD Settlement currency USD USD USD Issuer Acquirer

What happens when a cardholder pays local? If the shopper pays in his local currency, the FX margin should be applied to the sale price. The 3% mark-up reflects the issuer mark-up, and therefore the shopper pays the same amount. THB THB Shopper Merchant Authorisation USD Settlement THB Cardholder currency THB Transaction currency USD Settlement currency THB THB USD Issuer Acquirer

The cardholder always pays

Domestic currency transactions are straightforward in terms of pricing 100 USD 100 USD 2. Sale price 3. Settlement value Business margin 90 USD 1. Cost price The difference between the sale price and the cost price is the business margin The sale price equals the settlement value (excluding any payment costs) because there is no FX conversion. Therefore the sale price determines the level of business margin desired.

When you throw in another currency it gets a bit more complicated … EUR 91.67 (104 USD) 4. Debit The cardholder is debited the same amount they would have paid in local currency with a 4% markup, but the FX income is applied by the issuer and the cardholder is unaware of the actual price until it is debited from their account. FX margin 4% USD 100 USD 100 2. Sale price 3. Settlement value Business margin The settlement value is the same as it would be for a USD-USD transaction because the conversion is carried out by the issuer of the card. USD 90 1. Cost price

Setting the transaction currency generates better control FX margin EUR USD 3. Sale price 4. Settlement value Y% FX margin X% If X% = Y%, the settlement value equals the USD sale price If X% < Y%, the settlement value is less than the USD sale price If X% > Y%, the settlement value is greater than the USD sale price USD 2. Sale price Business margin USD 1. Cost price

Worked example with international cardholder paying in their currency FX margin 91.67 EUR (104 USD equiv) 100 USD 3. Sale price 4. Settlement value 4% FX margin 4% Desired sale price is 100 USD Sale price marked up into EUR by 4% to generate EUR sale price of €91.67 Transaction processed at agreed exchange rate including 4% FX margin to generate desired USD settlement value Local pricing improves the customer experience, and the ultimate charge to the shopper is the same because their issuer would mark up their EUR transaction value to debit their account 100 USD 2. Sale price Business margin 90 USD 1. Cost price

Customer benefits of multi-currency pricing Increased conversion Better customer experience Achieve control over non-base currency pricing Higher average transaction value

And when you’re really cooking on gas … FX margin 91.67 EUR (104 USD equiv) 100.98 USD 3. Sale price 4. Settlement value 3% FX margin 4% Desired sale price is 100 USD Sale price marked up into EUR by 4% to generate EUR sale price of €91.67 Transaction processed at agreed exchange rate including 3% FX margin to generate USD settlement value USD settlement amount is increased by 0.98 USD, on top of the softer benefits of pricing in local currency 100 USD 2. Sale price Business margin 90 USD 1. Cost price

How to get FX on your side

Things to consider What should my international pricing strategy be? What currencies can I get? What currencies do I need? What risk am I prepared to take?

International pricing strategy How do you set pricing in local currency? What will your markup be? What’s price competition like with local providers? How often should I update my prices? How many currencies should I go with?

Hedging What risk am I prepared to take, or maybe am I permitted to take? How does my corporate hedging strategy play into my online pricing? Should I trade at spot, forward (deliverable/non-deliverable) or go for an option? What’s the metric by which I’ll measure success in my hedging strategy?

Hedging No risk No hedging required Rate Price changes daily Time Interbank Price is consistent over time Involves taking risk Mitigated by hedging (forward or option contract) Price Rate Interbank Time

Netting Transaction currency Settlement currency Payout currency SEK EUR Can you eliminate a chunk of FX costs by netting your exposure? If you have flows in and out in the same currencies, then you should investigate how to net those volumes Avoid double FX conversion and reduce FX risk FX USD FX JPY MYR FX FX MYR JPY FX FX Transaction currency Settlement currency Payout currency SEK EUR FX USD FX JPY JPY JPY MYR MYR FX USD FX

Summary FX is simply the conversion of one currency to another It is a great tool to drive global sales and perhaps generate its own income stream But you need a deliberate and considered strategy regarding how you price and how you protect yourself from unfavourable rate movements

Today’s speakers Bill Kelly, Director, Global Payments, Endurance International Group Olann Kerrison, Vice President, FX & Global Payment Products, Worldpay If you have any questions about the presentation, go to our LinkedIn Group (the Payments Education Forum) and request an invitation (this is a closed group specifically for the payments industry).