While being an entrepreneur exporting services worldwide is thrilling, navigating the complexities of <a href="https://www.skydo.com/blog/international-payment-terminologies-you-must-know-before-exporting-services-globally?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">foreign transactions</a> is challenging. The constant struggle is picking a suitable payment method that does not consume your profits.&nbsp;

It's not just small businesses that face these problems. <a href="https://www.sec.gov/news/press-release/2018-226">Even Tesla, in 2018</a>, incurred a staggering $20 million fine from the US Securities and Exchange Commission (SEC) for misleading investors about their capital and current account transactions.&nbsp;

The SEC discovered how Tesla had exaggerated its cash flow from operations by a staggering $600 million while understating its net income by $300 million. Their financial statements failed to disclose its capital and current account transactions, resulting in severe consequences.

Tesla's problems with capital and current account transactions were due to a major factor: a lack of understanding of the complexity of the rules.

To safeguard your global business from such complications, let's understand capital and current account transactions in detail.

Capital Account Transactions&nbsp;&nbsp;&nbsp;

A capital account transaction meaning is when India and other countries trade money-related things like assets and debts with each other. It includes transactions related to buying or selling non-financial assets, such as real estate and patents, and financial assets, including stocks, bonds, and derivatives.&nbsp;

The components of a capital account include the flow of foreign capital and loans, banking activities, and other forms of investment, as well as fluctuations in the foreign exchange reserve.

However, capital account transactions are restricted to a certain limit per the relevant regulations. The RBI or Central Government do not impose any restrictions on the withdrawal of foreign exchange for depreciation (decline in value) of direct investments.

Rohit Khurana, a Chartered Accountant professional and finance lead at Skydo, clarifying the rules for capital account transactions, explains, "The business may require a valuation report in the cases where it receives money against the issuance of shares. Similarly, there are many restrictions in particular sectors in terms of shareholding so that foreign companies can not exceed the particular FDI limits."

A current account transaction includes various types of payments associated with foreign trade, general business activities, services, short-term banking, and credit facilities used for regular <a href="https://www.skydo.com/blog/six-proven-strategies-to-propel-your-it-service-business-growth?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">business operations</a>.&nbsp;

It includes interest payments on loans and net income generated from investments. Additionally, it covers remittances sent to support the living expenses of family members, such as parents, spouses, and children residing in another country.&nbsp;

Education-related expenses, foreign travel, and medical care for parents, spouses, and children further fall under current account transactions.

Current account transactions are much smoother than capital account transactions by regulations. According to Section 5 of the FEMA (Foreign Exchange Management Act), any individual has the authority to buy or sell foreign currency from an authorised dealer if it is for a current account transaction.&nbsp;

To prevent money laundering through current account transactions, the Reserve Bank of India (RBI) may impose certain restrictions requiring the valuation report of the particular imported product or service.

Example of a Capital Account Transaction Classified as a Current Account Transaction

Dev, an Indian business owner, imports machinery from a vendor in the US for installation in his factory. Per accounts and income tax law, purchasing machinery is a “Capital expenditure.”&nbsp;

However, under FEMA, it does not alter (create) an asset in India for the US vendor. It does not create any liability to the US vendor for the Indian importer. Once the payment is made, Dev or the US vendor neither owns nor owes anything in another country. Hence, it is a current account transaction.

Compliance and Regulatory Considerations&nbsp;

Indian entrepreneurs dealing with capital and current account transactions must adhere to the regulations and procedural requisites outlined by the Reserve Bank of India (RBI). They monitor capital and current account transactions through a variety of regulations. Some of the most important regulations include:

In addition to complying with the regulations, you must also complete the appropriate forms when engaging in capital and current account transactions. Some of the most important forms include:

Best Practices for Navigating Capital and Current Account Transactions&nbsp;

You can follow several best practices to ensure smooth operations and compliance with relevant regulations. Here are some key recommendations.

1. Understand foreign exchange regulations

Familiarise yourself with the Foreign Exchange Management Act (FEMA) and the rules and regulations set by the Reserve Bank of India (RBI) regarding capital and current account transactions. Stay updated with any amendments or changes in these regulations.

