There are two primary options if your business needs the ability to hold, pay, and receive foreign currency: a multi currency account or a foreign currency demand account. A multi currency account allows you to hold multiple currencies within a single account. A foreign currency demand account allows you to hold a single foreign currency within one account. Both will reduce the number of foreign exchange fees you incur when dealing with international partners, which can result in big savings.
In this article, we’ll discuss the difference between multi currency accounts and foreign currency demand accounts. We’ll also discuss how multi currency accounting software can make managing your foreign assets and liabilities much easier. In fact, for many small businesses, multi currency accounting software can even eliminate the need to have foreign currency accounts, if they’re doing a limited number of transactions with international partners.
Before we dive in, if your business will be working with international partners you should have accounting software that makes multi currency accounting easy. Xero’s multi currency accounting software allows you to report on foreign assets, accounts payable and receivable, and unrealized gains and losses in over 160 currencies. Accounts are reported in your native currency and exchange rates are updated hourly, so you’re never in the dark.
Converting Currency Is Expensive
Banks charge a fee every time you exchange one currency for another. If you’re exchanging currencies frequently, those fees can really add up. Businesses hold foreign currency for a number of reasons, but the most basic reason is that they conduct business in that currency frequently, and want to reduce the cost of foreign exchange fees.
For example, if I get paid the equivalent of $10,000 every month from a partner in a foreign currency, I would have to pay ~2% to exchange the foreign currency for US dollars. At the end of the year, my business would have paid $2,400 in exchange fees. But what if I needed to use half of my revenues to pay contractors in that foreign currency? It would cost me an additional $1,200 in exchange fees, bringing my total spent on fees to $3,600.
It quickly becomes clear that the more you deal back and forth in foreign currency, the more savings you’ll realize by having an account that allows you to hold, pay, and receive payments in a foreign currency. Now let’s take a look at the two types of accounts most well suited for this: multi currency accounts and foreign currency demand accounts.
What Is a Multi Currency Account?
A multi currency account (MCA) is a demand deposit account (DDA) that allows you to hold multiple currencies within the same account. DDAs are accounts that essentially behave like normal checking accounts. It is an account where a small business can receive payments and/or draw from whenever they need to.
In most cases, business owners will be able to access the funds within their multi currency accounts via debit card, check, ACH, and wire transfer. As with all business bank accounts, there may be fees associated with these transactions.
That a multi currency account is a DDA is an important distinction because there are other types of accounts for foreign currency that do not behave like a normal checking account. Two common examples are money market accounts (MMA) and certificates of deposits (CD). These interest bearing accounts are savings products and not made to accommodate frequent business transactions the way a DDA is. While these products can serve as a hedge against fluctuations in a foreign currency, they are not practical as an operating account.
Multi currency accounts are common outside the U.S. For example, almost every major bank in Great Britain and Australia have a multi currency account product. Multi currency accounts are much less common in the U.S. This is primarily because many international customers are comfortable transacting in U.S. currency.
Where Can I Get a Multi Currency Account?
PNC offers a multi currency account. Interest bearing accounts have a minimum balance requirement of $100k, while non-interest bearing accounts do not have a minimum balance requirement. Pricing information and other such details are not available online or by phone. PNC requires you to visit a branch and speak to one of their treasury management officers. These accounts are domiciled in the US and are FDIC insured
Wells Fargo also offers a multi currency account. They offer accounts in 33 currencies, but these deposits are held in non-U.S. branches and are not FDIC insured.
What Is a Foreign Currency Demand Account?
A foreign currency demand account (FCDA) is a DDA that allows you to hold and transact in a single foreign currency. However, foreign currency demand accounts are typically not as easy to transact in as multi currency accounts. In general, making or receiving payments will need to occur via wire transfer which can take a day or two to process. You generally will not have access to debit cards, checks, or ACH payments like you would with multi currency accounts.
This restricted functionality might not be a problem if your foreign partners are okay receiving payments via wire transfer, and you have a stable invoicing system in place. However, if your business requires you to have regular access to cash or a debit card linked to the account, a foreign currency demand account would present some problems. That means an FCDA might not be a great option for a company that will have team members traveling a lot.
If your business needs regular access to multiple foreign currencies, you will need to open up multiple foreign currency demand accounts. This isn’t a huge inconvenience necessarily, but it can be more expensive as each account will come with its own set of fees. It can also create cash flow restraints as each account will have its own minimum balance requirement. So the more of these accounts you need, the more capital may need to be parked in an account.
Where Can I Get a Foreign Currency Demand Account?
Union Bank offers foreign currency demand accounts with no minimum balance requirement. The FCDA will come with a $40 per month charge and you must also have a US denominated account with them. Additional fees will include wiring fees ($10 per outgoing wire, $15 per incoming wire). Because wiring is the only way for you to process transactions to and from the FCDA (there are no checks or debit cards), these fees can add up. Wires outside the US typically take 2 business days to go through.
East West Bank also offers a foreign currency demand account which also has no minimum balance requirement. These accounts must also be linked to a US denominated account. East West Bank offers a lower monthly fee than Union Bank, at $25 per month, and also does not charge for incoming wires. Outgoing wires, however, cost $30 each.
