Whether importing, exporting or buying a house from abroad, you’ll need to transact currency exchange. The industry is known to charge exorbitant commission rates even with high-value exchanges. With hidden charges as high as 7%, we show you how the industry works, what to look for, and how to get smart currency exchange rates.
Let’s jump in:
How do Foreign Exchange Companies Make Money
Banks and currency brokers like to advertise that they don’t charge ‘fees’, and if they do, they will show a nominal £5-£10 ‘wire fee’ on money transfers. Don’t be distracted by this fee. It’s there to make you think that is all you are being charged. Whereas in reality, that’s only the tip of the iceberg.
The bulk of the money is made within the exchange rate. Currency exchange businesses and banks work precisely the same as any other wholesale industry. They buy in bulk at a low price and sell the currency for a higher price, creating their profit.
The price you will see on XE or other exchange rate feed websites is the interbank rate. This is the price that most banks or brokers buy in the currency market, if not very close. They aim to sell you currency as far away from that price as possible.
Let’s look at an example:
You want to convert GBP into $100,000 to pay a supplier. The interbank rate is 1.24, but you get quoted by your provider at 1.22.
Your provider buying at a rate of 1.24 is paying £80,645.16 for $100,000, but they are charging you £81,967.21 at a rate of 1.22. This creates a difference of £1,322.05, which your provider keeps as their profit on the transaction.
Foreign Exchange Fees
Foreign Exchange fees as a bit like the wild west. Typically there is no structure in pricing unless you deal with companies that promote fixed pricing. The industry is run by salespeople who are paid high commissions on your transactions. Does that incentivise them to give you a great rate?
Let’s take a look at the different options out there in the market:
High Street Banks
It wasn’t too long ago that high street banks were the old option for businesses converting currency. They are known for charging high fees through exchange rates. Normally they only tend to get interested once your monthly transaction volume enters the millions.
Unless you negotiate directly with the bank, your account will likely start on high fees. These can range anywhere from 3%-7% of each transaction value. Once your volume starts to grow, you might see this come down but generally only after you push back.
It’s not all doom and gloom. Banks can offer great rates. This usually is only reserved for the higher transaction volume customers, but they can offer market-leading pricing once you get to that point.
Brokers / Party Foreign Exchange Companies
Ironically enough, foreign exchange companies do buy directly from banks. Surely they should be more expensive? Often not the case. Due to banks, high charges, entrepreneurs saw a gap in the market to undercut their pricing.
Hence foreign exchange companies were formed. Having enough purchasing power to buy currency in bulk means that they buy at a similar rate to the bank but typically sell for a lower price.
Whilst they will undercut your banks' pricing, it doesn’t mean to say they are the best solution. Often they will find out your bank's price and undercut it slightly to win your business. In reality, they are still taking a big slice of the pie.
There are effective ways to get the pricing down with both banks and foreign exchange companies. We’ll dive into that shortly.
Looking for an in-depth overview of foreign exchange? Check out our article here, including spot contracts, forward contracts, etc.
How to get a Smart Exchange Rate
There are several ways to get yourself and your business smart currency exchange rates. As far as we have seen, this information isn’t anywhere online, most likely for a reason (companies don’t want you knowing).
Whilst some of these options might seem simple, they are effective:
Know the Interbank Rate
Knowing the interbank rate is the most simple and effective way to reduce your foreign exchange pricing. This is the exchange rate shown on XE and other sites. Use this rate as a benchmark to know if you are priced fairly.
You still have to be realistic, you're not going to get the rate you see on XE, but you can get close. This primarily works with brokers, if smart currency businesses know that you know where the interbank rate is, they are less likely to quote you a bad rate, for fear of losing your business.
People often think that what they are quoted on the exchange rate is all they can get. In reality, that's far from the truth. Every transaction with brokers is negotiable, even if they say it isn’t. Likewise, with banks, you can negotiate their rates down, although bear in mind this is a lengthy process.
Having multiple options available to you is always effective. When brokers or banks see their pricing against someone else, they will likely give you a better rate to win the business.
This is a labour-intensive process as you have to sign up to multiple providers and reach out to each of them when booking an exchange.
There is one surefire way to make sure you get a fair and smart exchange rate, we’ll dive into that next.
The Best way to get a Smart Exchange Rate
There is one way to ensure you get fair exchange rates every time you book. That is through fixed margin agreements with providers. What is a fixed margin? Fixed margin means they charge you a set percentage from their buy rate on every transaction.
It assures you that whatever happens, your exchange rate will remain consistent, helping you price your currency for the long term. This way of pricing has come into the spotlight in recent times, with companies like Transferwise leading the helm, offering transparent pricing.
Agreements can be put in place with banks and brokers, but you need to know where to look. Here at Funding Routes, we have built a team of industry-experienced foreign exchange specialists who know where to secure effective and fair fixed margin agreements.
Get in touch with our team here, and we’ll be happy to show you how this works. Our service is always free, and no charges are ever involved.