Ahead of next week's Travolution European Summit, Ben Santos, consultant at currency management technology specialist and summit sponsor Kantox, explains how travel companies can turn using multiple currencies to their advantage
Travolution Summit 2023: How to turn currencies into a competitive advantage
In a world of thin profit margins, rising interest rates and low forecast accuracy, as a travel business, you could boost your competitiveness and profitability simply by using more currencies than you currently are.
By dynamically pricing with FX rates in real-time, and by making it possible for you to hedge any number of orders from the booking moment, in any currency pair, digital technology opens up an entirely new world for travel businesses.
Let us take a brief trip to this largely undiscovered world, and see how currencies can be turned into a key competitive advantage.
Multi-currency pricing and its many advantages
It all starts with a seemingly simple proposition: you should sell in your customers’ currencies. This practice, known as multi-currency pricing, creates the following opportunities:
- Pricing markups. OTAs, tour operators and hotel chains can monetise FX pricing markups, thereby boosting profit margins.
- High-margin sales. Hotel chains can leverage currencies to increase direct, high-margin sales on their website with many different payment methods.
- Reduced cart abandonment. Online travel businesses can deploy multi-currency pricing as their secret weapon to reduce cart abandonment.
Surveys show that 60-70% of people are more likely to abandon an online purchase if they don’t see the product’s price in their native currency.
Additional benefits of multi-pricing
There are other under-reported, and sometimes poorly understood, features of multi-currency pricing that are particularly relevant in the current climate of sharp currency and interest rate fluctuations.
- Pricing with the forward rate. By using the forward FX rate in pricing, your business’s commercial team can take advantage of interest rate differentials between currencies to price more competitively without damaging budgeted profit margins.
- Dealing with credit risk. In the event of a sharp local currency devaluation, some clients may feel inclined to wait for a better exchange rate to settle their bills if forced to pay only in GBP or USD. Multi-currency pricing prevents this from happening.
Finally, on the contracting side, bed banks, OTA’s and tour operators can buy in more currencies to avoid FX-related supplier markups and contract in the most profitable currency.
This allows you to widen the range of potential suppliers. From a liquidity perspective, it may also mean extended payment terms.
Profiting from a multi-currency world
To profit from this array of margin and competitiveness-enhancing benefits, travel companies like yours need to implement robust currency hedging strategies. There are two dominant business models.
On the one hand, in businesses that operate on a calendar basis, keeping fixed prices during a campaign/budget period, the treasury team needs to defend the budget rate that is used in pricing.
This can be done by placing conditional FX orders that mathematically guarantee the exchange rate to be protected.
On the other hand, businesses that face dynamic prices have to protect the dynamic currency rate in each transaction.
Either way, you need to hedge your firm sales/purchase orders right from the booking moment.
Given the number of transactions involved, this can only be achieved with the help of FX hedging programs using Application Programming Interfaces (APIs) — essentially easy-to-install software interfaces.
Until now, the perception of currency management as a resource-intensive activity explains why many travel businesses still appear somewhat reluctant to embark on the multi-currency pricing journey. APIs, however, change this completely.
A strategic issue in the age of innovation
By taking FX risk out of the picture, you can put your business in a position to confidently use more currencies in its day-to-day operations.
While doing so, you remove many cumbersome, time-consuming and error-prone tasks that are often manually executed.
With some additional notable bonuses:
- Less reliance on forecasts, and more on firm commitments
- Automatic handling of booking cancellations
- Optimisation of interest rate differentials between currencies
- More time for finance teams to focus on value-adding tasks
- Openness to further automation; in a recent PYMNTS.com survey, 8 out 10 respondents say they are looking to implement new B2B payment solutions.
For travel firms like yours, automated currency management is not a ‘finance-only’ topic. It is an all-embracing transversal issue.
By empowering commercial teams to contract and sell in the most profitable currency, your finance department can act as a strategic business enabler within the enterprise.