eCommerce now accounts for 0.06% of the entire GDP of the USA. Sure, while 0.06% may not seem all that high, just remember that we are talking about an economy worth $20.94 trillion annually. Furthermore, the size of eCommerce is growing by around 5% annually as more and more businesses and sole traders decide the time is nigh to punt their wares online.
This post will deeply dive into how foreign exchange rates (fx rates) impact eCommerce traders. We'll look at how currency rates affect sales and how sellers can ensure they get the best exchange rate at all times. Finally, we'll also touch on why merchants should consider using PayPal alternatives and the nuances of making a money transfer for online sellers.
While eCommerce has been bad news for the high streets, it has been a boon for consumers and traders. If you cast your mind back just a decade, customers were generally limited by the products and goods for sale in the stores of their hometowns. Anybody who had a taste for exotic spirits or appreciated archaic works of literature would often struggle to find what they were after. The rise of eCommerce, however, made pretty much everything in the world available to us more or less instantly.
Then, of course, there are the prices. Running a high street shop costs money, and these costs are priced into the items sold and passed on to the customer; eCommerce means we now get what we want for less.
Another significant benefit of eCommerce is that it has, to some degree, democratized the marketplace and allowed many part-time traders, producers, and merchants to enter and begin running businesses. Whereas a part-time jewelry designer can not afford to open a store, they can afford to set up a website or Etsy store.
Online Sellers and Foreign Exchange Rates (FX Rates)
However, while eCommerce has provided budding traders tremendous opportunities, there are complications and complexities to navigate. One of these is the intricacies of international trading and how foreign exchange rates impact profitability. We will examine how getting the best exchange rates is significant in eCommerce.
Let's imagine that we run an eCommerce store that sells t-shirts. We buy our blank t-shirts for $10 per piece, pay to have them printed at $5 per time, and then sell them at $30 for a healthy $15 profit which is a 100% markup. If we sell exclusively to US customers, then $30 is $30. However, if we are selling internationally, we need to start paying attention to foreign exchange.
If we are selling internationally, we have two basic options. We can either keep their item value fixed at $30 and use our e-store software to handle the conversions. For example, if a customer in the United Kingdom visits our store, then from their perspective, the item will be priced at £26.05, the customer will pay in pounds using their bank card, and their bank will handle the conversion (which will cost the customer money). Our store will receive a flat $30. However, this approach risks making our shop uncompetitive to foreign customers because of the conversion fees and odd prices.
Varying Currency Rates
Alternatively, we could choose to set the price depending on location. In the example above, we could agree to accept payment in pounds, meaning that our bank (or PayPoint) handles the transaction. We absorb the currency conversion cost, making the item more affordable for our British customers. Furthermore, as an additional sweetener, we could set our UK prices to a nice round £25 because the £1.05 reduction will drive more sales.
While the second strategy will encourage more sales, we must keep a close eye on exchange rates. For example, if in 2 months the pound dropped further against the dollar, we would risk selling our items for a reduced profit, or maybe even at a loss.
PayPoints and PayPal Alternatives
Many online sellers use Paypal as their default PayPoint. After all, the brand is ubiquitous, and it does allow fast payments from pretty much anywhere in the world. However, Paypal is notorious for charging high fees and offering poor exchange rates. If the seller absorbs the exchange costs, they will lose money on each sale, and if the buyer absorbs the price, the item will cost more, which may deter them.
Many sellers now turn to PayPal alternatives such as Skrill, Payoneer, or Stripe.
Different Ways of Sending and Receiving Money Abroad
Let's take this further. Now imagine that we discover that rather than buying our t-shirts in the US for $10, we can buy them from China for 49 Yuan. In today's market, 49 Yuan is $7, meaning we would save $3 by buying them from China. However, if the dollar dropped against the Yuan in the future, the t-shirts would start to cost us more money, so once again, we would need to be very mindful and pay close attention to foreign exchange rates.
When buying goods or materials from abroad, eCommerce traders must consider the best way to send money overseas. To pay our Chinese supplier, we would need to send dollars from the US, convert them to Yuan, and then send them to China. If we use our bank to handle the payment, this will incur bank transaction fees, and the bank will also set the foreign exchange rate, which will typically be around 3.5% below the optimal market rate. That means we have to send 3.5% more dollars than expected, which, once again, eats into the profitability of buying from China.
Getting The Best Exchange Rates
Therefore, instead of using a bank to pay our supplier, our business could use a specialized and dedicated money transfer provider who can offer low or no transaction fees and an optimal and best USD rate.
Final Thoughts – Foreign Exchange and Money Transfer For Online Sellers
Many eCommerce traders are relatively inexperienced business people, and there is a learning curve involved in learning to make the most of foreign exchange rates. Still, any business that sells or buys goods from abroad needs to take the time to get to grips with fx rates and currency rates to minimize costs and maximize profits for their business.
Also, to get the best USD rate on sales, it may be worth seeking out one of the top PayPal alternatives to lower fees and deliver the best exchange rate.