Let’s start looking at this topic from the basics. As an exporter, you must know the role of currency conversion fees when you accept international payments in various aspects of your business. Learning about currency conversion fees is essential when your business involves business transactions across the globe.
What are Currency Conversion Fees?
As an exporter, you incur currency conversion fees when you receive your export proceeds in another currency via a cross-border payment platform, which will then be converted into the local currency. Currency conversion charges can vary depending on the type of service your bank or financial institution offers.
What factors should exporters know about currency conversion fees?
Given below are some factors that will help you manage your foreign transaction fees:
Exchange rate margin: When a foreign currency payment is often deposited in the account, the bank or financial institution will discount the payment or have a margin on the exchange rate and pay the remaining amount to your account. For example, if you receive a payment of 1000 dollars and the exchange rate at the time is INR 80 per dollar, then the bank may pay you INR 78 per dollar instead.
Fee per transaction: The other way you may incur a fee is when the bank or financial institution imposes a flat fee, which could be a certain percentage per currency conversion.
Be aware of local laws: Local laws, regulations, and compliance requirements will apply to any currency conversion transactions. Keep these in mind while conducting these transactions.
Multiple currencies: If you export to different countries and deal with numerous currencies, set up accounts with banks that can easily handle these.
How are currency conversion rates charged?
Currency conversion fees are calculated on several different factors and often, could be a combination of methods.
Exchange rate margin: This could consider the actual rate at which currencies trade in the market, the bank’s exchange rate, and the margin the service provider will build in as their profit margin.
Transaction charges: Banks often charge a flat fee per transaction, which will not depend on the amount converted. They can also charge a percentage transaction depending on the conversion amount. The third option under this could be tiered pricing for different amount tiers.
Hidden charges: Among the most insidious charges are those applied without being informed beforehand. These could be service charges or fees.
Other fees: This could consist of applicable taxes, cross-border fees, platform service charges, or other related charges.
When third-party providers are involved: If you use online money transfer service providers like PayPal, you can expect a different fee structure. While they provide multiple options to collect the payment, it’s often very expensive
Hedging and forward contracts: If you have high foreign currency exposure, one can employ hedging strategies to manage the risk of currencies and reduce the cost of conversion. You could also consider forward contracts on the rates.
