Foreign Currency Accounts can be an incredibly useful tool or a black hole of fees and charges. So, is it something your business needs? This guide covers the basics of how foreign currency accounts work and showcase the best (and worst) features and when they are most useful.
Foreign Currency Accounts have a lot in common with your everyday transactional banking account in Australian dollars that you might already use for your business. You can use them to receive money or pay money. Most accounts also accrue dismal interest, just like most everyday banking accounts.
The big difference is that the account is based in another currency, such as US dollars. They are also subject to a load of international fees - a reality you should consider before opening an account.
The big 4 banks all offer accounts in foreign currency. You can apply at a branch, but, chances are, they will refer you to their business banking or corporate banking department. You'll have to hold a local Australian dollar account first, so if you need to set one up, allow a few days. Bank of Queensland, HSBC and Citibank also offer foreign currency accounts.
US Dollar, Euro Dollar, British Pound, Japanese Yen, New Zealand Dollar accounts are offered at every bank. Most banks offer accounts in the most common 10-15 international currencies. National Australia Bank has the best range of 20 currencies.
Most of the best features relate to businesses that are exporting or receiving money in from overseas. A foreign currency account allows you to bill in a foreign currency, which makes dealing with overseas customers much easier. It also allows you to hold the foreign currency in a local account that you control.
One of the biggest advantages of these accounts is avoiding conversion costs. If your business receives US dollars into an account and can then use the same account to make US dollar payments, you are avoiding having to convert the currency back into Australian dollars.
This is a huge benefit and can save you anywhere between 1-10%, depending on your cost of conversion. It also saves you a fair bit of hassle too.
The last thing to consider is buying currency ahead of time and putting it in a foreign currency account in case the exchange rate falls. While this is a way you can x`, iit’s important to understand that it does tie up your cash-flow. Can your business sustain that? There are also other ways of locking in an exchange rate, without having to open a foreign currency account (see below).
The biggest consideration is the cost. Bank fees on these accounts are high, compared to a regular local Australian transaction account and are different, depending on which bank you use.
Minimum transfer $250. Please note that the receiving bank or intermediary bank may charge fees on transactions.
Each bank we looked at had a separate list of conditions, fees and features. Here are some of the most important:
· Minimum balance requirements - NAB, Bank of Queensland and Citibank all have mimimum balance conditions to open an account, so make sure you'll have enough money to open an account.
· Tiered interest - Citibank was the only bank we compared that pays the same interest rate, no matter what your account balance. Every other bank will pay you a different interest rate, depending on the balance in your account.
· Monthly fees - Definitely check the fees before you open an account. CBA, Citibank and HSBC offer foreign currency accounts without monthly fees. Westpac and NAB charge depending on your account balance - so you may avoid fees if you keep enough in the account. Bank of Queensland has a flat $25 monthly fee.
· Being able to deposit and withdraw cash - This is a great feature which not every bank offers. The Commonwealth Bank is the only Australian bank to offer it, while HSBC only offers it for US and Hong Kong dollars.
· Access to a Foreign Currency Overdraft - Not every bank offers this product, which is surprising. All the overdrafts we compared from the CBA, National Australia Bank and Westpac, are subject to credit approvals, just like a normal business overdraft.
· Multi-currency accounts - The 2 international banks we looked at - HSBC and Citibank - both offer Multi-currency accounts. This allows you to have multiple currencies that are held in the one account. This is a great product, but make sure to check the charges and conversion costs if you transfer currencies from one to the other.
The most common charge is the monthly account-keeping fee, however it may not be the one to watch out for. Most banks charge you when currency comes into the account AND when you send currency out. For a business that has a lot of payments and receipts in foreign currency, this fee can add up quickly so be careful to monitor it thoroughly.
If you are buying currency to put into your foreign currency account, make sure you check the exchange rate. It can make a huge difference, depending on the amount.
If your business is just starting to send money overseas, or receive money in other currencies, foreign currency accounts are worth looking at, but may not be cost-effective, given the fees that come with it. There is no magic number at which point they become useful, however if you are receiving more than $500,000 in another currency, it is worth considering.
Foreign Currency Accounts are most effective when you use them to receive currency from customers AND pay the same currency out to your suppliers. In this case, you just need to keep an eye on the bank fees for receiving and sending the currency, along with any monthly account-keeping fee.
Weigh up if the cost of running the account is worth the benefits. If you are receiving under $500,000 a year, or are receiving payment in foreign currency as a one-off, you may want to consider some other options
1. Bill in foreign currency, but get your customers to pay into your Australian dollar account. It’s important to note, that some banks will charge to receive the currency and give you a lousy exchange rate.
2. Bill in foreign currency and use a non-bank currency provider like OFX or World First to convert the money. This may be a lot cheaper than sending it to your Australian dollar bank account and easier than opening a foreign currency account.
3. Ask your customers to pay you in Australian dollars. It's an easy option for you, but be aware that it could put your customers offside. They may want to pay you less, given they are now having to pay in a currency that is foreign to them and exposes them to currency exchange rate risk.
If you need to send money overseas, but also have the receipts in the same currency, a foreign currency account is really useful. A lot of importers that don't have any currency coming into the account just use it to buy currency when they feel it is at a good rate. They hold it in the account until the payment is due. It effectively locks in the exchange rate, but it’s important to note that it also comes with a couple of drawbacks.
Buying currency and putting it in a foreign currency account ties up your Australian dollar cash-flow. While the currency is sitting in the account, it usually won't accrue any interest and can't be used in the running of the business, unless you convert it back. Also, if you buy the currency at what you think is good exchange rate and it continues higher, you may have locked in an unfavourable rate.
In this situation, there are other alternatives that will protect your business against exchange rate movements, without locking up your cash-flow. Talk to a currency expert or contact a foreign exchange specialist at your bank or currency provider.
For more tips, tools and information, go to The Essential Guides to Foreign Exchange for Business
You can also head to the Australian government website EFIC. It gives a good run down of these accounts from an exporters point of view.
For more information, on the banks we have mentioned in this post, here are the links