Lee Hayhurst spoke to Toni Rami, co-founder and COO of Kantox, the London-based fintech, about why FX automation is a disruptive force in travel
The international nature of the travel industry means that applying the right foreign exchange (FX) risk management strategies can mean the difference between turning a profit or not.
Indeed, because most travel firms operate with extremely tight margins, effective currency management is a critical competency for many finance departments.
The central challenge is FX risk management. Companies take hedges to lock-in the forward rate of the currencies they need to buy/sell.
Due to the large time gaps between booking and payment that are common in the travel sector, this approach enables travel firms to protect themselves from the risk of unexpected currency fluctuations.
For the London-headquartered fintech Kantox, deploying smart technology to manage firms’ FX requirements not only protects margins, but can also open up new business opportunities.
Co-founder and chief operating officer, Antonio (Toni) Rami, said: “By its nature, travel has a lot to do with currencies and, as a general rule, they are usually a problem for companies in this industry.
“Telling your customers or suppliers that you can take that burden away from them can result in great value for both sides, in terms of lower costs and increased sales.
With currency hedging, you do not know where the currency value is going, but we can help firms be immune to the risk that uncertainty brings. When you’re immune, you can pay in a supplier’s local currency and sell to your customers in their own currency and realise significant value.”
Rami also explained that Kantox is working with all parts of the travel distribution chain from hotels and bed banks, to tour operators and travel agencies.
He said they are educating them about the advantages of automating their FX management and moving away from traditional pre- and ad hoc-hedging strategies into real-time micro-hedging.
This, Rami argues, enables travel firms to remain more competitive in a sector that is using technology to forge more complex supplier connections and moving toward dynamic pricing strategies.
Micro-hedging means firms can hedge each transaction as they occur and in doing so de-risk the impact of FX movements between the booking and collection of the invoice.
Rami also says this is the most accurate way of hedging FX because it no longer relies on individual brokers or in-house traders reading the markets and taking longer-term bets.
By paying suppliers, like hotels, in their own currencies, travel players open themselves up to more supply because many will only sell rooms in their local currency.
And for the hotel supplier using traditional hedging practices, it can lose control of the final room price that the intermediary offers to the end customer.
In addition, leveraging currencies enables retailers and wholesalers to be more price-competitive, because they are not passing on the FX risk to their suppliers, who typically add a premium to room rates to compensate for this.
Kantox works with its travel clients to understand where their bookings are coming from and the nature of the supply side of their business in order to optimise their FX strategy.
“We connect to their booking engine to understand the currencies they trade in,” he said. “It’s very focussed on how the corporate runs its business. We align with what they’re doing in real-time.”
Rami explained that under traditional hedging strategies, firms’ chief financial officers habitually create a false financial picture by being too risk-averse and over-estimating FX costs.
He claims that by applying automation, firms can manage their FX exposure more effectively than when it is done by a human, although he adds: “Of course, the company needs to really understand how this works and that it’s not just a black box being put into the organisation.
“We explain how our solutions work and try to give as much transparency as we can. We customise the way each company wants to manage its exposure.”
Trusting such a business critical area to third-party technology does require reassurance, continued Rami, but once partners see how it works they are keen to fully automate processes.
“There are many areas where we are adding value and allowing clients to reduce costs and increase sales, while completely removing FX risk and automating manual processes.
“We have some customers today buying and selling in more than 130 different currencies, because they have become comfortable doing it and managing their FX risk.
“Managing currencies in this way is like having the ability to speak the languages of your suppliers and customers. It means you are speaking their currency language.
“We are more than a company just doing FX trades, it’s the value of the software. We spend a lot of time explaining what we are doing and how it can be useful. This isn’t something people Google, it’s not software that people buy off the website.”
Kantox, which was founded in 2011 and now employs over 100 people in London and Barcelona, has raised €30 million including a $5 million venture debt agreement with Silicon Valley Bank in April.
The fintech also recently partnered with Voxel Group and joined their e-invoicing and payments platform BaVel to enhance B2B payments in the travel industry. They are currently the only company on the Voxel platform to offer FX risk management services.
In March, they were named on the Financial Times’ FT 1,000 list of Europe’s fastest-growing companies for a second consecutive year, having seen growth of nearly five times over the last four years.
The firm works in a number of sectors including ecommerce, food, chemical and adtech but its flagship solution, Dynamic Hedging, was originally devised from the needs of a client within the travel industry.
In January, at the annual trade show Fitur in Madrid, Spain, Kantox launched its ‘FX as a Disruptive Force in Travel Distribution’ report.
Kantox has three co-founders; Rami and chief executive Philippe Gelis, both formerly of Deloitte and chief technology officer John Carbajal, who has worked in R&D at Intel and Hewlett Packard.
“Our backgrounds are in consulting,” said Rami. “If we were to have come from pure financial or FX backgrounds we would not have built something like this.”