How do multicurrency accounts safeguard businesses operating on the global stage? This question is more relevant than ever in today’s world, where international trade fuels countless enterprises.
Let’s put things into perspective: The value of cross-border payments is on track to surge from nearly $150 trillion in 2017 to over $250 trillion by 2027. That’s an astounding over $100 trillion increase in just a decade. With these stakes higher than ever, the demand for efficient currency management is at its peak.
This is precisely where the multicurrency account, often known as a foreign currency account, enters the scene as a potential shield against the complexities of international finance. It streamlines the management of various currencies, simplifies financial record-keeping and opens doors to capitalizing on favorable exchange rates.
Understanding Currency Exchange Risks
When it comes to international trade, foreign exchange risk is a constant concern. It’s the risk that comes from the unpredictable nature of currency values, and it affects both investors and businesses involved in global trade.
Let’s break down this risk into its core categories.
When a company buys goods or services from a foreign supplier, the deal often happens in the supplier’s currency. Now, if that supplier’s currency gains strength against the buyer’s currency, the buyer has to dig deeper into their pockets in their home currency to fulfill the agreement. This risk predominantly affects the party using a foreign currency for the transaction.
This risk revolves around how foreign exchange transactions impact a company’s financial reports. This happens because when a company has subsidiaries in different countries, each using its local currency, the parent company has to translate these subsidiaries’ financial statements into its own currency for reporting.
Economic risk (or operating exposure) is arguably the most significant factor among foreign exchange risks—a conclusion drawn from my extensive personal experience. The potential impact of unanticipated currency fluctuations is profound, capable of significantly altering a company’s overall market value, future cash flows, foreign investments and earnings.
This risk is particularly heightened for multinational corporations. The International Monetary Fund’s “Regional Economic Outlook” for Sub-Saharan Africa found that in 2022, a prevailing trend unfolded where a majority of currencies experienced depreciation against the U.S. dollar (automatic download). This depreciation averaged 7% in non-pegged countries, with certain instances surpassing a noteworthy 20%.
A multicurrency account is a versatile demand deposit account that consolidates various currencies in one place. These accounts can simplify international transactions, making them swift and cost-effective.
As noted by Emily Batdorf, with these accounts, “You can deposit money, make withdrawals, send and receive payments, and—depending on the account—potentially earn interest.” Additionally, “When you receive payments in foreign currencies, you can keep the money in that foreign currency or convert it to U.S. dollars.”
Typically, multicurrency accounts encompass a range of currencies, including the U.S. dollar (USD), Euro (EUR), Hong Kong dollar (HKD), Australian dollar (AUD), Japanese yen (JPY) and more. This versatility eliminates the need to open multiple foreign accounts, simplifying your international financial management.
How Multicurrency Accounts Protect Businesses From FX Risks
Here’s a look at how multicurrency accounts can protect your finances.
• Reduced transfer fees: Multicurrency accounts cut the costs associated with cross-border transactions, saving time and money. They eliminate additional charges when sending money between countries, making international expansion more cost-effective.
• Efficient cash flow: These accounts facilitate efficient cash flow management, a vital aspect of any business. You can receive payments in multiple different currencies without the need for manual conversions. Your bank handles currency exchange automatically, ensuring easy access to funds in your preferred currency.
• Currency stability: Multicurrency accounts help you avoid the negative impacts of currency fluctuations. With the ability to hold multiple currencies, you can transact in stable ones, even when others are subject to rapid changes.
• Swift payments: Businesses can enjoy swift international payments, reducing the need to wait for funds to convert into local currency. This streamlines transactions and can positively impact business growth.
• International payroll: For businesses with global employees or freelancers, multicurrency accounts offer cost-effective solutions for international payments, eliminating the need for expensive wire transfers.
The Drawbacks Of Multicurrency Accounts
Before opting for a multicurrency account, consider the following.
• Account fees: Some multicurrency accounts may impose higher fees compared to traditional bank accounts. Before opening an account, be sure to conduct thorough research and fee comparisons to understand the cost implications.
• Fluctuations in exchange rates: Despite favorable rates, multicurrency accounts do not eliminate the risk of exchange rate fluctuations altogether. Be vigilant about market trends and have strategies in place to manage potential losses due to currency value changes.
• Limited access to banking services: Multicurrency accounts may not offer the same range of banking services as traditional accounts, such as overdraft facilities or credit lines. Assess your business’s specific banking needs to ensure a multicurrency account aligns with required services or if alternative solutions are necessary.
Best Practices For Implementing Multicurrency Accounts In Your Business
1. Regulatory Compliance
Ensure that the provider of the multicurrency account is properly regulated. Opt for highly reputable institutions such as digital banks or e-money institutions that adhere to strict financial regulations.
2. Security Measures
Prioritize the security of your funds and investigate how the provider safeguards your capital. Look for accounts that hold funds in segregated client accounts, reducing the risk of losing your funds if the institution encounters financial issues.
3. Pricing Evaluation
Carefully assess the pricing structure of the multicurrency account. Make sure you understand the fees involved, including maintenance, transaction and currency conversion fees. Additionally, evaluate the account’s capabilities, ensuring it aligns with your business’s requirements.
Multicurrency accounts offer a valuable shield against the unpredictable world of foreign exchange risks for businesses engaged in international transactions. They streamline cross-border payments, reduce transfer costs and enhance cash flow management, providing a competitive edge in the global market. However, if your business engages in infrequent international transactions, exploring other alternatives may be more suitable for your financial needs.