Understanding Alternative Currencies and Automation

For businesses that handle international transactions, it’s critical to understand alternative currencies through explanations and alternative currency examples. How does your company efficiently and cost-effectively make alternative currency payouts in the best alternative currency for the payee? We provide an answer in this guide. 

What are Alternative Currencies? 

Alternative currencies are used to make cross-border payments or payouts in the foreign currencies of other countries that aren’t the functional currency of the payer. In another definition, alternative currencies are types of cryptocurrency, such as digital currency Bitcoin or Ethereum, used as a store of value and means of exchange, mined with decentralized blockchain technology.  

Unique to a local area of the United States, the Berkshires region of Massachusetts launched an alternative currency, a complementary currency to the dollar called BerkShares, in 2006 to use locally to benefit the local economy and local businesses. BerkShares paper currency is available at some local banks at an exchange rate of $1 U.S. dollar (USD) to 1 BerkShare, with a 1.5% fee for conversion. This type of alternative currency doesn’t work for payments in other areas, such as out-of-area domestic or international payments and payouts but is intended for spending in the local communities. 

This article focuses on cross-border payouts and supplier payments in foreign currencies rather than crypto or local community currencies like BerkShares. These alternative currencies in our sights are fiat currencies, backed by a government entity as official currencies but not supported by gold or silver, like the national currency of the United States dollar and the euro regional currency. 

Understanding Alternative Currency Payouts 

To understand alternative currency payouts, consider the difference between domestic currency payments and alternative payouts in foreign currencies. 

Factors Affecting the Value of Currencies

According to the CFA Institute:

“Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy. By contrast, fiscal policy refers to the government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time.” 

Economic conditions, the central banking system managing currency systems, inflation, interest rates, monetary policy for monetary systems, and fiscal policy determine the strength of a country’s currency used for domestic and alternative currency payments.

According to the Financial Times, in the first half of 2023, there is a large currency fluctuation of Argentina’s peso with the country’s 109% annual inflation rate and potential devaluation of its currency. Argentina is taking emergency measures and initiatives to prevent currency devaluation, including raising interest rates to 97% and seeking disbursements on IMF loans. To retain value for their owned money, Argentinians use alternative U.S. currency for receipts and payments instead of their own currency. 

Domestic vs. Alternative Payouts

In domestic payouts, foreign currency exchange isn’t needed, and businesses don’t incur fees from foreign currency conversion. 

With alternative payouts, different currencies are involved, which can result in:

• Time-consuming transactions without using automation software 
• Limited high-cost payment methods like wire transfers for small transactions 
• Lack of transparency about the foreign currency conversion and transaction payment status 
• Foreign currency conversion fees
• Potential gains and losses from foreign exchange rate volatility

As examples of domestic vs. alternative payouts, a domestic American company based in the United States can make payments with the United States dollar or use alternative currencies besides the U.S. dollar instead to make cross-border payments to its affiliates and partners, including overseas creatives earning royalties, publishers, and suppliers. And your company may make international payroll payments in alternative currencies to employees or non-employee independent contractors and freelancers. These payees often prefer being paid in their local currency, which is considered a type of alternative currency. 

Besides payouts, companies can make payments to their foreign suppliers with specified forex alternatives in foreign government-issued currencies. The preferred FX payment currency may be a local currency or another designated strong foreign currency that isn’t experiencing devaluation. 

As a second example of domestic vs. alternative currencies, 20 member European countries currently use the euro (EUR) as their primary currency. The regional currency, the euro, includes digital currency, banknotes, and coins as legal tender managed by the European Central Bank. Transactions made in euros between these 20 countries don’t use alternative currencies. 

Switzerland isn’t a member country of the European Union and doesn’t use euros as its currency. Instead, Switzerland uses the Swiss franc (CHF) legal tender, also the primary currency for Liechtenstein, and an enclave in Italy, Campione d’Italia, surrounded by Switzerland. 

