In this guide we take a look at Foreign Currency Accounts, both the good and bad aspects and what to watch out for.
Foreign currency accounts are exactly what they sounds like – a bank account for your business denominated in a foreign currency.
The advantage for businesses using foreign currency accounts is that it won’t constantly pay 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 business transactions.
If, for example, a business in New Zealand has frequent two-way trade with Japan, it may make sense for the business owner to open a Japanese yen account.
With such an account, no FX conversion charges would be paid on yen payments or yen received.
Let’s also say that this business’ monthly payments of NZD 40,000 to their Japanese supplier (a monthly purchase of JPY 3 million at a NZD/JPY exchange rate of 75.0) are expected to increase to almost NZD 43,000 in the coming months, given forecasts for the NZD/JPY rate to fall to 70.0. If holding and paying in yen from the outset, the payments would remain identical (always JPY 3 million) and any increase in the monthly cost would be avoided.
In terms of their features, 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 such withdrawals have high fees.
Opening Foreign Currency Accounts
Foreign currency accounts are available at most major banks and some of the larger banks will offer multi-currency accounts, in which our New Zealand business
could receive not only JPY, but also USD, EUR and other major currencies without paying for FX conversion.
With the exceptions of a minimum balance (see Minimum balances, below) and a local currency account with the same bank, there are not usually any special
requirements for opening a foreign currency account.
Disadvantages of Foreign Currency Accounts
They pay horrible rates of interest, if any at all
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 local accounts (aka normal accounts) in most countries pay 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 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 also 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.
Impact of large deposits on business cash flow
While 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.
Long-term vulnerability of large deposits to FX risk
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 JPY 40 million deposit owned by an Australian may be worth AUD 500,000 today, given the AUD/JPY exchange rate of 80.0 or thereabouts. The same deposit would be worth only a little more than AUD 420,000, however, 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 the use of the foreign
Alternatives to Foreign Currency Accounts
All is not lost if you believe that a foreign currency account is not suitable for you. If selling overseas, you might consider using the services of a company like OFX
or WorldFirst – Best Exchange Rates partners. You could continue to bill your overseas customers in the foreign currency and then use OFX or WorldFirst to convert your revenues instead of your bank. This might save you a great deal on FX conversion charges.
If the avoiding exposure to exchange rate moves was your motivation for exploring a foreign currency account, then you might instead consider an FX forward or option. You can learn more about these hedging tools in Best Exchange Rates’s Guide to Managing FX Risk.