Understanding Foreign Currency Exchange for Running an International Business

If you are a business that sells internationally, your handling of currency exchange influences your profit margins, costs, and customer experience. Clients are easily discouraged from converting currencies when they have to do extra work to make a transaction or when the payment fees are too high. 

To compete with local providers, it should not be harder for an international client to complete a purchase or make a transaction than it is for them to make domestic payments. Luckily, with today’s technology, you can make multi-currency work seamlessly. In this article, we’re going over what you need to know about foreign exchange (also known as FX, currency exchange, or forex) to run an international business and get the best rates possible.

How does automatic currency exchange work? 

To begin, there are no centralized foreign/currency exchange marketplaces like there are for stocks. Currency exchanges can be done by payment processing providers, forex companies, individual agents, hedge funds, banks, and many others.

Product and service providers working with multiple currencies usually focus on accepting and making transactions to and from international suppliers and customers. In these cases, handling currency exchange for every sale individually is rarely an option.

That is why the process usually looks like this:

• Customers initiate transactions in foreign currency with their card or via bank transfer. 
• The payment processing provider receives this data and communicates it to the customer’s bank and card network (Visa, Mastercard, etc.) to authorize the transaction and capture funds.
• Currency is usually exchanged via access to live foreign exchanges of large international banks, central banks, or FX brokers – a.k.a liquidity providers. 
• After conversion, the payment processor settles the converted funds into the payee’s account. 

Why it’s essential to understand local currencies and the factors that influence their rates

Not many economies, if any, are as stable as the US. This is why exchange rates may fluctuate often and significantly. If you’re operating on a small- to mid-size scale, you won’t necessarily be thinking about the geopolitics of a foreign nation you deal with. 

Still, you need to be aware of the myriad of factors in play in deciding the cost of their currency. For example, Türkiye is a developed NATO country with strong ties and political influence in both Asia and Europe. 

Despite a highly favorable position, the country's flawed economic policy and democratic deterioration led to an ongoing currency devaluation. In 2020, you needed 5 Turkish lira to get 1 US dollar. In 2024, you needed 35+ lira to buy the same dollar, even while the dollar itself became noticeably inflated during the same period.  

If you exported any products or services there during the period, your business would face the following:

• Reduced purchasing power in Türkiye as people who made money in lira didn’t start to get paid more, so now they just need seven times as much money to pay you.  
• Increased competitiveness and export opportunities for Türk goods, which cost about the same to produce, but when you sell them abroad, you get seven times as much revenue. 
• Unpredictable new taxes and tariffs make planning and pricing products and services risky.

Every market you will be entering has its own unique dynamic that you need to adjust to as the new participant in the landscape. Economic indicators like interest rates and GDP growth, political stability, sanctions, and trade policies all influence the currency rate and are crucial for working with your counterparts abroad.

Fees associated with foreign currency exchange

When a transaction becomes international, it instantly gets a whole list of new institutions and laws that get a piece of that transaction. Exchange rate markup, transaction fees from the financial institutions, wire transfer fees, conversion fees, and cross-border fees – the list differs by jurisdiction. 

While most of them are just a few cents, it is worth looking up who charges what fees on your payments and how much. Armed with this information, you’ll be able to find a foreign exchange solution that makes the best economic sense for your business.

Regulatory considerations when using foreign exchange

As your product or service expands into new jurisdictions, you need to strengthen and update your regulatory compliance framework. While the right payment processing provider will take almost all international regulatory tasks off your hands, you still need to be aware of the laws you’re now required to follow.

• Local regulations of foreign currencies – if you’re running your FX activities yourself, you may need to disclose your rates fees to the state and adhere to rules for using foreign bank accounts and payment systems. In the US, this includes Foreign Bank Account Reporting, Foreign Account Tax Compliance Act, Truth in Lending Act, Bank Secrecy Act, and a few other regulations, depending on how you run your payments. 
• Licensing – depending on the jurisdiction, you may need to obtain a license from the local authorities to do business in their country. 
• Taxes – if you’re handling currency exchange in-house, you may need to register to pay local taxes in the new countries.
• AML and KYC – while your local anti-money laundering (AML) laws and know your customer (KYC) laws may be strict enough, you need to take into account local requirements, too, when entering a new market.
• Data protection laws – most well-known is the EU’s GDPR standard, which regulates how personal data is collected, stored, and used in the European Union. Still, every major jurisdiction has its own set of rules it will use to analyze your operation. 
• Reporting requirements – as you know, regulators like to drop by to check that everything is up to code, so it’s crucial that your reporting is on par with their expectations and is ready to go. 

How to automate foreign exchange processes as a merchant

Some businesses are intimidated by cross-border payments and postpone the much-needed expansion. But in reality, nothing stops you from launching into new countries to grow your customer base or talent pool, save money, and diversify your revenue streams. 

To make sure you don’t spend all of your working hours managing hedging options, multi-currency balances, and reporting to a foreign nation’s regulators, you need a reliable payment processing provider who handles this for you. This way, when a customer pays in foreign currency, or you need to make a payout to someone, the payment processor automatically converts it to your preferred currency based on real-time rates.

At Payment Labs, we handle the entire transaction from conversion to depositing funds to the payee, ensuring compliant cross-border payments, minimizing your regulatory burden, and making your transactions effortless. The platform is a one-stop shop, providing every payment rail, every rate, and every currency available at a fair price. Don’t hesitate to schedule a call with us, and we’ll be happy to show you how we can automate cross-border payments for your particular business scenario.