While selling your products and services online, you may want to scale your business up to other countries. And in most cases other countries means other currencies.
In such a case it’s always advisable to think about offering your services in the currency that your customers know and have in their pockets. To do this you need different transaction currencies.
But transaction currencies are one thing. The other thing is you may also think about different settlement currencies, so that you can settle your balance in the currency your customers pay.
Normally, when we run a company we ask a bank to settle an account for the company. It is usually a bank account in our native currency. Which means that if we live in the UK where the currency is British pound, the bank will use it as the settlement currency for the bank account. If we live in Germany – that’s Euro. In Norway – NOK…
So all the money you receive – is settled in these currencies onto your bank account: e.g. GBP in case of the UK and EUR in case of Germany.
So let say you’re an entrepreneur from the UK, having a site where you have customers from the UK (GBP), France (EUR) and the United States (USD). Of course, you want to handle payments from all of them, so you design separate sites (for each language/country) with different pricing pages, where the prices are shown in their local currencies.
Now, let’s imagine you have clients from Paris and New York being interested in buying your services. They both register on your site and pay.
That means that you have money from two transactions: one in Euro and the second one in USD. PSP transfers your money to your bank account, which is a GBP bank account (as you are from the UK). So your bank has to convert that money to GBP.
In simple terms: we may say that EUR and USD are your transactions currencies here and GBP is your settlement currency.
Two scenarios of payments processing
The first situation has been already described above. Different transaction currencies + one settlement currency.
This scenario has two advantages:
- It’s a comfortable solution. You don’t need to worry about anything, the bank takes care of everything, including converting your money to your local currency
- It’s the fastest and the cheapest scenario
However, it has some disadvantages as well.
- The money you get is converted with the exchange rate set by the bank or a payment provider. You have to be careful with that, as it may happen that by choosing this solution you will lose lots of money due to the discrepancies in the exchange rates
- Your money is always exchanged to one particular currency, eg. GBP, and if you have any costs to be paid in yet another currency (let it be USD) you need to have the money converted again. Even though your customer has paid in USD before (so you did receive some money in USD).
In the second scenario we have the same situation… you sell in several regions of the world and, again, you accept transactions in GBP, EUR and USD. However since there are three transaction currencies, you decided to have three separate bank accounts so that money could be booked on the particular account appropriate for each currency: EUR on the Euro account, USD on the USD account, and so on.
Let’s look at advantages and disadvantages of this scenario.
First – advantages.
- Once the money from EUR transaction has been booked on the EUR bank account and there appeared a need to cover certain expenses in that currency, you don’t have to pay from your GBP bank account (and ask your bank to exchange the money)
- Money can be exchanged the moment you want, so you have the chance to seek for the best exchange rate
- You can exchange your money wherever you want: you can go to an offline money exchange or have it changed online. You may convert the money in the place that offers you the best rates.
There’s also one disadvantage here.
- The cost of having bank accounts in different currencies. Most banks will ask you to pay some additional fees for keeping currency accounts
When is it preferred to have bank accounts in different currencies?
There is no single good answer to this.
Having several separate currency bank accounts is preferred in a couple of situations.
First of all, it is applicable when it is profitable. It means that before making this decision, you would have to check what kind of exchange rates your bank offers and what exchange rates you may have if you decide to convert your money somewhere else. Then check the costs of having different bank accounts for different currencies in your bank. If the difference between exchange rates is higher than the costs of having different bank accounts – it’s fine. It’s worth having.
Second, it’s a good idea to consider if you have costs in several currencies. In this situation you won’t need to exchange anything to cover them.
If you don’t have costs in other currencies and (especially!) if it’s not profitable for you – you should not do it.