Ed Surman: (00:00)
Hi, I’m here today with John Marney who is a business analyst at Smart Currency. So, we’ve worked with Smart Currency for three years, as a company. We really love what they do. They have a very, very good offering to small businesses with moving money across borders, changing currencies. And, I’m here today to talk about the benefits of having a plan in place to move money across border and what kinds of things SME’s should look for and kind of solutions that we can use to help small businesses move money around the world with ease and control. John has had a career in FX markets for over 25 years. The financial institutions like ABN Amro, RBC and Credit Agricole before moving onto smaller FCA regulated institutions and is now at Smart Currency Business. The business of Smart Currency Exchange Limited has been supporting businesses for over 14 years moving money around the world. And I feel that sort of in the early days of this podcast and we’re talking about some technical issues we are having on leases soon, we think currency is really, really important area to discuss. Also it’s timely, as you know, we have Brexit uncertainty currently affecting different businesses in different ways and a good discussion and full discussion. During today will be a good starting point to help us navigate those choppy waters. How you doing today John?
John Marney: (02:57)
I’m good thank you very much. Thanks for having me.
Ed Surman: (03:00)
I’m really, really happy you came. So, just tell us a little bit about what Smart Currency does and when companies should really consider when to think about how they swap money. Do you think it should be from day one of a new company or when do you think it really matters?
John Marney: (03:19)
So we’ll start with Smart and as you quite rightly said Ed, we’ve been around for about 15 years and we’ve had really consistent growth. So that we’re now actually up to about a hundred employees. The mission from Charles Purdy, the owner has always been to help companies understand the risks that they have, specifically around currency and sort of volatility in foreign currencies. And we then, our DNA is really to take a holistic approach to go into companies and to give them every support we can and make sure that we understand their situation and their requirements before going any further. At that point we really want to look at setting, giving them some support and guidance on how to set the right budget rates for their business. And then with those budget rates, if they are applicable, the idea is to give them solutions that will help them attain those budget rates. And really the end goal is that they don’t have any nasty surprises from currency movements and they can get on with doing whatever business they do with their margins and their cashflows protected.
Ed Surman: (04:32)
So I mean, when we talk about budget rates, we’re saying, we’re setting exchange rates in our budgets for the next year or so. What sort of rates should companies have in mind or what sort of spread in terms of the volatility of a price move? What sort of things should businesses be thinking about there?
John Marney: (04:57)
I think that it’s a common question, a question that we get asked an awful lot when we go in and see people is, where do you think it’s going? Where do you think we will be in three months, six months, one year’s time? And really one of the answers that we give very, very frequently is that no one actually knows. That’s partially the point. No one knows exactly where it’ll be in a year’s time. And a very old answer to that question is if we did know we wouldn’t be doing this, we’d be trading the markets ourselves and making an awful lot of money doing that. So without that knowledge, the best thing to do is to be able to forecast your cash flows. That’s the key. And then at that point have an idea of what you expect. Given the current rate, those cash flows are going to return to you in that other currency. And as long as you’re happy with that, then really the best thing to do is to hedge that situation. And as we said, you then have visibility over your cash flows as long as they are reliable in that you forecast it and then you can get on with doing the business. The last thing in the world that people want to do, because you’re right there, to go back to the number of the question, currencies move around a lot. If we look at sterling against the dollar, that moved almost 7% in January this year.
Ed Surman: (06:19)
Yeah. I mean let’s not even talk about the referendum result, even just month on month, you know, it’s madness.
John Marney: (06:25)
The referendum result provided obviously one of those big digital moves. So we knew when the referendum was going to be, no one actually really expected, the result was going to be what it was. But we were fairly sure that had that result come through we knew that sterling was going to be lower on the next day. You’re absolutely right in one day sterling fell the best part of 15% against various currencies. And that is exactly the situation we want to avoid because that’s the kind of move, if you’re not prepared for it and if you’re not hedged for it, that can wipe out companies. And it did. There were various companies who went to the wall just because of that move. And it’s exactly the situation that we’re trying to avoid for people. As we said, a 7% move in January, that could have been very, very hard for some people, especially those companies, lot of companies set their budget rates at the beginning of their financial year and quite a few of them have financial years that end in December. So a lot of companies would have been looking at their forecasts in January and then trying to decide from those forecasts what kind of hedging they should put in place.
Ed Surman: (07:38)
So when we’re talking about when, we’re indicating that people set their budget rates at the start of the year, do you ever go in with companies and say, look, we’ll take a view of where we think sterling, dollar, just to keep it simple, might be in say six months time, would you apply forward rates sometimes in budgets? Or would you not really go to that layer of complexity?
