Currency Exchange Costs Explained for eCommerce Sellers

Currency Exchange Costs Explained for eCommerce Sellers

If you’re an eCommerce seller, you already understand that the ultimate goal of your business is to make a profit. After all, a successful business is a profitable one.

But how does a business become profitable? The answer isn’t so simple and can take some time to get there. Product research and sourcing, marketing, and order fulfillment are all vital steps that a business must learn to do well if they want to succeed. After all, you need to find the right products, build a system that works, and execute.

The right products influence profit margins.

The equation is clear; the more profit your products can bring, the more profitable your business will be. Another way that your product choices influence your profit margins is by how fast they sell or don’t sell. If your capital is tied up in inventory that isn’t moving, then you can’t use it to invest in other products that can bring you profits; you have to resort to more costly ways of financing additional inventory. Dead stock also has other costs, such as warehouse storage fees, advertising fees, and labor costs to maintain listings and accounting records. You could end up losing a small fortune throwing good money after bad and eventually selling the inventory as overstock or writing it off altogether.

Fortunately, a product research platform, such as Algopix, helps sellers avoid such costly mistakes and enables them to maximize their profit margins. In a matter of seconds, Algopix analyzes products on the seller’s choice of 16 international Amazon, eBay, and Walmart marketplaces and provides insights to help them decide the most profitable products to buy from their suppliers and the most profitable marketplaces to sell them on. Algopix aggregates all the essential data required for sellers to make smart, confident sourcing and selling decisions. Sellers become much more successful by making decisions based on real-time data, rather than simply relying on the recommendations of others or their own gut instincts.

But there’s something else you can do too.

About Currency Exchange Costs

In our increasingly global world, you are likely dealing with suppliers and customers in more than one country. That means you have to learn how to manage your currency conversion costs. Assuming you are using your bank to send international wire transfers, you’re probably paying between 2-4% when you convert a currency (e.g. USD > EUR). That cost is directly affecting your profits. Paying suppliers is one area you can likely optimize, but efficiently collecting international revenue can have an even bigger impact on your bottom line. This is because you are probably paying too much on conversion costs on 100% of your international revenue.

How would you like to boost your profit margin by 10-20%?

That’s the dream, right? To find a way to increase your profit margins with minimal effort. Well, you can do just that when you start efficiently managing your currency costs.

By taking the time to understand your currency conversion costs, you can directly impact your profit margins. In most cases, those that take a look at currency costs and make the proper adjustments can see a 2% increase in profit margins, which is a lot in eCommerce (or any commerce).

Let’s break it down:

  • With monthly revenue of $100,000, a 2% savings will translate to $2,000 per month and $24,000 annually.
  • That same savings is worth nearly $120,000 over five years.
  • If your profit margin is 20%, a 2% increase in profits is a 10% increase to your overall profit margin.
  • If your profit margin is 10%, a 2% increase in profitability is a 20% bump in profit margin.

Here’s the problem.

You’ve likely never thought about it like this before. As a small business, you likely live and breathe product development and sourcing, using a product research tool to help you find profitable products. Currency conversion fees are a background expense that isn’t always noticed, but once you know it’s there, it is a cost that is hard to ignore! Trust me when I say you should be paying attention. You can save a lot of money when you optimize your currency conversion processes and services.

Solving the Currency Conversion Problem

In today’s global economy, eCommerce businesses often earn revenues and make payments across multiple currencies. What many don’t realize is that there is a cost every time money is converted from one currency to another. Banks typically charge a margin of 2-4% of the amount being transferred, and marketplaces are known to charge around 3.5%.

Fortunately, there are a few easy steps everyone can take to minimize the currency costs of doing business globally.

Never Move a Dollar Twice

Say your local currency is USD, you are selling on Amazon Canada, and your supplier is in China. Your end goal is to turn your money into USD in your bank account, but every sale you make is in CAD, and your Chinese supplier wants to be paid in RMB.

Every time you convert between those currencies, you are being charged between 2-4%. It may seem tempting to convert everything back to USD. That way your money is more accessible, but that’s the wrong approach. If you are converting CAD to USD, then USD to RMB, you are throwing away a percentage of your money with each conversion.

Here’s how you solve this problem.

Never move the same dollar twice. To optimize how you move money, at least you need to be able to hold balances in the currencies you have revenue in. If you are making CAD from Amazon sales in Canada, need to spend RMB on purchase orders, and USD for your own expenses, having both USD and CAD accounts is the way to go. This way you can use your Canadian dollar revenues to pay for additional inventory directly, CAD > RMB, and avoid paying FX margins twice (CAD > USD > RMB). However, getting an international bank account with a bank in the specific country, in this case Canada, isn’t the easiest thing to do.

Use an International Receiving Account

While you might have been brought up to believe that banks are your friend, that isn’t always the case. Smaller sellers know all too well the various fees they charge. Whether it be flat wire transfer fees, monthly maintenance fees, or FX conversion fees on large transfers, banks are always looking to charge you for something. On top of that, it can be frustrating to try and set up foreign bank accounts. If you are a US citizen, this is something the IRS frowns upon and many foreign banks don’t want US customers due to complex US regulations and heightened scrutiny.

And then you have the marketplaces, which don’t make much effort at all to get you a favorable FX rate. On average, they charge around 3.5% and because they pay out on a set schedule, no matter what the rate is, you are at risk of getting a really bad deal. For example, the GBP > USD rate dropped 1% in a day recently due to Brexit fears. It quickly recovered, but if you were unlucky enough to have your GBP revenues converted at the low rate, your profits took a 1% hit for a reason that had nothing to do with your business.

Luckily there’s an easier answer.

Rather than using banks and marketplaces that don’t specialize in moving money, look into setting up international receiving accounts with a company like OFX. Local receiving accounts are designed to let you accept foreign currencies, hold balances, pay taxes, and pay suppliers directly. They cost nothing to set up and fees are less than 1.5% when sending money internationally. So you will not only have more options available, but you will also cut costs at the same time.

That means you benefit from an immediate 2% increase to profits as mentioned above. When you couple this with a product sourcing platform like Algopix, you can increase your profits even more.

About the Author

Gabriel Grisham is Head of eCommerce Sales at OFX. Gabriel has spent over a decade working with companies on cross-border commerce. A native of California, he lived in China for almost a decade before returning full time to the SF Bay Area. Gabriel has a B.A. from Duke University and an MBA from Thunderbird School of Global Management. You can reach him at Gabriel.Grisham@ofx.com

Related Blog Posts