Maintain accurate and up-to-date records of all your transactions, including invoices, contracts, and <a href="https://www.skydo.com/blog/automated-firc-simplifying-international-payments-compliance">FIRA documents</a>. Ensure you have all the necessary paperwork to support your export activities.

Stay updated on <a href="https://www.skydo.com/blog/forex-and-its-impact/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">currency exchange rates</a> to make informed decisions regarding the timing of your transactions. Monitor the foreign exchange market and consider using appropriate hedging mechanisms to mitigate currency risks.

<a href="https://www.skydo.com/blog/how-can-the-right-chartered-accountant-help-your-tech-export-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Consult a chartered accountant</a> to assist with regulatory compliance, taxation matters, and overall business documentation.

In the vast world of international business, understanding the differences between capital and current account transactions is vital. Capital accounts deal with investments and transfers of assets, while current accounts handle day-to-day transactions. You can confidently navigate the financial landscape by grasping these distinctions, avoiding pitfalls and maximising opportunities.

To further enhance your global payment strategies, you can reach out to us to broaden your knowledge and embrace the power of capital and current account transactions.&nbsp;

Q1. What is a capital account transaction?

Ans: A capital account transaction involves the exchange of money-related assets and debts between countries, including non-financial assets like real estate and financial assets such as stocks and bonds. It is subject to regulations and limits, and it encompasses investments and transfers of assets.

Q2. What type of account is a capital account?

Ans: The capital account is a component of the balance of payments and deals with transactions related to the exchange of assets and debts between countries. It includes both financial and non-financial assets and is subject to regulatory restrictions.

Ans: A capital account deficit occurs when a country's capital account transactions exceed its capital account surpluses. It indicates that the country is borrowing more from foreign sources or selling more assets to foreigners than it is acquiring from them.

Q4. What are current account transactions under FEMA?

Ans: Under FEMA (Foreign Exchange Management Act), a current account transaction involves various payments related to foreign trade, business activities, services, and short-term banking. It covers items like interest payments on loans, net income from investments, and expenses such as education, foreign travel, and medical care for family members residing abroad.

Q5. What are current and capital account transactions?

Ans: Current account transactions encompass day-to-day financial activities like trade, services, and income, while capital a/c transactions involve the exchange of assets and debts between countries, including financial and non-financial assets.

Q6. What are some examples of services within the current account?

Ans: Services in the current account include–

These transactions are part of a country's balance of payments in the current account.

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Earlier, the world operated under the golden rule – quite literally. Gold was the common standard to which all currencies were pegged. However, there has been a shift in the past half of the century.&nbsp;

No single reserve currency exists, and currencies no longer bow to the mighty weight of gold. Instead, each currency moves relative to the others, with a select few, such as the US Dollar (USD), emerging as the undisputed stars of this financial stage.

The Foreign Exchange (Forex) market has become the cornerstone of international commerce, which has evolved dramatically in the past few decades. This blog will be your one-stop guide for understanding forex.

The forex market, also known as the foreign exchange market, is a worldwide arena where currencies are traded. This market functions around the clock, five and a half days a week, and is the largest financial market globally.&nbsp;

Within this marketplace, various participants, including banks, corporations, retail investors, and government entities, buy and sell currencies.

These currencies are traded in pairs and are categorised as–

While understanding the dynamics of major, minor, and exotic currency pairs is fundamental, tech exporters encounter specific challenges with forex.

Challenges Tech Exporters Face with Forex

As tech exporters wrestle with the challenges presented by the forex market, it's crucial to understand the <a href="https://www.skydo.com/blog/checklist-for-your-accountant-to-get-money-from-us?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">factors influencing foreign exchange</a> rates. These factors play a key role in deciding the profitability and success of their international ventures.

Factors Influencing Foreign Exchange Rate Fluctuations

1. Interest Rates and Central Bank Policies

Interest rates set by a country's central bank affect the return on investment denominated in that currency. Higher interest rates tend to attract foreign capital seeking better returns, driving up demand for the currency and, consequently, its value.&nbsp;

Central bank policies, including quantitative easing and monetary tightening, can also change foreign exchange rates by influencing the money supply.