John Marney: (08:00)
So those are two different questions. You’re absolutely right. It’s generally the start of the year when people analyse their cash flows, their forecasts. An,d then that’s also when they look at an appropriate budget rate. And at that point you have the prevailing rate in the market, which is what we call the spot rates. And then you will have forward rates, and the forward rates are just the interest rate differentials of the two currencies, applied to the current spot rate.
Ed Surman: (08:28)
So example would be again, dollar, sterling. The Federal Reserve is quite hawkish with interest rates. So they want to keep raising the rates and the UK would probably like to, but with Brexit uncertainty, they’re keeping it flat. So the long term trend is actually that the dollar is going to become more expensive for UK buyers.
John Marney: (08:49)
That’s certainly true. The other point is as you said, you’ve got the FOC who we have US interest rates at the moment, that are 2.5% and you have UK rates, which are still 75 basis points 0.75%. So if you want to sell dollars but you want to sell them forward, which means that you’re actually keeping hold of them for the time being, you’re going to be penalised for not giving those dollars up right now because you’ll be able to get 2.5% on the dollars that you keep. And obviously the person who was expecting the dollars, let’s say we’re holding sterling, will only be able to get 75 basis points, 0.75% so the forward points are about readjusting those values. And so when we talk about forward rates, that’s all we’re really discussing is, given the current rate and given where those interest rate cashflows will make the difference, is the future values for those currencies, then at that point, that gives you the forward rate.
Ed Surman: (09:57)
I mean, it really is the only reliable place to start with forecasting a price. You know, everything else is pure, well not pure speculation, but pretty much pure speculation.
John Marney: (10:05)
Absolutely. And it’s a very good point. The one thing that we absolutely advise against is that kind of speculative activity and that kind of, it could even be argued that if you know what your cash flows are and you know that they’re reliable, then to do nothing is effectively speculation. Because you know what the rate is right now and you know what you can guarantee in terms of revenue. And obviously there are people out there who believe that the rate may improve for them and then they don’t do anything. But of course, by definition the rate can also worsen for them. And if it does, then your forecasted cashflows have just become worse. So it really is something that we try and instill in all of the people we talk to as often as possible. If you have reliable cash flow forecasts, the best thing you can do is to implement some kind of hedging strategy to manage that and to mitigate the risk from the currency moves as often as possible.
Ed Surman: (11:09)
Fantastic. So Smart Currency business is an FCA authorised payment institution. So your talk about hedging and about not speculating on prices when budgeting or cashflows makes you sound very sensible. So being an FCA authorised payment institution, what does that mean from a company that would, say a business, small businesses normally see their Lloyd’s or Barclays being a really reliable source of financial infrastructure? So not just holding deposits but borrowing money, making payments. I think actually that’s probably dying down in a way people go to all sorts of other providers now. If a business is saying, we want to use a company like Smart who isn’t the bank but we have this term FCA authorised. What does that mean?
John Marney: (12:01)
So the FCA authorisation is important because it guarantees the customer that their funds will be segregated and it means that they have security even, should in the very unlikely event Smart go bust, it means that their funds are absolutely segregated and secure for them. So that’s a very important part of that definition. I think in terms of the way that new offerings have come about, what we’ve found is that for a lot of, especially smaller businesses, they have found that while you say that traditional delivery method and the traditional relationship has been with their banks, the the level of service provided by the banks has been somewhat missing.
Ed Surman: (12:49)
It’s been crap. You’re polite, I’m not.
John Marney: (12:57)
And to some extent understandable. We all know that banks have closed down an awful lot of retail branches. We all know that following 2008 a lot of banks have had incredibly high costs and shifts in costs that they’ve had to somehow assimilate into the business. So a lot of banks have cut back on an awful lot of the servicing and support that they give, especially to smaller companies. And that’s really where Smart comes into the market. It’s exactly that kind of a guidance offering, a support offering, and then ultimately the ability to do that hedging through us. You mentioned the loan situation, we partner up with various business services, divisions so that we can offer things like trade finance, things like invoice finance, which again, help companies with working capital. If they have cashflow issues, it can help them out of those kinds of situations as well.
