Currency exchange on the frontier
FX player moves to serve quietly growing niche
The essence of entrepreneurship is to continually search for underserved markets and then serve them. It’s been that way since business began, but that path is becoming increasingly difficult in today’s world, where it seems some company is working almost every market niche.
The exception is if a previously ignored niche has suddenly become bigger and therefore more worthwhile to serve.
Toronto-based Cambridge Global Payments, which has carved out a strong position in global payments and FX (foreign exchange) risk management in the past two decades, recently launched a new line of business to serve a niche that has quietly grown under most similar companies’ noses.
This month, Cambridge unveiled an expansion that will provide international payment services such as currency liquidity, in-country delivery and knowledge of local regulatory requirements for making payments in emerging markets. For many of these countries, it’s the first time there has been a formal payment system in place.
Bernard Heitner, co-CEO of Cambridge, and others tend to refer to emerging markets as “exotic” or “frontier” markets, largely because they are often ignored by large international payments providers, usually banks, due to their Wild West ways of doing business. Read: finding an agent who can stickhandle the various gobetweens that bite off a little piece of every transaction and often make the process cumbersome, time-consuming, and more expensive than traditional FX-involved payments.
However, there is an increasing international presence in these frontier countries by resource companies and multi-nationals, as well as burgeoning deal sizes. But if a company needs to pay for oil or minerals or other imports in Haitian gourds, Tajikistan somonis, Vanuatu vatus or any of 130 different currencies, it can be somewhat difficult.
In countries such as these, one can’t just wander down to the local bank with a cheque written in advanced-country currencies and exchange them, which has left a growing need for someone who can tame what could generously be called loose payment structures.
“Emerging markets are at the fore of real economic growth today,” Heitner observed. “The driver for this business is that certain industries, such as mining, are active in these markets, and there is a lot of money flowing in. But they sometimes lack the needed infrastructure, which hasn’t evolved along with the business. China can still be very difficult in some ways, as well as some parts of South America and Africa.”
Many of the impediments to trade stem from the problems organizations that need to exchange money into exotic currencies encounter when attempting to operate in countries that use only those currencies. They may have limited knowledge of exchange rates and beneficiary deductions. There may be regulatory requirements they don’t understand. There may not be a local ability or desire to take foreign currencies.
For example, a company might want to pay in U.S. dollars for something made in China, but the local manufacturer may not be willing or able to take U.S. dollars and wants to be paid in yuan. There may also be regulations attached to such a currency exchange or lack of a structure to make it.
Someone has to be the gobetween that facilitates this interaction, and Cambridge, one of the largest bank-independent providers of hedging and risk management products in the world, saw that need.
Certainly, it had the infrastructure to make the move. It has already built a large and experienced network of on-the-ground currency and foreign exchange experts who are connected to local agents in most countries. Through its foreign exchange and international payments businesses, it securely moves US$25 billion a year and serves 14,000 clients worldwide.
Heitner acknowledges that in an industry as large as international payments, it was generally believed that untouched niches couldn’t exist because they featured low-value exchanges and were therefore too expensive to service. But technology has enabled an evolution that now allows mass payments of low value.
Another byproduct of this technology-driven evolution to new services is that it usually involves contracts, which changes the way foreign exchange businesses traditionally operated.
“We’re stepping out of the transactional to the contractual,” he explained. “It’s becoming the direction of a lot of companies that concentrated on transactions. They’re becoming more contractual.”