Global Expansion; Managing Exchange Rates

Stacks of money with a globe
13th October 2016

Selling in different currencies? It sounds like the stuff of nightmares, updating your product prices to fit exchange rates. But there are solutions to pricing using handy APIs and the help of online global payment providers. Some of the other challenges you’ll face might be a bit trickier, requiring the knowledge of experts. Let’s take a closer look at currency conversion for international e-commerce and how you can effectively manage fluctuating exchange rates to ensure your global expansion is a success.

Foreign Exchange Rates

Currencies are traded constantly, making values fluctuate every day, similar to the stock market. The only way you can buy currency is with a different currency, making a currency pair (for example GBP/USD).
This constant trading is based on complex economics and the values are never static. Exchange rates depend on inflation, interest rates, deficit, public debt, political stability and international imports and exports, making the rates notoriously difficult to predict.
That’s a lot to consider. The currency marketplace is vibrant and while there are profits to be made, it’s always attached to some risk.

International Pricing

Fluctuating exchange rates can have a substantial impact on the profitability of your international sales. Retailers need to understand how best to price their goods in different territories in order to insulate themselves against this continuous change.
By way of explanation, if the Pound Sterling strengthens against the currency in which you’re selling your goods, suddenly that currency is worth less and so maintaining your goods at the same price will mean your profit margins will take the hit on this change in value. If you’re operating with small margins, this could mean you’re selling at a loss. However, adapting your pricing to reflect the change in value enables merchants to maintain profit margins and ensure your global expansion is in fact profitable.

Automated Currency Conversion

When selling to international customers through your own website, using foreign exchange rate APIs, you can make sure you’re always on the money with your international pricing. It removes the need to manually change pricing: if you play it smart, you can manage thresholds to remain competitive, or to drive up margins in other territories.
Manually managing prices isn’t necessarily a terrible idea, but it may require additional staff. If you’ve got separate local webmasters for each territory, letting them manage their own product pricing and specials could be a better solution. If you’re flying solo, then it’s going to become huge a drain on your time and resources, so API integration is a must. Take a look at these multicurrency e-commerce apps.

Selling on International Marketplaces

Global marketplaces such as Amazon, eBay, TradeMe and Cdiscount provide great platforms to get your products in the sights of customers in new markets quickly and cost-effectively. It will, however, mean that the marketplaces you’re selling through will disburse funds to you in foreign currency opening your profit margins up to the risks of fluctuating exchange rates.
Working with the right partners to provide you with local collection accounts serves to insulate your business and gives control back to you on how and when you repatriate those funds back home to your local currency. We look at this in more detail below.

Taxes

Not all taxes are equal around the globe, so you’ll need to consider this element too when implementing other currencies on your site. Taxes can differ based on the type of goods, too. Depending on where you’re based, import and export duty may have to be added on top.
Every territory has its own VAT structure that you’ll need to adjust your pricing to, making sure you avoid odd and unusual sums of money that could deter your customers and affect conversion rates.
Companies trading internationally will need to ensure they have the appropriate reporting functions in house to correctly remit and account for VAT and/or Sales Tax in different territories. Throughout Europe the de minimus thresholds that apply to businesses requiring them to register for VAT in each country is different and so businesses must ensure they take a proactive approach to compliance so as not to get caught out by low thresholds. You can check out more tips on how to avoid the pitfalls of European VAT in our recent blog. There’s also the matter of taxable earnings, which differ from country to country; we look at this closer in the next section.

Bringing the Money Home

Repatriating your revenue can be tricky: any money earned overseas will need to go through the foreign exchange process. Equally, paying overseas suppliers for materials or products in foreign currency again will impact your cost centres, opening you up to some risks as exchange rates fluctuate.

How can you mitigate the risks to your business?

Local Collection Accounts are a method to ;give you a unique in-country account number for each country you do business in. You then instruct your marketplace to pay funds to this account. When funds are received into the account depending on your instructions proceeds accumulate, or, are automatically passed to your local bank account at great exchange rate. You get control of when the transfers take place and more money than you would using bank or marketplace rates.
Forward contracts allow you to secure today’s exchange rate for future market disbursements. You can protect yourself from adverse exchange rate movements and lock in a rate for a currency purchase or transaction and settle at a specified future date between two days and twelve months.; This helps manage the risk of exchange rate fluctuations and know exactly how much you will have to pay when converting at a future date.
Limit Orders allow you to set a target exchange rate; to make sure you don’t miss out if your target rate is reached overnight or while you’re busy. Once your target rate is triggered, a dealer will contact you to complete the transfer or it will execute automatically depending on your instructions.

Top Tips for Currency Management

Hopefully, this post has helped shed some light on how currency exchange rates can affect your international expansion. Let’s recap the main things you’ll need to do for effortless expansion:
1. Plug in a currency exchange API to your website to make sure values are consistent and up to date.
2. Calculate VAT, shipping and duty for each territory you sell to.
3. Work with the right partners specialising in repatriating funds, exchange rates and offshore accounting.
If you’ve still got questions, get in touch with us. We’ll clear up anything you’re not sure of and explain how our processes make international e-commerce work for you.

With special thanks to our Accredited Partner;

 
 
 
UKForex is becoming “OFX.” The OFX Group is one of the world’s largest online foreign exchange companies, providing foreign exchange services across 6 continents in 55 currencies. OFX employs over 300 staff in London, Sydney, Toronto, San Francisco, Hong Kong, and Auckland. Knowledgeable dealing teams are available 24/7.
 
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