New study shows SME Spot FX use is rising but few hedging currency risk

8 July 2009
New research into the business activities of Small and Medium Enterprises (SME’s) who trade internationally shows that while an increasing number are using Spot FX products, fewer than 1 in 20 are actively hedging currency risk.

The latest East & Partners Australian Business Foreign Exchange Markets May 2009 Report also indicates that there is a growing tendency for SME’s to use specialist providers like Travelex instead of the big four banks. Travelex Regional Divisional Director, Asia Pacific, Kerry Agiasotis said the latest report highlighted a number of key trends in the fast moving Australian FX market, especially within Travelex’s key markets – the Small and Medium Enterprise (SME) sector ($5-$20m annual turnover) and Lower Corporate Enterprises (LCE’s) ($20-$100m annual turnover).

Key findings of the report include:

  • A majority of LCE’s and SME’s used a Spot FX product in the prior six months and 15.9% believe it is a product of growing need to their business.

  • The incumbent Big Four banks have been under attack in many segments of
    the market and have collectively lost primary Spot FX market share in the SME
    segment in the six months to January 2009.

  • Only two of the top seven Spot FX providers, ANZ and Travelex, increased
    market share across all surveyed market segments in the prior six months–
    Micro (<$5m annual turnover), SME and LCE.

  • The use of currency hedging by SME and Micro enterprises remains limited,
    with only 5% using some form of FX derivatives, potentially exposing them to
    higher FX transaction costs.

  • Travelex is rated first in customer satisfaction with Spot FX across all enterprise
    segments covered.

“Travelex’s experience is that companies in the SME and LCE sectors have a greater need for specialised services and relationships from FX service providers compared with their larger corporate cousins. For the past three years, Travelex has ranked number one for customer satisfaction with Spot FX1. We are justifiably proud of this achievement, which underpins Travelex’s growth in market share in both the SME and the LCE markets, Mr Agiasotis said.

While high numbers of enterprises now engaging with the Spot market, Mr Agiasotis
said the East&Partners research reinforced that only a small number of SME’s and
LCE’s are adopting hedging strategies as a way of managing FX risk. It is alarming that so few organisations with an FX exposure are putting in place risk measures.”

This is especially concerning given the amount of volatility that we have witnessed in recent times and the direct impact that this has had on profitability, Mr Agiasotis said. Interestingly, the survey shows that even as business turnover increases, there is still a significant disconnect between the perceived importance of FX derivatives and the uptake in their use. Only 35% of enterprises with turnover between $20m and $100m use Forwards and just 25% use Options to hedge currency despite respondents in this segment agreeing FX derivates were important to their business. “

This mirrors Travelex’s experience in this market, where many clients are relatively young businesses, who having experienced a sustained bull period and grown quickly see little need to put in place strategies to manage currency risk, he said. We believe that the on-going currency volatility and challenging economic conditions should encourage these businesses to review how they manage their FX risk. Travelex’s ability to provide dedicated FX risk solutions along with streamlined international payment processes gives customers an opportunity to reduce risks and costs, and improve the efficiency of their inbound and outbound international
payments processes, Mr Agiasotis concluded.

Source: East & Partners, Australian Business Foreign Exchange Markets Report, May 2007, 2008 and 2009