This guide is provided by Alt21 Limited, trading as Alt21, an FCA authorised payments and FX provider and is intended for UK businesses considering FX hedging as part of their treasury activity. All examples provided are illustrative only and not a current or guaranteed rate. Please read the full disclaimer at the bottom of the page.
Ask most finance teams how many bank accounts, platforms or currency providers they use, and the answer usually takes a moment to work out.
This doesn’t happen all at once. It’s a gradual occurrence:
A new supplier in Rotterdam, a subsidiary in Zurich, an acquisition that brings its own banking relationships, or a finance tool that solved one problem without talking to any of the others.
These decisions make sense in isolation, but together, they build something else entirely – a patchwork of accounts, platforms and processes that were never designed to work as one system.
This is financial fragmentation, and it’s a cost of international growth that may get overlooked.
Quick summary
- Financial fragmentation happens when financial information, payment activity and cash become spread across multiple systems, providers, accounts and currencies.
- Liquidity fragmentation occurs when cash is held across different accounts, currencies, legal entities or financial providers.
- Fragmentation in financial markets vs fragmentation inside a business is the difference between fragmentation as a structural, industry-wide problem playing out across borders and banking networks, and fragmentation as the everyday reality of a single business’s accounts, currencies and finance tools failing to connect — with each one making the other worse.
- Financial fragmentation is increasing because of international growth, regulatory divergence across jurisdictions, and a finance technology paradox where more tools create more visibility but not more clarity.
- The risks of fragmentation include: Slower decision-making, reduced visibility, reactive FX decision’s, greater operational effort and less confidence in planning.
What’s the meaning of financial fragmentation?
Financial fragmentation describes what happens when your money, payment activity and financial data become spread across multiple systems, providers, bank accounts and currencies instead of working together.
What might this look like in practice?
- A spreadsheet built to reconcile two systems that report slightly different balances.
- A finance manager checking three platforms before answering a simple question about cash position.
- A technically accurate forecast that’s three days out of date by the time it reaches the person who needs it.
It’s easy to assume this may be a technology or a process problem, but it isn’t. It happens because growth and fragmentation tend to travel together.
For example, a company that once traded in a single market starts working with suppliers in the Netherlands, opens a subsidiary in Ireland, or begins invoicing customers in euros and Swiss francs.
Each of those steps is a sign of progress, but each may also create a new account, a new system or a new process that doesn’t quite connect to what came before.
Fragmentation in financial markets vs fragmentation inside a business
It’s worth separating two related but different ideas, because both sit under the same term:
1. Fragmentation in financial markets
This is a structural, industry-wide issue that shows up in:
- Correspondent banking chains that route a single payment through several intermediary banks.
- Capital controls that stop liquidity moving freely between jurisdictions.
- The sheer number of separate settlement systems a cross-border payment might touch before it lands.
2. Fragmentation inside a business
Is the accumulation of bank accounts, currency balances, forecasting spreadsheets and finance tools that don’t share information, and it’s the version most finance teams actually feel day to day.
And while they are different, the two are connected:
Fragmented markets make it harder to build joined-up financial infrastructure, and businesses respond by opening more accounts and adopting more tools to work around the gaps, which fragments things further at their end too.
The scale of the market-level problem is easy to underestimate.
Economist Impact research commissioned by SWIFT modelled three fragmentation scenarios out to 2030 and found that continued fragmentation could reduce global GDP by between 1.2% in a best-case scenario and 5.9% in a worst-case scenario, a loss of as much as $6.5 trillion and around 280 million jobs globally if cross-border capital flows continue to decline at twice their recent pace.
It must be highlighted that these are projections based on modelling assumptions rather than a guaranteed outcome.
Few businesses will ever deal with sums on that scale directly, but the same pattern appears on a smaller scale inside almost every growing company. As cash becomes spread across different accounts, currencies and providers, simple financial decisions become more difficult than they should be.
What is liquidity fragmentation?
Liquidity fragmentation is one of the clearest examples of fragmentation in financial markets, and it’s worth understanding on its own terms.
If financial fragmentation is about information becoming disconnected, liquidity fragmentation is about cash becoming disconnected.
Thus, liquidity fragmentation is the fragmentation of liquidity across multiple accounts, currencies, banking relationships or trading venues, rather than it being pooled and accessible where it’s actually needed.
A business might have healthy cash reserves overall, but if those reserves are split across several currencies and jurisdictions, with no easy way to move funds between them.
On paper, the business has healthy liquidity.
In practice, that liquidity isn’t doing its job because it isn’t accessible at the moment it’s needed.
Why financial fragmentation is increasing
Research cited by the Association of Corporate Treasurers, from Strategic Treasurer’s Treasury Aggregators study, found that nearly half of large corporations use ten or more banks globally, and 16% operate more than 500 separate bank accounts.
Financial fragmentation is on the rise, but why?