Economic data, such as strong GDP growth, low inflation, and low unemployment, can boost confidence in a currency, attracting investors and driving up its value.

3. Political Stability and Geopolitical Events&nbsp;

Countries with stable governments and predictable policies are more likely to attract foreign investment, bolstering their currency's value. Geopolitical events, such as elections, trade disputes, or conflicts, can introduce uncertainty and volatility into exchange rates.&nbsp;

4. Market Speculation and Investor Sentiment

Forex markets are influenced by the perceptions and sentiments of traders and investors. Understanding market sentiment and staying informed about related news is crucial for currency traders and investors.

It's essential to understand that these factors are not isolated but deeply interconnected. For instance, central bank policies are influenced by economic indicators and can, in turn, impact investor sentiment.&nbsp;

Understanding how these factors interact is essential for a comprehensive grasp of exchange rate movements. Exchange rate mechanisms encompass the methods and systems employed to determine the value of one currency against another.&nbsp;

These mechanisms are key in the practical functioning of the forex market and are influenced by the very factors we've just explored.

<a href="https://www.skydo.com/blog/how-much-forex-fees-do-you-pay-on-your-international-transactions?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Foreign Exchange rate</a> mechanisms govern how a country's currency is valued over other currencies. These mechanisms are vital in international trade, financial stability, and monetary policy.&nbsp;

There are three primary exchange rate systems: fixed, floating, and pegged, each with advantages and disadvantages.

In a fixed exchange rate system, a country's currency is set at a specific value about a reference currency, usually a stable and widely accepted currency like the US Dollar or the Euro.&nbsp;

The central bank actively intervenes in the foreign exchange market to maintain the currency's value at a fixed rate. This often involves buying or selling its currency to stabilise exchange rates.

In a floating exchange rate system, market forces of supply and demand determine the value of a country's currency. Central banks do not actively intervene to stabilise exchange rates. Currency values fluctuate freely based on economic conditions, interest rates, and other factors.

A country's currency is fixed to a stable foreign currency or a basket of currencies in a pegged exchange rate system. Unlike a fixed system, where central banks actively intervene, pegged currencies are adjusted less frequently and often follow a predetermined rate or a band within which they can fluctuate.

The Role of Central Banks in Exchange Rates

Central banks are responsible for maintaining stability in their country's currency value and ensuring the economy's overall health.&nbsp;

Here's an overview of their role and the interventions they use to influence exchange rates.

Central banks use monetary policy tools, such as interest rates and money supply, to control the value of their currency and influence the demand for their currency. Higher interest rates attract foreign capital seeking better returns, increasing demand for the currency and pushing up its value.

Central banks may directly buy or sell their currency in the market to stabilise or manipulate foreign exchange rates. When a central bank buys its currency, it increases demand, leading to an appreciation of its value.&nbsp;

Central banks maintain foreign exchange reserves, typically in major currencies like the US Dollar, Euro, or Yen. These reserves act as a buffer for central banks to stabilise their currency.&nbsp;

For example, if a country's currency depreciates rapidly, the central bank can sell foreign exchange reserves to buy its currency, thereby reducing depreciation.

Let’s take the case of the<a href="https://www.intereconomics.eu/contents/year/2015/number/2/article/currency-interventions-effective-policy-tool-or-shortsighted-gamble.html#:~:text=The%20Swiss%20National%20Bank's%20January,of%20stagnation%20%C3%A0%20la%20Japan."> Swiss National Bank (SNB) Intervention in 2015.</a>

SNB took outstanding action to influence its currency, the Swiss Franc (CHF). The SNB had maintained a peg of 1.20 CHF to 1 euro (EUR) for several years to prevent the Franc from becoming too strong and hurting Swiss exports. However, maintaining this peg became increasingly costly for the SNB.

Considering the central bank has the power to make such decisions, what does it mean for international commerce?

Exchange rates drives international trade and commerce. Their fluctuations can significantly impact businesses engaged in global markets.&nbsp;

Here's a detailed exploration of how foreign exchange rates influence international commerce.

Engaging in international trade can be lucrative for businesses looking to expand their reach. However, the intricacies of the foreign exchange (Forex) market can introduce volatility and uncertainty.&nbsp;

To navigate Forex effectively and maximise your international trade success, consider the following strategies.

1. Setting Product Prices for Foreign Markets

To succeed in foreign markets, setting competitive and profitable prices for your products is crucial.&nbsp;

Read more on "<a href="https://www.skydo.com/blog/price-it-right-driving-success-in-your-it-services-company?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Price It Right</a>" for comprehensive insights into pricing strategies.

2. Importance of Hedging Strategies to Manage Currency Risk&nbsp;

Hedging strategies involve using financial instruments or strategies to mitigate the impact of strong currency movements on your business. It's a vital tool for managing currency risk. Various hedging strategies include the following.

The forex market is not just a financial facet; it's the lifeblood of the global economy. Understanding Forex is akin to unlocking the secrets of international commerce, trade dynamics, and economic stability. It's a knowledge base that empowers businesses, investors, and policymakers to make informed decisions that impact nations and economies.

Remember: the world of Forex is not only about numbers and charts. It's about understanding the economic forces that shape our world. It's about recognising central banks' pivotal role, political stability's impact, and market sentiment's influence.&nbsp;

With continued exploration and a commitment to staying informed, you'll be better prepared to seize opportunities and navigate the challenges that the Forex market presents as you run your tech export business.

Ans: The forex market, also known as the foreign exchange market, is the global marketplace for FX trading. It's where FX transactions occur, involving businesses, banks, and investors in foreign exchange transactions.

Ans: An exchange rate represents the price of one currency in terms of another in the international market. It's determined by various factors, including interest rates, economic indicators, and market sentiment, affecting FX in business.

Ans: Forex rates fluctuate due to factors like interest rates, economic indicators, and market sentiment, impacting foreign exchange transactions and FX currency values.

Q4. How do FX rates impact international trade?

Ans: Exchange rates can impact international trade by affecting the pricing and profitability of exports and imports, influencing market expansion decisions, and affecting cash flow in business foreign exchange.

Ans: Predicting exchange rates is challenging due to the complexity of factors involved in determining FX rates, including interest rates and market sentiment in forex trading. While experts use analysis and models to forecast rates, they are subject to change due to unforeseen events.

Ans: You can find current FX rates on financial news websites, currency exchange platforms, or by checking with Skydo portals. <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a> also provides real-time exchange rate information on its website.

Ans: Exchange rates can change frequently, often multiple times in a day, in response to market dynamics, economic data releases, and geopolitical events, affecting forex transactions.

Q8. How is the exchange rate determined in India?

Ans: In India, the exchange rate is determined by a combination of market forces, interest rates, and central bank interventions, such as those by the Reserve Bank of India (RBI), impacting the value of the Indian Rupee (INR) against foreign currencies, particularly the US Dollar (USD).

Ans: Currency value changes due to various factors like interest rate differentials, economic performance, and market speculation, impacting the supply and demand for a specific currency in FX transactions.

Q10. How rupee value is determined against the dollar?

Ans: The value of the Indian Rupee (INR) against the US Dollar (USD) is determined by market forces, central bank policies, and economic indicators. It can fluctuate based on the relative strength of the Indian economy, interest rates, and other influencing factors in the foreign exchange market.

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For exporters, managing foreign exchange earnings is crucial. Despite a significant increase in cross-border transactions, sending and receiving international remittances in India via traditional banking remains challenging and costly due to multiple fees and regulatory hurdles. However, thanks to innovations in fintech and traditional banking, cross-border transactions are increasingly becoming less complex . Now, exporters can use Exchange Earner’s Foreign Currency (EEFC) accounts or cross-border payment platforms like Stripe and PayPal to handle global payments more seamlessly, avoiding many of the usual hassles. But which option is best for you? Is there a more convenient and cost-effective way to manage your foreign exchange earnings? Let’s dive in and find out.

EEFC accounts are current accounts, offered by AD Category I Banks that allow you to retain income received from abroad in its original currency for up to 60 days. Being current accounts, EEFC accounts do not yield any interest. Each bank offering EEFC Accounts supports a specific number of currencies and you can also hold multiple currencies in a single account. The accounts were primarily created to help exporters manage their foreign exchange earnings, however, it is open to companies, individuals and joint account holders.

Currently, multiple<a href="https://rbidocs.rbi.org.in/rdocs/FEMAMASTER/PDFs/1061.PDF?no_follow=true"> AD Category I </a>banks in India offer EEFC accounts including DBS, ICICI, HDFC, Axis Bank and many more.

However, it's always a good idea to speak with the bank first to confirm their services.

Residents of India, whether individuals or companies earning foreign exchange, are eligible to open EEFC accounts. However, entities in <a href="https://nsez.gov.in/Resources/SEZ%20FAQs.pdf?no_follow=true">Special Economic Zones (SEZs)</a> cannot open EEFC accounts, though they can open a foreign currency account

Exchange Earner’s Foreign Currency (EEFC) Account Benefits

Let’s take a moment to understand the benefits of EEFC accounts.

1. Retention of foreign exchange earnings

Traditional bank accounts do not allow holding money in foreign currencies. When you receive funds in a standard bank account, it is mandatory to convert funds into INR irrespective of the current exchange rate.&nbsp;

However, an EEFC account allows you to receive and retain money in foreign currencies for up to 60 days. Account holders can make cross-border payments using the same foreign currency and only convert the balance.

The value of INR against foreign currencies fluctuates daily based on demand and supply factors. Individuals or companies that receive payments in foreign currencies can lose out on the money value if the exchange rate is unfavourable, and they compulsorily have to convert the foreign currency into INR.&nbsp;

With an EEFC account, account holders can analyse the currency market for over a month and convert the foreign currency only when the exchange rate is favourable.&nbsp;

Traditional bank accounts follow the double-conversion process where you have to convert the foreign currency you receive to INR and then again convert INR to the desired foreign currency to make international payments.&nbsp;

An EEFC account eliminates the double-conversion process and allows account holders to retain foreign currency and make direct payments using the available foreign currency funds.&nbsp;

The Reserve Bank of India regulates the cash flow between India and foreign countries. Accounts such as EEFCs are effective alternatives to the cumbersome conversion process of traditional bank accounts. However, with stringent regulations, EEFC accounts come with some disadvantages.

Although EEFC accounts allow you to retain <a href="https://www.skydo.com/blog/should-i-invoice-in-inr-or-foreign-currency?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">foreign currencies</a>, the duration is limited. You must convert the balance funds in the accounts compulsorily to INR on or before the last day of the next month. For example, if you receive foreign payments in your EEFC account, on 16th May, you need to convert it to INR by 30th June, after which it will be automatically converted.&nbsp;

Additionally, you can only retain the funds without conversion if they are for prior commitments or approved purposes.&nbsp;

EEFC accounts help exporters save on double currency conversion and transaction fees. However, banks still impose various ancillary charges that can quickly add up. For instance, transfers to your EEFC account are processed via SWIFT, which incurs a SWIFT fee. Additionally, banks often apply a foreign exchange markup or currency conversion fee when converting your foreign earnings to INR. Moreover, banks may charge for extra services like providing FIRA

Cross-border payment platforms are gateways or applications that allow individuals or companies to make or receive payments in various currencies. These payment platforms work as middlemen between the payer and the receiver through their transaction processing technology.&nbsp;

The transaction processing technology transfers the payer's payment information to the receiver's account. Account holders can convert their funds into different currencies for cross-border payments. However, payment platforms can choose to levy a markup on the current exchange rate.

Features and Benefits of Payment Platforms

Payment platforms like Stripe and PayPal are available in nearly all major countries, serving both residents and registered business entities. These platforms enable businesses to expand their customer base globally by accepting payments from customers worldwide.

Additionally, individuals and businesses can receive <a href="https://www.skydo.com/blog/real-time-tracking-of-international-payments?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">real-time payments</a> directly from any foreign entity with an account on the same platform

2. Multiple Currency Support and Conversion

For businesses operating internationally, payment platforms often support multiple currencies, allowing them to accept payments from customers worldwide.

For instance, PayPal operates in over 200 countries and supports 25 currencies. This means you can convert your held currency into any of the other 24 currencies, making cross-border payments hassle-free.

Payment platforms simplify transactions for businesses and customers by enabling electronic payments, eliminating the need for physical cash or checks. These transactions are executed in real-time and reflected immediately in the accounts.

Additionally, most payment platforms offer e-commerce features, allowing account holders to use their funds for international online purchases with ease.

While <a href="https://www.skydo.com/blog/navigating-payment-platform-headwinds-to-stormproof-your-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">payment platforms</a> offer numerous benefits, they also come with their fair share of challenges and considerations.&nbsp;

1. Transaction Fees and Exchange Rate Markups

Payment platforms charge fees for their services, including transaction fees and monthly subscription costs. Most payment platforms also charge an exchange rate markup fee that can significantly reduce the net returns when converted into local currency.&nbsp;

For example, PayPal charges an <a href="https://www.skydo.com/blog/top-paypal-india-alternatives-for-international-payment">exchange rate markup</a> of 4%, effectively reducing your received amount by 4% after conversion.&nbsp;

Payment platforms are attractive targets for cyberattacks. However, most platforms today are embracing stringent security measures to minimize the chances of cyberthreats.&nbsp;&nbsp;

3. Limited Control Over Funds During Disputes

nlike EEFC accounts, where account holders must handle regulatory compliance, payment platform aggregators take on this responsibility.

However, if there is any legal or regulatory non-compliance, customers might face limited control over their funds. Authorities could seize the funds or blacklist the platform, causing potential disruptions.

Comparing EEFC Accounts and Payment Platforms

For a better comparison, here is a comprehensive side-by-side table comparing EEFC accounts and payment platforms.

Manage your foreign exchange earnings better with Skydo

At Skydo, we recognize the challenges of traditional banking and the high fees often charged by various payment platforms. That’s why we offer businesses and freelancers a fast, secure, and less expensive way to receive international payments. With Skydo, you can set up an international bank account in less than 5 minutes. Your foreign clients can pay into this account, making it a local transfer and eliminating SWIFT charges.

Further, we convert your foreign earnings to INR at live forex rates, without any markup or currency conversion fees, ensuring you keep more of your earnings. All we charge is a flat transaction fee: USD 19 for remittances below USD 2000 and USD 29 for remittances over USD 2000. And yes, you also receive an instant FIRA for every transaction at no extra cost, helping you stay compliant. 

Switch to Skydo and simplify your international payments while maximizing your earnings.&nbsp;&nbsp;<a href="https://www.skydo.com/blog/how-skydo-increased-success-rate-on-international-payments?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_link">Click here</a> to learn more about how Skydo increased the success rate of international payments.

EEFC accounts are tailored for specific use cases related to foreign currency earnings, while payment platforms are more versatile tools for general financial transactions. The choice between the two depends on the user's specific needs and requirements, especially in managing foreign currency earnings and conducting cross-border payments.&nbsp;

Analyse your personal or business needs and determine which account option would mitigate unnecessary costs and compliance complexities.&nbsp;

Q1. What is the disadvantage of an EEFC account?

Ans: The disadvantage of an EEFC account is its limited retention duration, requiring conversion of funds into INR within a specified timeframe, usually on or before the last day of the next month or 60 days maximum.

Q2. What is the difference between EEFC and foreign currency account?

Ans: EEFC accounts are tailored for Indian residents to manage foreign currency earnings, while foreign currency accounts are more general and may not have the same regulatory restrictions.

Q3. Do banks pay interest on EEFC accounts?

Ans: Banks do not pay interest on EEFC accounts, as they are considered current accounts without interest benefits.

Q4. How much foreign exchange earnings can be credited into an EEFC account?

Ans: A substantial portion of one's foreign exchange earnings can be credited into an EEFC Account, allowing for a limited retention duration, typically up to 60 days, before conversion into INR, subject to regulatory restrictions.

Ans. Any resident of India can initiate an EEFC account, including individuals and entities like companies, who fall under the category of foreign exchange earners.

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Inner voice: The client's payment will finally arrive in the business account today! I earned this. The entire team earned this!

A message arrives–the amount you received is less than what you charged.

It feels like a loss because it is a loss. But how and why did it happen?

If you transact internationally, a reduced amount appearing in your bank account can be disheartening, stressful, and puzzling. This is particularly true with SWIFT payments sent to India, where unexpected deductions may occur in your SWIFT money without explanation.

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a financial organisation enabling global transactions. It acts as a bridge between banks and other financial institutions worldwide to facilitate international payments.&nbsp;

This payment mode is vital for businesses and individuals who engage in global investments and trade. SWIFT payments come with the challenges of lengthy verification processes before funds are released.

Certain banks serve as intermediaries, transmitting funds from a sender to the recipient's bank account. Although their role is crucial to secure a safe and efficient transfer of funds, it can also lead to unexpected deductions in the final payment due to some factors.

SWIFT money transfer works in the following way.&nbsp;

This process makes SWIFT payments expensive. The costs associated with these transactions are typically distributed between the payer and the receiver or may be shared between them. This distribution is determined by the specific payment instruction selected.

Additional fees include intermediary bank fees, foreign exchange fees, SWIFT network fees, service fees, additional charges for specific services, and exchange rate margins. The cumulative impact of these fees and potential variations in exchange rates can result in higher costs compared to other payment methods.&nbsp;

The result is a reduced payment by the time it reaches its destination - the recipient's bank in India.

The implications of SWIFT payment deductions in India are real and can greatly impact businesses and individuals. Let's examine the causes behind these deductions, providing examples of how they have impacted the financial well-being of those affected.&nbsp;

Factors Influencing The SWIFT Payment and The SWIFT Money You Receive&nbsp;

The difference between expected and actual payment amounts can be significant due to <a href="https://www.skydo.com/blog/forex-and-its-impact?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">exchange rate fluctuations</a>. The changes in the value of currencies affect the currency conversion process that often occurs in international payments.&nbsp;

When a business in the United States sends a payment of $10,000 to a supplier in India, the initial exchange rate of 85 Indian Rupees (INR) per US Dollar (USD) will result in a payment of INR 850,000.&nbsp;

However, if the exchange rate changes to INR 84 per USD by the time it reaches India, then the final amount would be INR 840,000. This difference of INR 10,000 is lost due to currency fluctuations.

2. Role of Currency Conversion in SWIFT Money Transfer in India

Currency conversion is often required for SWIFT payments to send funds to the recipient's currency. Unfortunately, banks may charge a hidden fee known as a margin or spread to cover the cost of this exchange process. This factor reduces the amount you receive from the actual amount sent.

If your cousin in the United Kingdom wants to send you 1,000 British Pounds (GBP) in India, they can use a bank that offers an exchange rate of 90 INR per GBP for the conversion.&nbsp;

However, the interbank rate (the rate at which banks exchange currencies with each other) is INR 89 per GBP. This means that due to the margin held by the bank, 1 INR will be deducted from every pound sent, leading to a certain deduction.

Intermediary banks have a crucial role in the SWIFT payment system, as they act as the middleman between the sender's and recipient's banks. However, these services come with a cost.&nbsp;

The fees charged by intermediary banks can vary greatly depending on factors such as the number of correspondent banks involved, the complexity of the transaction, and the specific services provided.

For example, if an Australian business sends a payment of 2,000 AUD to a business in India. During its journey, the payment passes through 4 correspondent banks that each charge a fee of 20 AUD. This results in an overall deduction of 80 AUD from the original payment amount.

Regulatory and Compliance Factors of SWIFT Money Transfer

1. Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations

Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations are necessary for the global financial system. AML laws safeguard against illegal profits entering the legal financial system, while KYC policies necessitate that banks and other financial institutions authenticate their customers' identities.

To comply with <a href="https://www.skydo.com/blog/international-payment-terminologies-you-must-know-before-exporting-services-globally?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international AML and KYC regulations</a>, banks and financial institutions must conduct due diligence on the parties involved in a transaction. This process involves verifying the source of funds, confirming the identities of the sender and recipient, as well as assessing the nature of the transaction to ensure that no money laundering or other illicit activities are taking place.

The discrepancies or issues discovered during the due diligence process can cause banks to temporarily freeze or delay the transfer until they are addressed, resulting in extra costs and delays.

Growing Global

Understanding Global Payments blogs