In this guide we take a look at Foreign Currency Accounts, both the good and bad aspects and what to watch out for.
A foreign currency account is exactly what it sounds like – a bank account for your business denominated in a foreign currency.
The advantage of foreign currency accounts for a business is that it won’t pay continuous back-and-forth FX conversion fees, which can be substantial, on funds received and paid in a foreign currency, and also that it can avoid much of the exchange rate risk associated with overseas transactions.
It’s remarkable but true that many small business owners with frequent foreign-currency payments and receipts could increase profits by 10 percent or more simply by running international transactions through foreign currency accounts rather than domestic ones.
Consider, for example, a UK-based Amazon seller whose supplier is in Greece and whose customers are spread throughout Europe. The business will sell 15,000 euros’ worth of goods over the coming month and will then pay 10,000 euros to its supplier to replenish stock. Without a euro bank account, this business would pay an FX cost every time it received money from customers, because this must be converted to British pounds, and every time it paid suppliers, since pounds must be converted to euros.
For argument’s sake, if the business was paying 3 percent in FX costs by way of its local bank (you should never pay this much, always check for cheap foreign transfers), and if GBP/EUR exchange rates were steady at €1.15, then these Brits would have received £12,652 in revenue (0.97 * 15,000 / 1.15) and would need to send £8,965 to meet supplier obligations (10,000 / 1.15 / 0.97), for a profit on the aforementioned transactions of £3,687.
If, however, the business owner held a euro account, he or she would have paid nothing for receiving or sending funds. The 3 percent fee would be paid only on the €5,000 difference (if that were repatriated), making profits £4,217 (5,000 / 1.15 * 0.97), and that’s a 14.4 percent increase!
Some banks offer overdrafts on foreign currency accounts secured against local currency deposits and/or after credit checks have been performed, and some offer foreign cash withdrawal facilities, although these withdrawals usually come with high fees.
Foreign currency accounts are available at most major banks and some of the larger ones will offer true multi-currency accounts, in which a business could receive not only euros, but also US dollars, yen and other major currencies without paying for FX conversion.
With the exception of having a local currency account with the same bank, there are not usually any special requirements for opening a foreign currency account.
A great Foreign Currency Account is the WorldFirst World Account which offers both overseas bank accounts and great exchange rates when transferring between the accounts and to third party accounts.
As you might imagine, there are downsides to foreign currency accounts, and this is one of them. However, several years ago this may have been a bigger negative than it is now. In the current climate, where deposits in most parts of the world receive very little interest, this is unlikely to be off-putting to many.
Minimum balances are understandable, but vary greatly and in some cases will be too high for smaller businesses. As of writing, with the Australian division of the Bank of Queensland, for example, a minimum deposit is equivalent to AUD 50,000. By comparison, UOB of Singapore require only USD 1,000 or equivalent, which is far more reasonable and fortunately more typical. There is also a good selection of banks, like the UK’s Royal Bank of Scotland, which set no minimum balance.
Like minimum balances, fees vary greatly. Like any good consumer, you should shop around and be aware of what you’re getting yourself into. Ask your bank for a complete list of fees. These might include monthly account fees, transactions fees and balance-based fees, among others.
Balance-based fees relate to the average daily account balance. If this is below some given amount at month’s end, the bank will add to charges for that month.
Transaction fees should be the most important consideration. These will depend on the bank’s payment platform and the scope of the bank’s fee-reducing agreements with other banks around the world. Australia’s Commonwealth Bank, for example, will charge up to $22 for international transfers sent via its NetBank platform and up to $35 for money received. For Westpac, these amounts are $20 and $12 respectively. In addition, when sending money there will be charges applied by the receiving bank. Often, your bank will charge different amounts depending on the foreign institution and some banks increase their fees for transactions below a certain amount.
Though opening a foreign currency account is a useful exercise in cost and risk-reduction, the cash flow situation of some businesses may be negatively affected if tying up large sums in foreign currency accounts.
Although transactional FX risk is eliminated, there is a longer-term risk stemming from the fact that your business owns foreign currency, which will likely be changed back to local currency (be sold) at some point in the future, even if this is many years from now. Like any other asset denominated in a foreign currency, your deposit becomes vulnerable to exchange rate risk.
For example, a deposit of JPY 40 million held by an Australian business might be worth AUD 500,000 today, given AUD/JPY exchange rates near 80.0. But the same deposit would be worth only AUD 421,052 if in a few years’ time the exchange rate is 95.0. In that case, the loss on the deposit’s value in Australian dollar terms would likely offset the cost, risk and convenience benefits that had been realized in the interim from use of the foreign currency account.
All is not lost if you believe that a foreign currency account is not suitable for your business. If selling overseas, you might consider using the services of OFX or WorldFirst — Best Exchange Rates partners. You could continue to bill overseas customers in their local currencies and then use OFX or WorldFirst to convert your revenues instead of your bank. This would save your business a great deal on the cost of foreign exchange.
If your prime motivation for exploring foreign currency accounts was avoiding adverse FX moves — price certainty — then you might instead consider an FX forward or option. You can learn more about these hedging tools in Best Exchange Rates’ Guide to Managing FX Risk.
BER compares exchange rates from banks and FX specialists.