Dublin-based fintech Assure Hedge has developed an online service that enables small and medium-sized companies to hedge sterling exchange risk and protect the value of UK earnings, literally at the touch of a button. The solution, which also offers hedging in other currencies, is significantly cheaper, more accessible, and a major improvement on hedging services available from traditional providers.
The service is particularly suited to companies with export sales to the UK. “If a food company has a £500,000 export deal to the UK but isn’t going to get paid for six months, it faces a real risk if sterling falls off a cliff during that period,” says Assure Hedge founder and CEO Barry McCarthy. “Our product hedges against that risk for a small upfront fee.”
How Assure Hedge protects against foreign currency fluctuations
Although currency hedging is not insurance in its strictest sense, it is often seen as a form of insurance – as it allows a business to eliminate or reduce risk from potential future adverse movement in foreign currency markets. McCarthy explains, “It has historically been difficult for SMEs and individuals to utilise hedging when sending or receiving funds in a foreign currency, as it was only available to larger businesses that the bank spends more time and resources in catering for.”
This difficulty may explain the relatively low utilisation of the instrument by many businesses. “To mitigate their risk, business owners and managers generally take out insurance against all sorts of risks – product liability, general liability, property, commercial auto, theft, key man and so on — yet appear to do little to protect against foreign currency fluctuations.”
The original idea for Assure Hedge arose from McCarthy’s experience as a financial markets trader in a career spanning 15 years. “I have been trading on financial markets for most of my adult life working for different firms in London, Singapore and Chicago,” he says. “I was day-trading derivative instruments. These were originally developed in the late 1800s to manage risks for farmers. But they turned into a giant casino as time went on. There were lots of speculators in there, and the results weren’t always good.”
He asked himself why more businesses weren’t using these instruments to manage their currency risk. The answer boiled down to cost and a perception that hedging is overly complex when the reality is very different.
Traditional methods were expensive and complicated, and not without their own risks. In essence, they involve a business taking a bet on where the market will be at a certain point in time. If it goes in the wrong direction, they run the risk of losing a lot of money.
Fully regulated under MIFID and by the UK’s FCA, Assure Hedge addresses all these issues. Not only can clients hedge for a small upfront fee but the company will compensate them should they end up on the losing side of the trade.
Access to foreign exchange markets on an app
“The fee is really an upfront insurance premium to ensure that the client can’t lose,” says McCarthy. “We are not reinventing the wheel. We are giving business owners access to foreign exchange markets on an easy-to-use app.”
The CEO continues, “Our advantage is that we are first and foremost a technology company. It’s similar to what happened in the travel market. In the old days, when you were booking a holiday you went to a travel agent and they looked at various hotels and airlines and so on and eventually, after a long and involved process, came up with a suggested itinerary. Then along came Expedia and Travelocity, which use technology to scan thousands of hotels in seconds and they revolutionised this business. We do the same thing. We cut out all the middlemen and all the costs associated with them.”
Using the service is simple. “For a straightforward business it can take as little as seven minutes to sign up for the service,” says McCarthy. “The process involves logging on to the website, completing a quick questionnaire, and submitting the usual documentation such as an ID and proof of address. As is the case with any regulated business, we run anti-money laundering checks in the background.”
Once registered, the client has access to the Assure Hedge Quote Generator and the full suite of products. “This is a unique product anywhere in the world. Customers with UK contracts with payment dates of March or April 2019 are naturally concerned about the March Brexit deadline and its potential impact on the value of sterling. Now, they can go to the site and get a quote for hedging sterling for next April in a matter of seconds, much the way they would search for a flight on Skyscanner or a hotel on Trivago.
To lock in the rate, the fee can range from half of one per cent to 3% of the value of the sum to be hedged, all depending on the risk involved.”
While this sounds very simple, the underlying process is actually quite complex and involves futures and options trading and so on. “We did overcomplicate it a bit at the start,” McCarthy admits. “But then we talked to several CFOs and the penny dropped and we realised that what was needed was a simple product that solved a difficult and complex problem for them. And that’s what we offer with plenty of educational content now added in to teach our customers what currency hedging is all about.
“Companies exposed to exchange rate risk know something bad can happen,” he continues. “They can’t just opt to ride it out, that’s gambling. By coming to us they can mitigate the risk in one simple transaction.”
Impact of Brexit
Brexit has had a significant impact on the business. “We are getting very busy now because of it. Brexit has focused people’s minds and they are thinking differently about foreign exchange risk now. We are flat out with inbound calls and are hiring additional salespeople at the moment. We are also about to sign an exclusive deal with a major UK broker who will market our service under their brand in that market.”
Enterprise Ireland has supported the company almost since its foundation in 2016. “They have been really supportive and invested in us very early on,” says McCarthy. “We have been on the High Potential Start-up programme since April 2017 and they supported us in a funding round earlier this year. They have also helped us with international growth.”