A transaction between a France or Ireland-based company with the euro as its primary currency and a London, UK company using the British pound sterling (GBP) may use an alternative currency for payment. 

A case study about Tipalti’s customer, Pubmatic, in the global digital advertising technology industry, highlights its customer satisfaction with Tipalti’s automation software. Pubmatic started using Tipalti software in 2018 and has Tipalti-NetSuite ERP integration.

“With Tipalti, it takes 3 minutes to complete a payment run … there are no limitations with scalability—we haven’t had any incremental work going from hundreds to thousands of publishers.” 

– Jason Wechsler, VP of Revenue Accounting and Finance Automation, Pubmatic 

How to Set Up Payments in Alternative Currencies 

General steps to set up payments in alternative currencies include:

1. Set up or choose specific alternative currencies in your payment system. 
2. Decide whether to hedge the FX transactions for potential currency rate fluctuations when setting up the accounts payable before the payment due date. 
3. Determine the best cost-effective payment method. 
4. Get foreign currency conversion at the available exchange rate.
5. Use payee-provided contact and payment information details to provide to sending and recipient banks and intermediaries or payment processors for debit or credit cards or PayPal.
6. Communicate payment status to the payee. 
7. Track payments to suppliers for IRS form 1099 or 1042-S information return tax compliance reporting. 

Use AP Automation to Make Alternative Currency Payouts 

AP automation software and mass payments software let businesses make large batch alternative currency payouts or supplier payments efficiently and reduce fraud risk. When making international payments, companies need to have global regulatory compliance. 

For example, U.S. companies must avoid making payments to entities on OFAC sanctions lists and other blacklists and follow local currency regulations in foreign countries. Suppliers need to be validated. Tipalti AP automation and mass payments software achieve these business requirements and provide many other benefits for companies making payouts and supplier payments.  

With AP automation and mass payments software from Tipalti, your business can use its self-service supplier/partner onboarding portal to obtain contact and required payment information for the payee’s choice of cost-effective payment method available in their country. 

Supplier payees, including independent contractors, provide W-9 or W-8 IRS tax forms digitally through the Suppliers Portal. 

Your business will automatically track supplier payments and receive automatically generated 1099 and 1042-S tax preparation reports. Suppliers can check payment status through the Tipalti Suppliers Portal or receive some emails relating to invoice receipt, approval, and payment status. 

Tipalti’s six payment method choices include:

1. US ACH 
2. Global ACH 
3. Wire transfer
4. PayPal
5. Prepaid debit card
6. Paper check

The recipient’s country determines the available payment methods for that location. Global ACH, similar to domestic-only U.S. ACH in concept, includes SEPA payments in euros, used by member countries in Europe.

If your company uses PayPal for alternative currency payments, check Tipalti’s PayPal fee calculator for applicable domestic or international PayPal fees by country. Tipalti has a PayPal “mass transaction” (MT) license for PayPal mass pay or PayPal bulk payments. This removes restrictions around payment and funding limits, provides access to more favorable FX rates and payment speeds, and allows Tipalti customer service and support for troubleshooting any PayPal payment issues.

The Benefits of Finance Automation + Alternative Currencies

The benefits of using Tipalti finance automation to pay with alternative currencies are:

• Pay in a choice of available payment methods in 196 countries and 120 local/alternative currencies
• Streamline business domestic and international accounts payable processes, eliminate paper documents and manual data entry for time and cost savings from efficiencies.
• With advanced Tipalti Multi-FX software and FX Hedging software, eliminate the need for regional foreign banks by using a Tipalti virtual account to make payments with cost-effective live foreign exchange rates or transaction FX Hedging to reduce transaction foreign exchange risk losses recognized in FX accounting from exchange rate volatility in 30 currencies.
• Gain spend visibility and track currency conversion status
• Integrate mass payments software with your company’s performance marketing system to make alternative currency payments for performance-to-pay earned payouts 

To understand the full benefits of paying in alternative currencies with automation software, read our white paper, “How to Eliminate Currency & Forex Challenges in Payables.”