EEFC Account vs Payment Platforms

Imagine you have found a great data scientist in Latvia (or any foreign country) to work on your software product. You have found marketing agencies and distributors in different countries to bring it to market. You also use cutting-edge SaaS tools for office collaboration. But you have to pay for all of it in foreign currency. 

Wouldn't it be convenient to earn and spend in dollars and only transfer the net amount into your bank account, eliminating the need to exchange forex twice?

However, such cross-border payments are a fantasy if you want to execute them using a traditional bank account. But if not, bank accounts, what else?

Two of the most convenient and sought-after options are Exchange Earner’s Foreign Currency (EEFC) accounts and cross-border payment platforms such as Stripe or PayPal. But which one should you choose? Let’s explore both options further.

EEFC Account Meaning

Exchange Earner’s Foreign Currency Accounts (EEFCs) are foreign currency accounts in India to retain foreign exchange earnings outside India. These accounts help receive foreign currency payments, which you can use to make further payments outside India. 

The Reserve Bank of India has mandated that residents can open such foreign currency accounts in India as current accounts, which bear on interest benefits. 

EEFC accounts can only be opened by banks that handle foreign exchange. EEFC accounts are available at well-known Indian banks such as ICICI, HDFC, Axis, IndusInd, and DBS.

EEFC Account Eligibility

An individual residing in India can establish and operate an EEFC Account, following the terms and conditions outlined by the RBI, which encompass the FEMA Regulations 2000 and the Foreign Exchange Management Act, 1999, governing the functioning of the EEFC Account.

Exchange Earner’s Foreign Currency (EEFC) Account Benefits

EEFC accounts can benefit individuals or companies with a global business presence and make cross-border payments regularly in the following ways.

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. 

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

2. Hedging against currency fluctuations

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. 

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. 

3. Simplified international transactions

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. 

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. 

Limitations of EEFC Accounts

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.

1. Limited Retention Duration

Although EEFC accounts allow you to retain foreign currencies, the duration is limited. You must convert the balance funds in the accounts compulsorily into INR on or before the last day of the next month, or 60 days maximum. 

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

2. Complex Regulatory Requirements

Although Indian residents and entities are allowed to open an EEFC account, the operations are regulated by the RBI per the guidelines mentioned under the Foreign Exchange Management ACT of 1999. 

Furthermore, as an account holder, you must adhere to international taxation laws. 

Payment Platforms: All You Need to Know

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. 

The transaction processing technology stores and transmits the payer’s payment information to the receiver’s account. Account holders can choose to convert their held funds into various currencies to make cross-border payments based on the current exchange rate by paying a markup fee. 

Features and Benefits of Payment Platforms

1. Global Accessibility and Reach

Payment platforms such as Stripe, PayPal, etc., are available for almost all major countries, their residents, and registered business entities. They enable you and businesses to expand their customer base internationally by accepting payments from customers worldwide. 

Furthermore, individuals and businesses can receive real-time payments directly from any foreign entity with an account on the same payment platform. 

2. Multiple Currency Support and Conversion

For businesses operating internationally, payment platforms often provide support for multiple currencies, making it possible to accept payments from customers worldwide. 

For example, PayPal is available in more than 200 countries/regions and supports 25 currencies. You can convert the held currency into any remaining 24 currencies and make hassle-free cross-border payments. 

3. Seamless Online Transactions

Payment platforms make it convenient for businesses and customers to complete transactions electronically, reducing the need for physical cash or checks. The transactions are executed in real-time and reflected in the accounts immediately. 

Furthermore, most payment platforms have e-commerce features, making it easier for account holders to use held funds for making international purchases online. 

Challenges of Payment Platforms

While payment platforms offer numerous benefits, they also come with their fair share of challenges and considerations. 

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. 

For example, PayPal charges an exchange rate markup of 4%, effectively reducing your received amount by 4% after conversion. 

2. Security and Fraud Concerns

Payment platforms are attractive targets for cyberattacks. They regularly witness evolving cybersecurity threats, including ransomware, phishing, and malware attacks. Since payment platforms store the financial data of account holders, a data breach can negatively affect user data and threaten held funds. 

3. Limited Control Over Funds During Disputes

Unlike EEFC accounts, where the account holders are responsible for regulatory compliance, the responsibility for compliance falls on the payment platform aggregator. 

In case of legal or regulatory non-compliance, the customers may experience limited control over funds as the authorities may seize the funds or black-list the platform for the unforeseeable future.

Comparing EEFC Accounts and Payment Platforms

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

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Conclusion 

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. 

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

Frequently Asked Questions

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.

Q5. Who can open an EEFC account?

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.