Ed Surman: (13:52)
I think that’s kind of fragmentation in some ways is very good actually. I mean, you can see all these different suppliers coming in and adding value, you know, crowdfunding and peer to peer lending. I think there are some serious risks with it going forward and particularly with liquidity. But sorry, hope that wasn’t too financial but actually, you know, it’s good that there are alternatives out there. So the other thing that’s happening in the financial services market and I follow some great, there’s some great podcasts actually on that. Obviously the public awareness of getting better exchange rates is becoming more prevalent. So using you guys, you’re very competitive. You trash the banks on rates. But obviously there are Fintech app banks like Revolut, that have business offerings that pretty much get their exchange rates as close to the interbank rate, which means that, when banks and companies and when banks and finance institutions buy money off the international markets, they are very, very close to the actual market rate. And if you’re using say the post office, maybe not the post office for that example, but a cash exchange office on the street, they will be having much higher rates that you’re paying. So what’s it been like competing with those banks that are really trying to almost remove all sorts of basis points straight in commission?
John Marney: (15:26)
I think that as you say, the Fintechs offer a very different product. So a lot of the time they really are about technology. They’re really about a platform that allows two people who have mutually opposing interests to meet each other. And that obviously then reduces the spread that they pay each other down to a very, very tight margin as you said. But it does sometimes mean that for those kinds of companies, you might have to wait, for example, for a price if someone doesn’t happen to have an opposing interest to you and they are very light on the service and the support side, so they aren’t really interested in a relationship. They are, they generally tend to be more predominant in the private client space or the individual space. And as I said, Smart, really our DNA is as a treasury risk management company geared up really towards SMEs and micro SMEs. We do have the facility to obviously make payments for private clients and for individuals within the companies that we’re dealing with already as our customers. But our focus is really on, as I said, providing that very high level of support, guidance and help to people and really building very long term relationships.
Ed Surman: (16:59)
I think it’s really important, we were talking earlier about your experience of working in big financial institutions where your customers you were dealing with, you know, they had treasury palms of the rope. Just talk to us really about the level of education and and customer service and insight you provide around the whole treasury and risk management solution. We talked about it and in debt and cash flows but really go into the kind of work you go into with your clients at Smart.
John Marney: (17:34)
Sure. My job is really to go in and visit the clients and as you said we are generally looking at the SME world. So we’re looking at people who quite often may not even have a hedging policy. They may be covering contracts in foreign currencies on a really reactive basis. So as and when a contract comes through, that’s when they cover it. That’s not necessarily bad, but it does mean that they are then vulnerable to foreign exchange variances throughout the whole year. And obviously as we said at the beginning what we would rather is, if you have a fairly good idea of what your cash flows are going to be, then cover as much of it as possible at the beginning of your financial year. So it’s really about giving guidance to people. A lot of our customers are specialists in their own fields. They’re very good at what they do, but we are talking about smaller companies. Sometimes they may be single owner companies where the level of expertise and experience in terms of hedging and in terms of knowledge about financial markets is very, very low. And it’s really a question of us going in helping them, sitting with them, making sure they understand what those risks are and how they can impact any of their KPIs, any of their bottom lines. And then once we’ve gotten to a point where they’re happy that they understand them and they’re ready to set some kind of rate, then we can start talking properly to them about what the best thing to do would be for them and for their business going forward.
Ed Surman: (19:17)
Yes. I think the other important thing to really consider now, it’s coming to a head and more of a pressing issue. So one of the blessings I think in the private sector at the moment is more and more and more SMEs are exporting or their supply chains are going more international and also supply chains are going more international as well, so buying goods from different countries in. So where services are great as a whole, what sort of risks do you think are going to get carried forward for the SME community if companies like yourselves are not going in and or the owners are not getting enough of an education of how really important this stuff is. I mean, I have plenty of examples where, you know, people have been buying foreign currency on the spots, at the time they really need it, and then, over the year they find out they’ve actually lost nearly all of their profit for the year. I mean that’s in the worst year. We’re talking about Brexit years here, the referendum year. But going forward it’s going to be kind of critical. It’s one of the, I think it’s the most important facet of the financial markets that meets the real economy, you know? So what kind of things do you think SME’s should be looking out for and what kind of risks do you see in the economy as a whole for small businesses, if that stuff isn’t really being talked about?
John Marney: (20:46)
It really comes down to currency volatility. And as you said, for a lot of customers who are exporting and exporting because of the drop in sterling and following the referendum, if you are able to export, obviously for a lot of companies then their goods have become that much cheaper to all the other countries, so exporting is definitely blossoming, but at the same time it really depends what you’re exporting. If you can manufacture locally and if you’ve bought all of your raw materials locally, then obviously you’ve sourced those good prices because you bought everything and serving and you can benefit from that lower level. However, if you are a clothing manufacturer and you have to buy in all your raw materials and you’re buying in cotton ….
Ed Surman: (21:35)
In Dollars as well.