International growth stands out as the most obvious reason.
Every new market, currency or acquisition typically brings its own banking relationships and reporting requirements with it.
And, it’s a pattern that scales.
Most growing businesses are nowhere near that scale, but the direction of travel, more accounts, more currencies, more platforms, tends to be the same.
Regulatory divergence across jurisdictions plays a part too.
Rules that differ from one market to another make it harder to pool liquidity or standardise processes across a group.
Then there’s the finance technology paradox.
Modern accounting software, forecasting tools and AI-powered reporting are giving finance teams more visibility than ever into cash flow and performance.
But when those tools sit on separate platforms that don’t communicate with each other, the result is several versions of the truth.
One system reports one balance. Another reports something slightly different. Before a decision can be made, someone first has to work out which version to trust.
None of this is really a technology problem, even though it looks like one. It’s a decision-making problem. The data usually exists somewhere in the business. The issue is how long it takes to find, reconcile and trust it, and how much of its value is lost in that process.
Growth doesn’t have to create fragmentation
As businesses expand internationally, bringing payments and currency management together can help finance teams spend less time reconciling information and more time planning for the future.
Explore how Alt21 supports businesses as their international finance needs evolve.
(Applicants must pass Alt21’s onboarding process and accept our terms and conditions before becoming a client.)
What are the risks of financial fragmentation?
The risks of financial fragmentation tend to build quietly while your team is hard at work rather than announcing themselves. This is part of what makes them so easy to underestimate.
Let’s look at each in more detail:
Slower decisions
When information is split across systems, the natural response is caution. Rather than acting on data that might be incomplete, teams wait, double-check and reconcile.
The safest short-term decision is often to delay, but delay has its own cost:
Missed opportunities, slower responses to market movements and a finance function that reacts to events instead of planning for them.
Weaker forecasting
You can’t build forecasts around partial or outdated information. It creates inconsistencies and isn’t reliable.
Additionally, when cash, currency exposure and payment activity live in separate places, forecasting becomes an exercise in stitching together fragments rather than seeing the full picture.
Harder currency management
This is where fragmentation is often felt most acutely.
Managing currency exposure depends on knowing which currencies will be needed, when they’ll be needed and how much exposure exists across the business at any given time.
A business trading across the UK, the eurozone and Switzerland might clearly have exposure to sterling, euros and Swiss francs, but working out precisely when each currency will be required, and whether the right amount is available in the right account at the right time, is a different challenge altogether without joined-up visibility.
Operational drag
Reconciling accounts, chasing balances across platforms and manually re-entering data all take time away from analysis. Resulting in your finance teams spending more hours assembling information than acting on it.
Increased exposure to error and oversight gaps
More accounts and platforms generally mean more logins, more manual processes and more places for something to be missed, whether that’s an overlooked balance, a forgotten subscription or a transaction that goes unreviewed for longer than it should.
A harder job justifying decisions
When leadership, investors or auditors ask how a number was reached, a fragmented setup may make that question much harder to answer clearly and quickly.
Higher compliance costs
More accounts and providers generally mean more relationships to monitor, due diligence and reporting lines to maintain.
A 2023 LexisNexis Risk Solutions study found that financial institutions collectively spend more than $206 billion a year on financial-crime compliance, and fragmented account structures are part of why that oversight is so resource-intensive to get right.
You may also be interested in reading our guid to FX risk management.
Why fragmentation makes foreign exchange harder to manage
Foreign exchange deserves its own mention because it tends to expose fragmentation faster than almost anything else in finance.
Without joined-up visibility over currency balances and future currency needs, FX decisions tend to become transactional rather than strategic.
To manage FX with more confidence, it helps to understand
- The currencies you need
- When you’ll need them
- How much you’ll need
- Whether future cash flows have already been planned
Bear in mind that adding more specialist tools doesn’t automatically fix this.
If those tools remain disconnected from everything else, they simply become another source of information to interpret rather than a source of clarity.
That doesn’t mean FX can’t be managed well; it usually comes down to understanding your position before deciding what’s next.
Moving from fragmented to connected
Solving financial fragmentation doesn’t usually require a major transformation project, and it rarely means reducing the number of currencies or markets a business operates in.
Disconnection is the problem.
Businesses that make the most progress here tend to focus on a few things:
- Building a clearer, more current view of cash and currency exposure.
- Bringing payments and FX activity into fewer better-connected places.
- Developing a consistent approach to how currency will be managed rather than leaving it to be figured out payment by payment.
That’s really what sits behind Alt21’s approach to international payments and currency management.
Rather than treating a payment as a one-off task, our platform is designed to give finance teams a clearer, connected view of their currency exposure, so that FX international payments become the starting point for more informed planning rather than another disconnected transaction to reconcile.
Want to try it for yourself? Sign up for an account today.
(Applicants must pass Alt21’s onboarding process and accept our terms and conditions before becoming a client.)
