What is a multi-currency account?

Let’s talk about legal entities

This is going to get a little bit technical, but ultimately it comes down to which type of entity you are placing your money with - either a bank or an Electronic Money Institution. Both are tightly regulated by the authorities (e.g. by the FCA in the UK) but their licences mean they operate quite differently.

Common or garden-variety banks

When you put your money into a bank account you are essentially loaning it to the bank with the understanding that they will return it to you whenever you ask for it back. Technically this means that the bank now legally owns your money and can use it to generate income by loaning it to other customers (e.g. for mortgages) or by investing it.

This is one of the key benefits of keeping your money in a bank as because they put the money to work they are able to pay you interest on your deposits.

However, as we are all aware of post-2008, as the bank loans this money out to other customers it means that if there were a “rush on the bank” it wouldn’t have enough money on hand to pay everybody back in full.

To offset this risk bank accounts are often protected up to a certain limit by government-backed insurance schemes (e.g. the FSCS in the UK).

You probably knew all this already!

New fangled Electronic Money Institutions

Now let’s explore what a multi-currency account (MCA) held at an Electronic Money Institution (EMI) is (so many acronyms already!)

A key difference when placing your funds in an MCA with an EMI is the funds still remain yours and that the EMI is actually issuing you e-money that is "backed" by your real money. Your real money is held in safe-guarded and segregated accounts with their partner banks. However, because it's still your money and not theirs, an EMI isn’t authorised or able to loan out or invest your money and therefore can’t pay you any interest on it.

In terms of safety, although money held with an EMI isn’t covered by any government-backed insurance schemes, because the money is segregated from the EMI’s operating accounts, if the EMI fails your funds are still safe and able to be returned to you.

But what about the partner bank that’s holding the EMI’s money?

The regulations on holding an EMI’s money varies by jurisdiction (of course) but in the EU and UK any funds placed at a bank by an EMI are generally not available for lending by the bank and are often be held in trust accounts to help protect against bank insolvency. Think of it as the bank just acting as a custodian of the funds.

Bank vs. EMI Summary

So to summarise, a bank account is probably exactly what you already knew it to be, whereas a multi-currency account is more like a pre-paid credit facility where your money is held safely by an EMI in trust for you so it’s always available for your transactions.

But my MCA has an IBAN - isn't that a banking thing?

Yep, you're right, but EMI's are also able to issue them. From a practical perspective whether it's an IBAN, a UK sort code and account number, or US ABA routing and account number, it is often one of the EMI’s partner banks that facilitates it.

Having the ability to send money to an MCA using these standard methods is really convenient.

Why wouldn’t I just open a bank account?

Often because you just can’t - banks tend to only want to open accounts for domestic customers, plus you’d need to open one for every currency.

An EMI has done the heavy lifting for you here - they typically work with partner banks all around the world so they can issue you an MCA with local account details in many countries that are also connected to local payment networks.

Imagine having an account that works locally in the US, the UK, the EU, Canada, etc. How easy would it be to take payments from international customers and to make payments to international suppliers from that account? That’s right, really easy.

Right! I get it! Tell me some of the other benefits?

• Local-in, Local-out. In case it wasn’t absolutely clear above, a stellar benefit of an MCA is that your USD account can accept and make payments via ACH in the US, your GBP account by Faster Payments in the UK, your EUR account via SEPA, etc. You get the gist.
• Cost-Effectiveness. Because you and your customers are able to use local payment networks you no longer need to pay high international transaction fees for those payments.
• Control over your FX conversions. You get to choose when and if you want to exchange your money between currencies rather than just having your bank automatically convert it into your local currency when it arrives in your account. You may also get to benefit from natural hedges where customers pay you in their currency and you then use that to directly to pay your suppliers without converting it back to your local currency.
• Convenience. Work with a single provider online or over the phone for all your international accounts and payments rather than multiple banks.

How does Flowbrite fit into all of this?

We can offer you a multi-currency account!

Whether you are a US-based company looking to pay global suppliers, a European business with global customers paying you, a bit of both, or anywhere in-between, we have got you covered.

To find out if your business could benefit from a multi-currency account as well as any of our other FX products such as spot and forward contracts, please get in touch below!