Small businesses don’t need to think too hard about domestic transactions, beyond making sure the payment amount is accurate. However, when you begin transacting across borders, currency considerations quickly come into play. It’s a new wrinkle for businesses to consider — one that could have significant impacts on the transaction.
What, exactly, are currency considerations? Below, we’ll take a look at this concept through the lens of the biggest challenges small businesses face as they seek to transact globally. Then, we’ll take a look at how to simplify and solve some of the obstacles that stand between sending money to recipients in other countries.
1. Local vs. Landed Currency
The first and most important concept to understand when transacting abroad is the difference between local currency and landed currency. In some cases, these might be the same currency; in other situations, it might be different.
- Local currency is the currency used in a specific region. For example, the United States Dollar (USD), Mexican Peso (MXN), Hong Kong Dollar (HKD) or the Euro (EUR).
- Landed currency is the currency that’s available upon transfer. For example, if you send USD to a contractor in Vietnam and they receive it as USD, that’s the landed currency.
The reason it’s important to consider both local and landed currency is because banks require them to be the same, which means currency exchange. This is in contrast to digital payments platforms, which allow businesses to send USD and recipients to accept USD as the landed currency, even when the local currency differs.
2. Exchange Rates and Fees
One of the biggest problems with the traditional banking system is that landed currency needs to match the local currency. You can’t transfer $100 USD from your American bank account to a local bank account in Japan, because the local currency isn’t USD—it’s the Japanese Yen (JPY). The currency needs to arrive as the JPY equivalent to $100 USD.
Currency exchange has historically been one of the most cumbersome parts of global transactions, for a few reasons:
- It adds additional cost, because there’s a fee to convert one currency to another.
- Exchange rates aren’t always disclosed by banks and they’re ever-changing.
- The exchange rate you pay may not be close to the prime (best) rate available.
- Currency exchange can add extra processing time to an international transaction.
When it comes down to it, transferring $100 USD and having it land in the recipient’s account in the local currency will cost you more than $100. It’s yet another expense for small businesses.
3. Global Currency Values
Part of the reason global currency exchange is such an opaque and cumbersome process is because currency values are constantly in flux relative to one another. One currency might be worth more or less than another, and that dictates the value of a transaction.
For example:
- $1 United States Dollar (USD) is equivalent to 52.40 Philippine Pesos (PHP)
- $1 United States Dollar (USD) is equivalent to 0.95 European Euros (EUR)
In the above examples, the dollar’s value has different impacts on the nature of the transaction. For instance, European contractors may request payment in EUR, since the Euro is worth more, while a supplier in the Philippines may prefer payment in USD. This can also delegate the burden of currency exchange to either the sender or the recipient.
4. Currency Transfer Barriers
Last but not least, there are various other currency implications that can pose troublesome for small businesses expanding sales and operations to multiple countries. They include:
- The unbanked populations of some countries are higher than others. This means contractors, customers and even some businesses don’t operate via an institutional bank account. Instead, they rely on fintech apps and digital wallets.
- Institutional funds transfer to some countries can take longer than others through the SWIFT system. This can lead to processing and payment delays, which can put a strain on the trust that small businesses seek to cultivate.
- Sending money abroad through the SWIFT system comes with gaps in transparency. From the time the money leaves your account to the time it becomes available for withdraw by the recipient, there’s no telling where it is or when it will arrive.
- Many banking institutions have stringent rules or guidelines when it comes to sending or receiving money from certain countries. If they perceive suspicious activity (high amounts, frequent transfers, etc.), they could flag or freeze your account.
Really, these barriers break down to problems with transparency and control. Sending money through traditional financial channels means paying more, knowing less and giving up control over how the transaction is handled. It’s just not conducive to doing business at the global level.
Digital Wallets are Currency Inclusive
Small businesses seeking to avoid the many pitfalls and barriers associated with transacting across multiple currencies have a simple solution: digital payment platforms. Not only do digital wallets offer flexible control over when and how to pay someone, they’re a peer-to-peer transfer solution that cuts out the middleman entirely. That means transparency in transactions, from where the money is in transit to empowering recipients in how they handle landed funds.
In a world where small businesses need control over transactions, regardless of destination or the currencies involved, digital payments platforms are ideal. They’re the simplest way to navigate global currency considerations, opening the door to a world of opportunities.
Veem offers solutions that make the world more accessible for small businesses–simply. Request a demo to find out how you can make your business borderless.