Multi Currency Account vs Foreign Currency Demand Account
As stated above, a multi currency account allows you to hold multiple currencies within one account. This is different than holding a foreign currency demand account, which typically allows you to hold only one foreign currency. This difference has important ramifications for small businesses when it comes to capital requirements, fees, and reporting.
As with almost all checking and savings accounts, banks typically set a minimum balance requirement for both multi currency accounts and foreign currency accounts. With a multi currency account you have to meet the capital requirement of only one account. So, whether you are holding two currencies or five currencies, there is only one minimum balance that must be maintained.
In general, a foreign currency demand account will hold a balance in only one specific currency. Each account you open may have its own minimum balance requirements. For example, if your FCDA provider has a minimum balance requirement of $10,000 and you want to deal in 4 foreign currencies, it would mean maintaining a total balance of $40,000. That can mean tying up a lot of capital for a small business.
There are a number of different fees that both multi currency accounts and foreign currency demand accounts will be subject to. The three most common are:
- Foreign exchange fee
- Monthly maintenance fee
- Wire fees
Foreign exchange fees occur when you’re converting one currency to another. Typically, the fees run around 3%. However, some providers of MCAs and FCDAs will offer you wholesale exchange rates if you’re converting large amounts of currency (say, over $100k in an order). In those situations you may be able to get a rate of .75% – 2%.
Maintenance fees are typically charged monthly. With a multi currency account, you typically only have one monthly maintenance fee (because you only have one account). With foreign currency demand accounts, you’ll at least have two, as in addition to your FCDA you’ll need a US denominated account. In some cases, these fees will be waived based on average balances or number of transactions. Typically you’ll see fees range from $25 – $50 per month for these accounts.
Wire transfer fees are charged when you make or receive payments via wire transfer. Multi currency accounts give you more options for accessing your cash and making or receiving payments (e.g. credit card and debit card) so you may wire money less frequently. With FCDAs wire transfers are normally the only transaction option and so will be a more important expense. These fees generally run between $10 – $30 per transaction.
There are other small service fees that may apply to these accounts as well, depending on the bank. However, by and large these fees will be similar for both multi currency accounts and foreign currency demand accounts.
Reporting is made easier with a multi currency account because all deposits and withdrawals will show up on the same account’s monthly statement regardless of the transaction’s currency. With foreign currency demand accounts, reporting would be spread across your various accounts which means more time spent reconciling and bookkeeping.
Whether you decide to set up a foreign currency demand account or multi currency account, Xero’s multi currency accounting software will help you keep things straight. You will have one centralized place to check your foreign and domestic accounts, your accounts receivable and payable, and to see your unrealized gains and losses based on up-to-the-hour exchange rates.
Multi Currency Accounts & Foreign Currency Demand Accounts Are Not Always FDIC Insured
It’s easy to take for granted the fact that your business’s cash is safe in a US bank account. That’s in part because of the work of the Federal Deposit Insurance Corporation (FDIC), which insures the accounts held in an FDIC insured bank for up to $250k. If you’re holding funds in a bank outside of the US, those funds will not be protected by the FDIC.
The FDIC also will not insure certain types of accounts even within the US. That’s the case for most investment accounts that hold mutual funds, stocks, bonds, and treasuries. Depending on how a US bank handles their multi currency and foreign currency demand accounts, those funds may not be FDIC insured either. In some cases, they won’t be insured because the bank is treating them more like an investment account. In other cases, as with Wells Fargo, the bank will be holding your deposit in non-U.S. branches, so that’s why it’s not insured.
When Can Multi Currency Accounting Software Replace MCAs and FCDAs?
Most international partners are happy to transact in US currency. That means many US small businesses will not need to process a lot of foreign currency transactions. So, rather than trying to reduce the frequency of currency conversions, most US small businesses are primarily concerned with being able to compete for international business.
For US small businesses to compete for international business, they will want to:
- Be able to bid in US currency or a partner’s native currency
- Be able to invoice in US currency or a partner’s native currency
- Have access to accurate exchange rates
- Display accounts payable and accounts receivable in both native and foreign currency
- Have all exposure to foreign currency reported clearly on their balance sheet
- Keep track of unrealized gains and losses due to fluctuations in exchange rates
You don’t need a multi currency account or a foreign currency demand account to do this. All you need is a good multi currency accounting software. For example, Xero’s multi currency accounting software allows you to do all this and more. You can see just how easy Xero makes multi currency accounting in our slide share below:
The Bottom Line
U.S. small businesses that need to process foreign currency transactions frequently will likely save a lot of money by using a multi currency account or foreign currency demand account to reduce their exposure to currency exchange fees. But because most international business are happy to work in US currency, many US small businesses might find very little to be gained by these accounts.
Whether your business would benefit from a MCA or FCDA or not, if you’re participating in international trade, you will benefit from having multi currency accounting software like Xero. Xero is capable of accounting and invoicing in over 160 currencies with the exchange rate updated hourly. That means that no matter where your trade partners happen to be located and no matter what currency you’re dealing in, your books will be straight.