What are currency conversions?
Currency conversions help businesses expand their reach to consumers who use different currencies. Currency conversions are beneficial to companies that sell and ship products to different countries through the same product pages with one standard currency. This process can be automated so that currency conversions are automatically estimated in advertisements for the products and prices listed on the company’s site.
On shopping ads, currency conversions show advertisements that are understandable to audiences that use differing currencies. Product prices in ads and on landing pages will reflect the customer’s native currency, rather than that of the company.
Currency conversions also allow companies to complete transactions in the customer’s native currency. These conversions calculate product prices based on market exchange rates and rounding rules.
With currency conversions, companies can sell to customers with varying currencies at the same rate. Organizations often use remittance and money transfer software to make these types of transactions.
How currency conversions work
Companies run the risk of losing or gaining money when dealing with currency conversions. Below is how currency conversions work in the context of e-commerce, and the risks involved:
- Automatic exchange rate conversions: Stores that sell in multiple currencies will automatically convert prices to the customer’s currency according to market exchange rates. Prices cannot be manually set for products in different currencies. Prices are converted by multiplying the store price by the currency conversion rate, adding the conversion fee, and applying any applicable rounding rules.
- Manual exchange rate conversions: With this method, companies set the exchange rates manually. This locks in a fixed exchange rate for each supported currency, meaning prices won’t change with fluctuating market rates. This method can result in gain or loss depending on variance against current market exchange rates.
- Rounding rules: Companies selling in multiple currencies might find their product prices have inconsistent price endings. This can be avoided by applying rounding rules. Rounding rules can be automatic or custom.
- Manually captured payments: Companies that capture payments manually face a unique issue where the currency rate at the time the customer is charged might vary from the rate when the order was submitted.
- Refunds: Time gaps often occur between when a customer creates an order and when they make a return. The converted amount received from the order doesn’t always equal the converted amount given back in the refund.
Basic elements of currency conversions
With currency conversions, the customer is charged in one currency and the vendor is paid in another. There are terms for each side of the currency conversions:
- Presentment currency: The currency the customer is charged in, also called local currency
- Settlement currency: The currency in which the funds are deposited into the vendor’s account, also called payout currency
- Store currency: The currency companies use to set store prices and calculate reports
Benefits of currency conversions
Currency conversions are a way for e-commerce businesses to reach more customers. Accepting more currencies for payment takes business internationally, forming an inclusive customer experience. Key benefits of currency conversions include the following:
- Advertise in native currencies: Automatically show ads for products without making extensive edits to the company’s site
- Sell to more customers: Broaden reach to buyers in countries with unsupported currencies
- Account for fees: Consider elements like exchange rates, and round up to ensure no money is lost in the process
Currency conversions best practices
The biggest risk to currency conversions is losing money in the exchange. This loss can result from returns, manual exchange rate conversions, chargebacks, and more.
Here are some currency conversion best practices for companies that want to expand their customer base without losing money:
- Use native requirements: Follow the price and tax requirements of the country the currency of the product data is native to. If a company’s product data is in USD and the website charges in USD, they must follow the price and tax requirements for the United States. Any other requirements will follow that of the local country.
- Avoid possible loss: Using automatic exchange rate conversions and rounding rules help companies avoid possible loss.
- Refund right: When customers return an item and the converted amount received from the order doesn't match the converted amount for the refund, a best practice is to refund the full amount the customer paid in their local currency, despite the resulting loss or gain.
Currency conversions vs. currency exchanges
The terms currency conversions and currency exchanges may sound similar, but they actually describe two separate processes and are used by two different groups.
Currency exchanges are when businesses let customers swap one currency for another. These are used when customers require currency to spend in another country. Customers exchange their native currency for the currency of the country they are visiting.
On the other hand, currency conversions are the process of converting prices to match the customer’s native currency. This is used when companies wish to sell to international audiences.
Martha Kendall Custard
Martha Kendall Custard is a former freelance writer for G2. She creates specialized, industry specific content for SaaS and software companies. When she isn't freelance writing for various organizations, she is working on her middle grade WIP or playing with her two kitties, Verbena and Baby Cat.
