Everything You Need to Know About Foreign Currency Exchange for Online Sellers

Foreign Currency Exchange
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When you’re ready to expand your Amazon seller business to the various global Amazon marketplaces, one of the scariest aspects can be working with foreign currencies. Values fluctuate, expectations differ, and some currencies can’t even interact with various aspects of your business. However, you shouldn’t let that stop you from expanding to a new Amazon marketplace. With an overview of how foreign currency exchange (FX) works and a solid vendor that can act as a partner for you and your business, you can be up and running in a new country in as little as one day.

How Foreign Currency Exchange (FX) Works

Exchanging foreign currencies is functionally similar to “buying” that currency with another (often, your own local currency). Just like any other product, there are many places that will sell you foreign currencies (or your own local currency for foreign currencies) ranging from professional international business vendors to kiosks at the airport. The price you pay depends on a couple of factors:

1) The exchange rate used by the vendor you are exchanging with (more on how this is calculated below).

2) Any service fees that the vendor charges—this can be a flat fee per transaction or a percentage of whatever amount you are exchanging per transaction.

As a small business owner, you’ll find the most savings with a vendor who can offer you the lowest fees for services that meet your business needs. Service fees often fluctuate according to transaction type, convenience of the exchange (this is Amazon’s primary selling point despite having very high service fees), and transaction size. To ensure you get the best return on investment, you need to research which vendor can offer the best rates for what you need. 

How Exchange Rates Are Calculated

Foreign Currency Calculation

Exchange rates for the most commonly used and traded currencies can change constantly, depending on a variety of factors. Just like any other highly traded item, currencies are an investment and the primary driver of an exchange rate is the expected value of that investment. You won’t need to track the factors that impact foreign currency exchange rates as a small business owner, but like all things, it can be helpful to have a cursory understanding of the fundamentals. The main attributes that contribute to an exchange rate are:

1) Supply – If there’s too much supply, relative to what people need or want, the value is going to drop. If a country prints too much of a currency too quickly, it can negatively impact the exchange rate.

2) Demand – Again, some basic economic principles apply to the number of people who want a currency versus the amount that’s available. This is most often measured through interest rates set by the country’s central bank. If the bank offers an attractive interest rate for investors, then the country’s currency will generally be more desirable.

3) Stability – Undoubtedly the most subjective factor that contributes to a currency’s exchange rate is the perceived stability of the country printing the currency. If there is a lot of political turmoil or expected trouble, it becomes more difficult to predict a country’s actions or reactions (e.g., print more money, change central bank interest rates, etc). While not always true, stability can be a strong indicator of currency values.

Investors and FX traders assess these three factors to determine the exchange rate.. There is no central government or organization that dictates the rate for one currency relative to another, which is why rates can fluctuate multiple times per day (or even per hour).

What to know about FX as a Small Business Owner

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If the information above seems daunting or too troublesome, there’s good news.  As a small business owner, you really only have to think about two things when it comes to looking for the best exchange deal and one other factor when selecting a partner or vendor to handle your international exchanges.

1) What fees does the partner charge to exchange currency?

2) Does the partner maintain a competitive exchange rate? 

3) What other services or conveniences does the partner offer? 

Additional services and conveniences may come with a cost. Whether or not that cost is worthwhile depends on your business.  However, it’s best to not get overwhelmed by a single provider’s entire list of services and instead consider the handful of services offered by different providers. Many vendors who seem convenient (e.g., Amazon’s built-in exchange service) charge considerably higher fees and exchange rates. 

Improving ROI of Foreign Currency

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Outside of looking for a company with the lowest fees and a competitive exchange rate, there is little that you can do to manage the impact that exchange rates have on your revenue. Fluctuating currency values is just an aspect of doing business internationally on Amazon Marketplace. To maximize the few levers you control, make sure you:

1) Don’t move money any more than necessary. New international Amazon sellers often make the mistake of immediately converting foreign revenue to their domestic currency, not realizing that they’ll still need to handle normal business expenses (e.g., legal, marketing, etc) as well as VAT (value-added taxes) in the foreign currency. The avoidable extra fees that come from converting domestic currency back to the foreign currency is referred to as “double exchange fees.” Until you know you won’t need it and if it isn’t hurting your business, it’s best to leave income in an international bank account.

2) Evaluate which expenses you can handle in other currencies. If currency in the foreign country that you’re operating in is worth more than another, is it possible to handle other business expenses in the currency with more value? If your supplier or freight shipper will accept another currency, you can save yourself both exchange fees and play the exchange rate to your advantage. This likely won’t be possible until you have a decent revenue flow from various international Amazon marketplaces.

3) Properly evaluate your time. You are in the business of creating and selling products on Amazon Marketplace, not in trading on the FX market. While the previous two points can absolutely help you get a higher ROI, don’t let it consume your day. You want to find a happy medium between finding the best deal and spending your time on more productive business activities.

Improving ROI of Foreign Currency

A few places that you can find foreign currency exchange programs include:

1) Foreign currency exchange vendors – PingPong, for example, specializes in helping businesses expand globally and get the most out of their foreign transactions.

2) Domestic banks – Bank of America in the US, for example, offers foreign currency exchange if you have an account with them. Expect higher fees and limited support outside of simple currency exchange transactions.

3) Vendor tools – Amazon’s own currency exchange service, for example, charges higher rates for extra convenience. This might be where you start so that you have fewer things to worry about when starting in a new Amazon marketplace, but they will charge you much more in fees compared to other services and should be re-evaluated quickly.

4) Money transfer vendors – Western Union, for example, often market themselves as providers for quick transfers, but you should always avoid these services as a small business owner. Regularly using these services will cost you unnecessary fees and lower your profit margin.

Summary

International Amazon sellers can’t avoid foreign currency exchanges, but it doesn’t have to be something that drastically hurts your profit margins. With a bit of research and an understanding of how FX works, you can find a vendor who will both help you break into new Amazon marketplaces and offer you the most competitive rates on foreign currencies.

Partner with PingPong through the process of expanding your Amazon small business to a global operation. PingPong can help guide you through VAT, supplier payments, and foreign banking while offering the lowest fees and most competitive exchange rates. Check out www.pingpongpayments.com for more information and to set up your free international account in just one day. PingPong can help you #growglobal!

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