Foreign Currency Accounts: Explained and Compared
Foreign Currency Accounts can be an incredibly useful tool or a black hole of fees and charges. So, is it something your business needs? This guide covers the basics of how foreign currency accounts work and showcase the best (and worst) features and when they are most useful.
Foreign Currency Accounts have a lot in common with your everyday transactional banking account. You can use them to receive money or pay money.
Most accounts also accrue dismal interest, just like most everyday banking accounts.
The big difference is that the account is based in another currency, such as US dollars. They are also subject to multiple international fees – a reality you should consider before opening an account.
Where can I get a Foreign Currency Account?
There are 7 banks which offer accounts in foreign currency. They are ANZ, ASB, BNZ, HSBC, Kiwibank, TSB and Westpac. You can apply at a branch, but, chances are, they will refer you to their business banking or corporate banking department. You’ll have to hold a local New Zealand dollar account first, so if you need to set one up, allow a few days.
Wise Borderless Account
Wise (formerly known as TransferWise) just released the Borderless Account in Australia. At first glance, it is significantly easier to set-up, receive and send foreign currency. The fee structure is also better than any of the other foreign currency accounts listed below.
The thing that makes it different to every other foreign currency account, is that it allows you to up a local bank account in AUD, GBP, EUR or USD. That means if you open up a USD account, you’ll have your own ABA and account number (think BSB and account number).
It’s a big deal. Why?
Having your own local bank account makes it significantly easier, faster and cheaper to receive money.
To read our full review of the Wise Borderless Account, click here or watch this video
Learn More About the Borderless Account
Most common currencies available
US Dollar, Australian Dollar, Euro Dollar, British Pound, Canadian Dollar and Japanese Yen accounts are offered at every bank. Most banks offer accounts in the most common 6-13 international currencies. TSB offers 26 international currencies.
The best benefits:
Most of the best features relate to businesses that are exporting or receiving money in from overseas. A foreign currency account allows you to bill in a foreign currency, which makes dealing with overseas customers much easier. It also allows you to hold the foreign currency in a local account that you control.
One of the biggest advantages of these accounts is avoiding conversion costs. If your business receives US dollars into an account and can then use the same account to make US dollar payments, you are avoiding having to convert the currency back into New Zealand dollars.
This is a huge benefit and can save you anywhere between 1-10%, depending on your cost of conversion. It also saves you a fair bit of hassle too.
The last thing to consider is buying currency ahead of time and putting it in a foreign currency account in case the exchange rate falls. While this is a way you can save, it’s important to understand that it does tie up your cash-flow. Can your business sustain that? There are also other ways of locking in an exchange rate, without having to open a foreign currency account (see below).
The biggest consideration is the cost. Bank fees on these accounts are high, compared to a regular local New Zealand transaction account and are different, depending on which bank you use.
Foreign Currency Accounts Compared
Each bank we looked at had a separate list of conditions, fees and features. Here are some of the most important:
Minimum balance requirements – ANZ, ASB and BNZ all have minimum balance conditions to open an account, so make sure you’ll have enough money to open an account.
Tiered interest – All the banks we compared will pay you a different interest rate, depending on the balance in your account.
Monthly fees – Definitely check the fees before you open an account. ANZ, ASB, Kiwibank, TSB and Westpac do not charge a monthly maintenance fee. HSBC does not charge monthly maintenance fees its Premium customers. At BNZ have a monthly fee which can be refunded if your average daily balance for the month is over the rebate level for your account’s currency, the fee will be refunded in full.
Multi-currency accounts – ASB and HSBC both offer Multi-currency accounts. This allows you to have multiple currencies that are held in the one account. This is a great product, but make sure to check the charges and conversion costs if you transfer currencies from one to the other.
Fees & Charges
The most common charge is the monthly account-keeping fee, however it may not be the one to watch out for. Most banks charge you when currency comes into the account AND when you send currency out. For a business that has a lot of payments and receipts in foreign currency, this fee can add up quickly so be careful to monitor it thoroughly.
If you are buying currency to put into your foreign currency account, make sure you check the exchange rate. It can make a huge difference, depending on the amount.
When to use a Foreign Currency Account and Why
If your business is just starting to send money overseas, or receive money in other currencies, foreign currency accounts are worth looking at, but may not be cost-effective, given the fees that come with it. There is no magic number at which point they become useful, however if you are receiving more than $500,000 in another currency, it is worth considering.
Foreign Currency Accounts are most effective when you use them to receive currency from customers AND pay the same currency out to your suppliers. In this case, you just need to keep an eye on the bank fees for receiving and sending the currency, along with any monthly account-keeping fee.
Your other options
Exporters and billing in foreign currency
Weigh up if the cost of running the account is worth the benefits. If you are receiving under $500,000 a year, or are receiving payment in foreign currency as a one-off, you may want to consider some other options
1. Bill in foreign currency, but get your customers to pay into your New Zealand dollar account. It’s important to note, that some banks will charge to receive the currency and give you a lousy exchange rate.
2. Bill in foreign currency and use a non-bank currency provider like OFX or WorldFirst to convert the money. This may be a lot cheaper than sending it to your New Zealand dollar bank account and easier than opening a foreign currency account.
3. Ask your customers to pay you in New Zealand dollars. It’s an easy option for you, but be aware that it could put your customers offside. They may want to pay you less, given they are now having to pay in a currency that is foreign to them and exposes them to currency exchange rate risk.
Importers or buying goods from overseas
If you need to send money overseas, but also have the receipts in the same currency, a foreign currency account is really useful. A lot of importers that don’t have any currency coming into the account just use it to buy currency when they feel it is at a good rate. They hold it in the account until the payment is due. It effectively locks in the exchange rate, but it’s important to note that it also comes with a couple of drawbacks.
Buying currency and putting it in a foreign currency account ties up your New Zealand dollar cash-flow. While the currency is sitting in the account, it usually won’t accrue any interest and can’t be used in the running of the business, unless you convert it back. Also, if you buy the currency at what you think is good exchange rate and it continues higher, you may have locked in an unfavourable rate.
In this situation, there are other alternatives that will protect your business against exchange rate movements, without locking up your cash-flow. Talk to a currency expert or contact a foreign exchange specialist at your bank or currency provider.
For more information, on the banks we have mentioned in this post, here are the links: