Should you pay in USD or local currency?
With the increase of globalization, businesses are working with international suppliers, contractors, and retailers to meet their needs. When this happens, businesses have to answer a deceptively simple question: do we pay them in our US dollar or their local currency?
The way currency exchange works can be unnecessarily complicated, especially when you’re busy trying to run your operations. The majority of businesses in the United States will pay international suppliers in USD because of how quick and simple it is compared to the alternative. But is this best practice?
Here we’ll break down what it looks like to pay in USD versus a foreign currency, the pros and cons of both, and the steps you can take right now if you want to take advantage of the benefits of paying in a foreign currency.
Paying in foreign currency
What it looks like
Let’s rewrite our web development story. When you reach out to the web developer, you ask if they prefer being paid in USD or GBP and they excitedly tell you they’d prefer their local currency.
You work with your bank to make a foreign currency wire transfer with complete transparency into their exchange rates. They perform the exchange rate before sending the money. Once they send the money, it’s a quicker processing time for the receiving bank since they’re taking in their local currency meaning no currency conversion needs to take place.
The web developer is in turn excited to see the exact amount they expected to hit their bank account on the date they expected to receive it. No guessing games as to what their invoice will eventually convert to allowing them to budget better and keeping them happy.
When working with foreign providers, you’ll often be offered discounts for paying in their local currency. In fact, a survey by Aite Group found that most middle market importers in the United States paying in foreign currency received a 1-2% discount. Some respondents even reported discounts of up to 10% per payment.
You can get potential discounts on products and services. Most payers and payees use USD simply because both assume it’s easiest. In short, it’s because “that’s how it’s always been.” But when you reach out to foreign providers, you may find they’re willing to give you a discount by simplifying the process and using their local currency. Even a small discount can add up if you frequently work with them.
You strengthen relationships with your providers. By working with a provider on how to best pay them, you’re signaling that you care about their experience. This is often reciprocated as they will look for ways to improve your experience. It’s little actions like paying in a foreign currency that can take your provider relationships from purely transactional to more collaborative.
Some banks and credit unions have poor foreign exchange services. Typically, the smaller the bank, the less they’re investing in their foreign exchange service. For businesses working with local credit unions, the currency exchange experience can be longer, drawn out, and more expensive than a larger bank that has an established and scaled exchange service.
Incorporating foreign currency will change your accounts payable process. When you’ve had a tried and true process, making small changes can create a short-term learning curve. If you’re in the middle of your peak season or have a lot on your plate, making a change like this can be much more taxing than it needs to be.
Paying in USD
What it looks like
Let’s start with a simple example. You recently made some big improvements to your website and an international contractor sent you an invoice for $10,000 USD, or more. As you’re about to pay it, you remember you hired the self-proclaimed best China-based programmer after looking at their portfolio.
If you send them the payment in USD as outlined in the invoice, your bank then withdraws the USD amount and sends it to the contractor’s bank. Their bank converts the payment to the Chinese Yuans (CNY), potentially charging an international transaction fee and not even disclosing the exchange rate used.
Beyond that, if you send the payment on Monday, the contractor may not even receive the funds until the end of the week because of how long the bank takes to process the exchange. Now the self-proclaimed best China-based web developer is having the self-proclaimed worst payment experience.
However, there are definite pros to paying in USD. Let’s break them down:
The USD is considered “the world’s reserve currency.” Due to how much commerce runs through the United States, USD has a larger amount of flexibility in terms of its purchasing power. Foreign providers and contractors might actually prefer holding onto USD for some of their purchases down the line. This also has the ability to quickly understand legal changes in dollars and cents.
Paying in USD is quick and simple. You’re already holding that currency so you can send a payment quickly and efficiently. This can be especially helpful if you find an invoice you missed and need to send out a payment to make a closely approaching due date.
Most providers will pass their exchange costs onto you. That story above? Imagine if after it’s all said and done, the contractor opened up their bank account to see that the bank gave them a less than favorable exchange rate on top of an exchange fee. After experiencing that and the slow turnaround time of the payment, they decide they’re going to charge an extra fee for customers abroad.
USD is withdrawn right away. For some operations, having funds for an extra two or more days for a conversion to take place can make a big difference. If your operations benefit from longer turnaround time on expenses, consider converting to the local currency before sending the payment.
How can I start paying in foreign currency?
Commerce in foreign currencies isn’t the future, it’s happening right now. This means it’s time to optimize your business for the modern world and get familiar with working with foreign funds.
But don’t rush to your bank to start opening up every foreign currency account you could possibly dream of quite yet, there are easier ways to start paying in foreign currency.
Reach out to your providers and contractors
Before you start paying in foreign currencies, it’s best to check in with the foreign businesses you work with to confirm they want to be paid in their local currency and whether they’re willing to discount you for it. This will save you any time spent setting up a new payment system only to find out all your foreign connections actually prefer receiving USD.
Learn the currency exchange dos and don'ts
You might be using a service like PayPal or OFX that already works for sending foreign currency. So you’re all set, right? Not exactly.
Many payment services hide their exchange rates and fees so you don’t know where your money is really going. Take for example PayPal’s 4.0% foreign transaction fee. Unless you’re scouring through your transaction details, you could be losing valuable dollars on every payment you send, especially on larger amounts. For some payment processors, they won’t even state their fees but rather incorporate it into their exchange rate. If you aren’t comparing their exchange rate to another third party’s, you wouldn’t even know how much they’re shorting you on the exchange.
Bring on help that specializes in foreign transactions
Take out all of the guesswork and uncertainty with foreign currency accounts and payments by working with a bank or payment processor that makes it clear from the get go.
At Airwallex, we give you complete transparency into your foreign transactions. There’s no set up fees or monthly maintenance fees for our products that work in 31 different world currencies.
We offer banking and payment options for businesses looking to take advantage of everything international commerce has to offer. You save money on every transaction, but then you also save time and stress in trying to figure out all things foreign currency. Get started today.
Related article: 15 signs you should switch to an online business account
Evan Dunn manages the growth of Airwallex's SMB business in the US through marketing avenues. Evan is a generalist with expertise in SEO, paid media, content marketing, performance marketing and social selling. He also enjoys slam poetry and waffle making.