Foreign Currency Accounts: Explained and Compared

Foreign currency accounts

Foreign currency accounts are ones maintained in a U.S. or overseas bank but in a foreign currency.

 

Foreign currency accounts can be a handy tool or a source of endless fees and charges. Determining whether your business needs one can be complicated, which is why we’ve written this post to break down the details. We’ll explain the basics of how these accounts work and highlight their pros and cons.

 

Foreign currency accounts

When you look under the hood, foreign currency accounts are quite similar to many other business banking accounts. You can use them to accept money or pay money. And just like other standard accounts, their interest rates are extremely low.

 

The operative difference then is of course that they are in another currency, such as euros. They can also be subjected to a slew of international fees, so consider carefully before you go ahead and open one.

 

Who offers foreign currency accounts?

It is surprisingly rare to find a foreign currency account offered in the US. A few major US banks (e.g., US Bank or Citi) and some smaller players do offer foreign currency accounts.

 

In order to set up an account, the easiest thing to do is contact a bank or visit a branch. They will likely refer you to business or corporate banking where you can easily get your account going. Most banks require you to hold a US dollar account with them to qualify for the international account.

 

Most common foreign currencies available

US Dollar, Euro, British Pound, Japanese Yen, Chinese Yuan, and New Zealand Dollar accounts are offered at essentially every bank with these accounts. Finding Nepalese rupees may be slightly harder — but most banks will offer the 10-20 most popular currencies.

 

The best perk?

Probably the biggest advantage of a foreign currency account is that it allows businesses to accept payments from overseas customers in their local currencies. This makes things much easier for the customers and can simplify accounting as well. You can also hold a reserve of business related cash in one of these accounts.

 

Another big benefit of having a foreign currency account is that you can dodge some of the conversion fees. If you’re getting paid in euros and immediately transferring that into dollars you’re likely to incur fees and eating into your profit.

 

These fees can range anywhere from 1-10% depending on your conversion rate and what other charges you have to pay. Needless to say, this can be substantial in larger amounts and it saves hassle to boot.

 

The final thing to think about is that having a foreign currency account allows you to buy currency and hold it in the account in case the exchange rate falls. While this is a way you can protect yourself, it also ties up your funds. There are other methods to this end, for more details see below.

 

The downside?

The cost would be the biggest potential negative factor.  Fees on these type of accounts are usually high compared to normal accounts and of course they vary, depending on the bank you use.

 

Foreign Currency Accounts Compared

Each bank you look at is going to have a slightly different set of terms and fees. So, we’ve weeded through and found some of the most important specifics.

 

Minimum balance requirementsEverbank, PNC Bank, Citi, and US Bank all have minimums needed to open an account so be sure to check before proceeding. Some can be as high as $50,000.

 

Interest rates – None of the banks we surveyed had fixed interest rates, but rather they fluctuate over time. Everbank has a convenient interest rate checker, which can be found here.

 

Are these accounts FDIC insured?Foreign banks don’t always offer Federal Deposit Insurance Corp backing. So, for your foreign currency account you will be without the backing of FDIC which protects deposits up to $250,000 per bank account if the bank folds.

 

Monthly Fees – It’s very important to check fees before you open an account, failure to do so could lead to paying more than you want. Everbank does not charge a monthly account fee, PNC and Citi charge you depending on the balance in your account and US bank has a flat $25 fee.

 

Access to a foreign currency overdraft – Not all banks offer this product, which is a little surprising. All the overdrafts we compared from Citi, PNC, Everbank and US Bank are subject to credit approvals, just like a normal business overdraft.

 

Multi-currency accounts – You can open a multi-currency account through both PNC and Everbank. This affords you the benefit of having two currencies under the umbrella of one account. This is a useful product but make sure you check fees and conversion charges to switch between currencies.

 

Fees and charges

The most common ways foreign currency accounts end up costing you are through flat monthly fees or surcharges for sending or receiving money. Many banks charge whenever money goes in or out of the account. So for a business that is conducting many transactions, this can get expensive really quickly. Be sure to read the fine print before signing up and monitor the account diligently.

 

If you’re purchasing foreign currency to load into the account also be sure to double check the exchange rate. Small percentage points can make a huge difference.

 

When is it a good idea to use a foreign currency account and why?

If your business is relatively small and only beginning to transact in foreign currencies, you can certainly look into a foreign currency account. However, it might not make financial sense due to high fees. Every business is different, so the dollar amount at which the fees justify opening the account will be different for everyone. If you are dealing in the hundred thousand’s, though, it is probably safe to assume the account would add value to your business.

 

The most effective use of a foreign currency account is when you utilize it to pay bills and receive payments consistently in a foreign country. If this is the case for your business, assess the fees and monthly charges and determine whether it makes sense for you.

 

Alternative Options

If the amounts you’re dealing with are under $100,000 and/or you need to deal with a one-time transaction you probably don’t need a foreign account.  Instead, you can consider one of these options:

 

  1. Bill in whatever foreign currency you need, but ask customers to pay in USD. Be aware, though, some banks will charge to receive the foreign currency and also give you a poor exchange rate.
  2. Bill in a foreign currency and then transfer the money to USD through money transfer providers such as OFX or HiFX. This can he a good lateral solution and save you the hassle of opening a foreign currency account.
  3. Ask your customers to pay you directly in USD. This is obviously great for you but might turn off some of your customer base. They may also end up wanting to pay you less considering they now have to deal with the hassle and cost of converting their money to USD.

 

Importing and buying goods overseas

If you need to pay for goods overseas but need your receipts to match the payments, having a foreign currency account really comes in handy. Many importers who don’t have money actively coming into their foreign currency account simply buy currency when they believe the rate is good and park it there. This is a way of locking in the exchange rate, but it comes with its own set of risks and effects the liquidity of your money.

 

Buying a foreign currency and letting it stay in your foreign account may affect your USD cash flow. Interest rates for these accounts are usually pretty abysmal and if you need the money you’ll get charged fees to convert it back to dollars. Additionally, if you’ve bought at what you felt was a good rate and then the rate goes higher, you’ve tied yourself to an unfavorable exchange rate.

 

In this situation, there are some other things you can do to protect your funds against moving exchange rates without tying up your money. You can talk to a currency exchange expert or call your bank.

 

Further information

For more information about the banks and accounts mentioned in this article please see the links below.

Everbank international currency account – click here.

Citibank international currency account – click here.

US Bank international currency account – click here.

PNC international currency account – click here.

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