Lessons from FX hedging for taking your online store global
The following is a guest post from Daniel Mayhew, UK country manager at Payoneer, an international payment services provider.
Online stores face a choice: to hedge or not to hedge. This question applies both to the FX exposure hedging strategy of an online business and the internationally-focused online business’ customer acquisition model for growth. I’m fascinated to see that the thought processes for each of these strategies can be so similar, although there’s no one correct answer. As with all such trading issues, there is always a risk. The real test is how we mitigate that risk.
To give an example, an online business that only purchases inventory from one or two international markets isn’t particularly focused on overseas customers and is only exposed to one or two foreign currencies. With just one or two currency pairs to consider, there is far less risk involved. The business might opt to conduct all its foreign exchanges via ‘spot’ contracts without hedging any exposure.
In comparison, an online store that is internationally focused in just one or two overseas markets can opt to sell online directly, choosing the correct region-centric payment mark, SEO provider, international card acquirer, payment gateway, localisation, language, logistics vendors and brand support. In turn, he or she is able to set forth and sell to the online buyer ‘on the spot’ vis-a-vis ‘spot’ selling.
Another scenario could lead to a different FX strategy decision. An online store that purchases its inventory from multiple overseas markets, or trades significant principal volumes in non-domestic currencies has a higher exposure to the volatility of the currency markets. In this situation the business could adopt a 50 per cent spot contract and a 50 per cent hedging contract to manage its FX exposure.
Interestingly, the same online store trading in multiple markets could adopt a similar approach for its overseas customer acquisition model. By using 50 per cent of its budget to directly win orders ‘on the spot’ and 50 per cent through a lower cost-to-market option known as ’marketplaces’, the business could reduce its risk and overall cost when entering international, complex markets.
Marketplaces are an attractive option for many online sellers for both FX exposure and customer acquisition. With ever-increasing numbers of new marketplaces opening up around the world, there are numerous benefits for online businesses to using marketplaces rather than tackling a new region alone. For example, instead of setting up a localized website, the business can take advantage of the local marketplace’s existing loyal customer base of visitors, fulfilment services, and often, a site that has mobile-optimisation for browsing.
As always there is no one correct answer or approach that fits every online business. However there are more options than ever for taking your online store global, just like there are different ways to protect your business from currency exposure. Personally, I prefer the ‘spread your risk’ approach and view marketplaces as a perfect solution.