For startups and small business, it has never been easier to take online payments from your customers. Previously businesses had to set up and get approval to set up special bank accounts and merchant facilities.
Now companies such as Stripe and Braintree make it really simple to create an account and with a bit of development work from your developer, you can have a payment gateway integrated in to your website within hours.
They also make dealing in overseas markets extremely simple with most offering to accept payments in up to 100+ currencies. This is great for the startup SaaS businesses looking to go global from day one by allowing them to price in local currency and removing friction at that critical time of signing up.
But as this business grows in overseas customers, inevitably there will come a light bulb moment when they realise that Stripe is now making a fortune out of them.
Whilst rates are a little different for each one, typically a business will pay a 2% margin on top of 2.9% + 30cent transaction for an international transaction or over 5% of the transaction. To put that in to perspective, that is the same rate that your Grandmother in England went in to her bank to wire you a $100 for your birthday.
Admittedly there are card interchange fees that need to be taken in to account in this pricing but the reality is that it is a significant chunk of revenue to be giving away.
Now for the startup founder that is running a million miles an hour, the thought of having to deal in foreign currencies can make their head spin but as the international component of the business grows, it may be very worth looking at getting a bit more sophisticated.
So what are the options available:
Foreign Currency Accounts
Firstly, and most importantly is coming up with a solution to have your major currencies deposited in to a foreign currency bank account (FCA). This account is denominated in a currency other than your base currency e.g. US dollars and allows you to pool revenue without being converted in to your base currency at a 2% margin. This effectively isolates the funds allowing you to get control. The best we have seen is Citibank which doesn’t charge you for incoming funds. Stripe has this functionality in the US and is rolling it out to other countries as we speak.
Netting foreign cashflows
One of the simplest ways that businesses can reduce foreign exchange exposure is by ‘netting’ foreign cash flows. For instance, if an Australian business is receiving USD each month in revenue from overseas sales but is also spending USD to set up offices overseas, pay salaries or marketing costs, then it makes sense to use up the USD you already have in your USD account.
Get access to a dealer
For any business that is starting to get some serious traction in overseas markets, having a direct contact with an FX Dealer is a must. It might also be worth having a relationship with two, just to ensure you are getting the best rate possible.
OFX has a really simple offering for small businesses and you could be transacting at a rate more like 0.5% than 2% but this will depend on the size of your transactions and your negotiation skills.
Whilst a bit of a clunky process, you can transfer the USD in your account to their USD account and they will exchange it to your base currency. They can set you up with an online system for smaller transactions.
Pricing and taking advantage of exchange rate volatility
If you are in a country other than the US, chances are your currency has devalued significantly against the global base currency in the past 12 months. For startups and online businesses selling in the US market, this means opportunity.
As the US dollar strengthens, this means that your revenue will increase as you convert it to your base currency. By holding an FCA, netting your foreign cash flows where possible and using third party FX providers will definitely save conversion costs over time.