The True Cost of Overseas Banking
Operational costs
If you’ve set up in the country, there will be more, and probably cheaper, banking facilities available to you than if you were just operating from Australia. However, there are operational costs you need to consider in running that asset, and this means tax and legal obligations.
“Typically [residency] affects the tax and legal aspects, whether you can earn interest. In Australia, non-residents who don’t put in a tax file number get charged at the highest tax rate,” says Booth by way of example.
McClintock agrees; regulations affect foreign currency accounts. “Is there additional reporting required by operating that account? If the account is domiciled in the foreign country it can change those obligations considerably.” Any interest earned could also make managing those accounts more complex if you’re dealing, and receiving interest, in multiple currencies.
Exporters also need to know whether they can repatriate funds, and the regulations around that process. Booth says it depends on the country and the business’ residency. “You cannot get renminbi out of China because of local regulations. When we sit down with our clients we need to understand how it is they’re going to structure their business and the implications of putting money into each of those countries,” she says.
At the end of the day she recommends exporters partner with a bank that knows offshore to make banking easier and more efficient: “Really sit down and talk through the movements. Let them understand your supply relationships. Do that early.”
Counting currency
Having an understanding of your foreign exchange movements can help you minimise your banking costs, so it pays to take a closer look.
McClintock says beyond rates and margins, a foreign exchange account would incur the usual account-keeping fees from your provider. Fees vary depending on the type of currency activity. “If customers are receiving in US dollars and making a US dollar payments there could be a different fee levied for that service because there’s no exchange involved,” he explains.
The number and type of currencies you’re dealing in would also affect the cost of your account. “If it’s just one US dollar bank account, that might be a different case to where the exporter needs 10 different foreign currency accounts,” says McClintock. “The other thing is, what currencies do you need to hold those accounts in? If we’re talking about the major currencies, there’s going to be better pricing available than operating an account in a more exotic currency.”
He adds that there could be conditions to keeping the account, for example minimum account balances or certain activity levels or thresholds, which exporters need to consider.
While these fees and charges are generally unavoidable, you may be able to negotiate. The key here is to understand your business’ payment patterns, then shop around for a suitable provider. “There are different features attached to various foreign currency products in the marketplace so it’s about negotiation for value for money,” says McClintock. “Volume generally drives the price dynamic.”
In most cases, it’s more cost effective for payments to undergo as few currency exchanges as possible. McClintock advises exporters to build natural hedges by earning and making payments in the same currency.
Timing is a further consideration for businesses; the time it takes to convert money for use elsewhere could incur tiny, but incremental, costs, so it’s something you need to know to manage your money. “Ultimately you’re completing one transaction to make another, to fund another part of your business,” says McClintock. “Work with your provider to develop a strategy and implement that strategy to get the most efficiency out of your foreign exchange positions.”
Additionally, McClintock says it’s important for exporters to develop a foreign exchange policy that will identify the currencies in which you’ll be managing receivables. Obviously being paid in Australian dollars is ideal, but otherwise “stay in the majors because you’ll get benefit of volume in the marketplace and better liquidity in product offerings and margins generally,” he suggests. “Not forgetting to keep an eye on the exchange rate as well.”
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