In dollars or from India, from China, possibly Turkey, then all of a sudden you’re having, in the last couple of years you’ve been having to pay more money for those materials. So there is a real risk.
Ed Surman: (21:52)
It sounds like you’ve got to really predict. It sounds like it’s actually a lot, a big piece is about predicting your gross margins, right? So, you know, if you’re in a wholesale distribution company, you’re buying goods and selling them on, margins will always be under pressure because there’s always a competitor that can do it cheaper than you can. So if you’ve got a company with a very broad international supply chain on your purchases and costs side and then you’ve got a global market on your sales side, you’ve got two very, very, very big variables that if you have to forecast your business plan, your finance plan, your cashflow, you could be anywhere between a loss to a stonking profit, right?
John Marney: (22:34)
Absolutely. As you quite rightly said, especially when you’re on both sides of the coin. So if you are importing raw material and then exporting back out, you have double the risk in terms of currency volatility. It’s not uncommon for currencies to move 10% in a year. oYou get that wrong both ways and that’s 20% of your margin gone. Now that for most businesses is going to be something that they’d rather obviously not have to suffer and some of them literally won’t be able to suffer that kind of loss. It’s more, rather than margins, it’s more about the cash flows. Because if we can hedge the cash flows, then it guarantees your margins. So to go back to your question, actually what happens is if you don’t do it properly, then your margins get eroded. And that’s exactly the situation we’re trying to avoid for people.
Ed Surman: (23:29)
So let’s just quickly fire through some technical terms. We’ve gone through quite a lot. So I’m just going to reel off one words and just for the benefit of our listeners, we’re going to do some jargon busting. Okay. So, spread?
John Marney: (23:47)
Spread is effectively the price that you pay over and above what we call the interbank rate. So as you said, there is an interbank rate, which is seen as being the middle of the market and as the name implies, it is where banks trade with each other. It’s a very, very tight margin. And as with most business, because they are doing very big amounts, they get very good prices. So that’s really the benchmark that people use and when people talk about spread, really it’s the distance away from there that you will actually end up trading your contract at.
Ed Surman: (24:35)
Okay, cool. Then let’s go for the term spot?
John Marney: (24:41)
So spot is a financial market term. It basically just means for standard delivery, which is usually two days. So in the professional financial market, spot is for two day delivery. But given the smaller amounts and given the flexibility that a lot of SMEs need, spot effectively can really be anything from today. Settlement today out to two days.
Ed Surman: (25:10)
Cool, basis point?
John Marney: (25:13)
Basis point’s a good one. So basis point is actually an interest rate term. So a basis point is 100th of 1%. So if we write down 1% as being 1.00 a basis point is that second zero, the 1.01. So when we talk about central banks and we talk about moves that they may make in rates up or down, generally central banks tend to move 25 basis points.
Ed Surman: (25:46)
So that’s 0.25?
John Marney: (25:48)
A quarter percent. Exactly right.
Ed Surman: (25:49)
Yup. Cool. Great. So if you were a small, medium sized business, you haven’t done anything about your foreign exchange, you’ve just opened up a market in Asia or Europe. And you’re thinking, oh damn, I really should think about this. I haven’t organised this at all. I need to talk to someone. What, where’s a good place to start? What resources out there, obviously your own, but what resources out there are useful for small businesses to look at?
John Marney: (26:30)
I think the Smart Currency business aside, I would recommend to anyone that if they are new to dealing in markets and new to the experience of having foreign currency exposure, then they should definitely be talking to an expert. They should be talking to someone who will, as we said, go through their situation with them, explain to them what the risks are in very basic terms, explain to them how that is likely to impact their business if they don’t do something about putting some hedging in place. And then once it’s clear that they’ve understood that conversation, then at that point go through with them the possibilities, the solutions that are available to them. Because there are more than one, to hedge that currency risk off and as we said, to ensure those cash flows that they expect to come in from those other countries.
Ed Surman: (27:32)
Fantastic. Well John, thank you very much. Really, really insightful. I think we should be doing more on this. I also would say that if you are looking at foreign currency, look at things like UK Trade And Investment, the partner of international trade. I think you guys have actually done a lot of work with the UKCI and small businesses and moving currency around, is that right John?
John Marney: (27:55)
Yeah, we have a couple of partnerships. So we’ve got the UKFT, we’ve got BIFA the freight organisation, and then obviously with the IT, and the larger governmental organisations as well.
Ed Surman: (28:09)
So if you’re exporting, go through there, meet up with Smart Currency business, they’re based in London, they’re really really great. I’m really glad you came on.
John Marney: (28:20)
Thank you very much.
Ed Surman: (28:20)