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

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

3. FX basics

4. 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

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

6. 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

7. 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

8. 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

9. The cardholder always pays

10. 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.

11. 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

12. 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

13. 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

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

15. And when you’re really cooking on gas …
FX margin
91.67 EUR
(104 USD equiv)
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

16. How to get FX on your side

17. 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?

18. 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?

19. 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?

20. 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

21. 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

22. 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

23. 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).