What do software major Twilio [TWLO] and electric carmaker XPeng [XPEV] have in common? The answer: both companies operate in multiple markets with costs and revenues spread over multiple currencies. And both, along with thousands of small- and medium-sized (SME) businesses, make ideal customers for newly formed fintech company Bound.
“Over 90% of the larger companies have professional risk managers or actively manage their currency exposures,” said Seth Phillips, founder of Bound, “but over 90% of small and midsize businesses, who have the exact same problem, don't do anything to manage the risk.”
Clearly, the financial world agrees with Phillips, as the company just raised $6.5m from venture capitalists and investors who were early believers of fintech companies like buy now, pay later platform Klarna and Stash among others. Investor Valar Venture has found that the need for increased investment in financial services serving the SME currency hedging market to be “insanely overdue”. The global forex hedging market is estimated to be worth about $20trn, but over half of it comprises large companies.
“Over 90% of the larger companies have professional risk managers or actively manage their currency exposures, but over 90% of small and midsize businesses, who have the exact same problem, don't do anything to manage the risk” - Seth Phillips, founder of Bound
Why hedge currency?
The need to hedge is vital for SMEs affected by currency fluctuations on the foreign exchange markets.
For example, Twilio’s profitability and share price may be affected if the dollar gains or loses against European currencies. Similarly, XPeng’s share price may also be affected if the dollar rises against the Chinese Yuan – its international debt could suddenly look much larger and the company may need to book foreign exchange losses in its quarterly statement.
At the very least this distracts management from focusing on its core business. For companies working in commoditised markets, such as semiconductor chips or furniture, where margins tend to be thin, a forex fluctuation can wipe out their entire profits.
To counter this risk, companies hedge their foreign exchange inflow and outflow by making future contracts to trade currencies at the current level. However, Phillips says that while large companies have dedicated executives or banking relationship managers to help assess and counter risk, “when companies get too small, they stop being profitable for the traditional banks to serve”.
“We hope that pure automation can extend the benefits of hedging to smaller companies that really don't get served” - Seth Phillips
Phillips says the service Bound provides SMEs helps take the pressure off them to manage their exposure to currency risk. Understanding what risks an individual company runs, helping it understand the financial products it should use to manage those risks, putting those transactions in place and monitoring to keep those contracts up to date is a lot of work, he says, for both the company and the service provider.
In the past, circumventing the fees has cost companies dearly. Forex hedging through complex banking products turned sour when sharp currency movements in 2008 pushed some companies to the brink of bankruptcy. “We hope that pure automation can extend the benefits of hedging to smaller companies that really don't get served,” says Phillips.
Robinhood for hedging
Bound’s approach to forex hedging is similar to what Robinhood’s [HOOD] was to share trading. What Robinhood did was to expand share trading to individuals who didn't have a traditional brokerage account with brokers or banks, says Phillips. “It's not exactly the same because we're not targeting individuals. What we’re doing is targeting small businesses.”
Bound works by integrating the backend business database of the company, such as customer invoices, payroll or purchase orders, with its exposure to various currencies. The platform then recommends the currencies, the amounts and what timeframe to hedge for. From a list of partner foreign exchange brokers, it will then propose the available rates at which the hedge can be booked. Finally, when the user confirms, a hedging order is routed to the forex broker partner offering the rate. Bound software can integrate with office software, such as Xero, Wave, Sage and Zoho Books.
Phillips is hopeful of the future. It is for this reason that Bound is aggressively recruiting in the hope of doubling its staff numbers in the next quarter. “We will probably raise more money next summer,” he says, adding that for now the company is well funded to expand the team and the client base.