In our globalised world, it is becoming increasingly common for businesses and individuals to send and receive remittances across borders and between currencies. In this article, PayAlly will explore the benefits of multicurrency accounts and how they can make international transactions more accessible, efficient, and cost-effective.
What is a MultiCurrency Account?
Unlike a standard debit account which allows account holders to hold only the local currency, a multi-currency debit account allows the account holder to make financial transactions in many different currencies from one single account. It is often confused with a foreign currency account, which will allow the account holder to hold one foreign currency. However, this type of account is subject to approval processes, interest, overdrafts, and minimum balances, just like a regular debit account. When making cross-border payments, a standard debit account is not ideal as one can face many complications, such as slower transfer times, higher rates from vendors, and inflexible foreign exchange rates. The multi-currency debit account holds many advantages, such as improving cash flow, better rates from vendors, and flexible foreign exchange.
Improving Cash Flow
Many banks take two business days to post cross-border payments to accounts, even for currencies that allow delivery on the same or the next day after receipt. When a payment is made in local currency, the money is immediately withdrawn from the account. This ensures the money is sent to the vendor’s account right away. Alternatively, when a cross-border payment is made, the funds are not wired until they’ve been converted from the original currency to the vendor’s currency. The financial institution may be willing to delay withdrawing the funds from the account until the conversion is complete, which could take up to two business days. Two days of funds availability can be meaningful in terms of earnings credit and working capital availability. With a multi-currency account, the currency is converted instantly, allowing one to make a cross-border transaction in the local destination’s currency, thus improving the cashflow.
Better Rates from Vendors
Because exchange rates are constantly fluctuating, vendors may charge slightly more than needed to protect themselves against changes in the market. Having the ability to send remittances in the vendor’s local currency can help one avoid paying a risk premium that may be charged when sending cross-border payments. Your vendor may experience faster payments and an easier account reconciliation process if you choose to pay in their local currency.
According to a case study done by JP Morgan, “A wholesale distributor based in the southeastern U.S. imported machine tools from China for more than 80 years and always paid in U.S. dollars. However, beginning in 2010, the internationalisation of the Chinese currency allowed the distributor to make payments in CNH, the Chinese currency traded outside of mainland China. By agreeing to pay in CNH, the wholesale distributor was able to negotiate more favourable pricing from their vendor.”
Flexible Foreign Exchange
When sending and receiving remittances in different currencies, one can have difficulty matching credits to invoices when dealing with multiple currencies. Since the rates fluctuate so often, by the time the payment arrives, it may not match the amount on the invoice.
Most multicurrency debit accounts also allow users to lock in and store currencies when it reaches a favoured rate. This means that when a currency reaches a predetermined rate, one can make a foreign currency exchange conversion and store the currency in their account. This protects money against exchange rate fluctuations which in turn can stretch earnings from your investments or interest earned.
The reason for this is that foreign currencies often require increased administrative effort on the part of the financial institution. To outweigh the cost of administrative efforts, foreign currencies are automatically converted by the financial institution at expensive exchange rates, whether incoming or outgoing.
With a multicurrency account, however, account holders are able to pay and receive in the local currency and also foreign currencies – all with the same account. This not only facilitates payment processing with international suppliers and customers but also saves a lot of money and administrative effort.
Is a MultiCurrency Debit Account right for you?
There are a few considerations to be made when deciding if a multicurrency account will fit your needs. Are you losing money in exchange fees? Do you do business in many different countries? Would you like to be protected from currency fluctuations?
With a multi-currency debit account, there is no need to worry about the conversion because the financial institution will make the transfer and wait for the best rate for the buyer. The buyer will no longer need to delay the purchase date, and the seller will no longer have to worry about the exchange rate since they can be paid in their local currency.
It’s worth noting that a multicurrency account can possibly require a higher opening balance and ongoing maintenance fees. Still, the benefits outweigh the costs for people who frequently travel internationally or do business in multiple currencies. PayAlly offers secure and flexible remittance exchanges instantly in the PayAlly application. If you are unsure if a multi-currency account will fit your needs, you can discuss your options with your personal PayAlly Relationship Manager.