Many people exchange money in their everyday lives to travel abroad themselves, or to send money to friends and family that live outside the US. You could even be paying money to employees who work remotely. However, it’s not as easy as just Googling the exchange rate and sending the currency directly to a bank account. Doing this will often leave you with less money that you were expecting as there are a lot of political and economic factors that affect the exchange rate on a daily basis.
Common Mistakes When Sending Money
One of the biggest mistakes that people make when trying to understand the exchange rate is the money that you’ll see online isn’t necessarily what you’ll receive. If you type in $100 into a conversion calculator online, it will give you the current mid-market rate at that time. Although that’s an approximation of the funds that you’ll receive, it’s unlikely to be exact when you actually transfer the money. This happens for two reasons:
The traders market fluctuates on a minute-by-minute basis based on the current economic climate. So, unless you intend to send the money that very second, it’s unlikely to reflect the exact amount when you do click to send. If you use a conversion calculator the next day, it will likely show you a slightly different figure to the day before.
If you’re using a bank or another means of creating a transaction to transfer the money, these services will usually take a cut of your money included in the exchange for this service. This is before a) they need to make a profit, it’s why they are there in the first place and b) because similar to your at-home conversion calculator, the actual exchange rate may change before they send the money, and they need to ensure they aren’t making a loss.
Using a Bank
Most people rely heavily on banks to exchange money, incorrectly assuming that they’re the best and fastest payment method. Lots of people just use a simple bank transfer from one bank account to another. During these transactions the bank will often withhold a certain amount of money to cover the exchange rate, should the market decrease while the money is transferring. On top of this, they will often ask for a standard transaction fee for carrying out the service. If their transaction fee is $10, they will declare this prior to transfer, however, they will not declare the small amount that they shave off the top to cover market changes.
This means that instead of sending $100, you may be down to $90 for the transaction fee, and they could remove a further $5 to cover the changing rate. Your $100 cash exchange actually only has you transferring $85 and if the market in the country you’re sending to is below the current US dollar, then the person at the other end is probably going to end up disappointed.
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Why Are High Street Banking Exchange Rates Not Cost Effective?
Although banks seem to be the go-to place that people think of when exchanging currency, they certainly aren’t the most cost effective.
They operate using an admin fee to cover that bank’s services and purchase of the currency and, depending on the bank, may also shave off a further 5% of your exchange to cover exchange rate
costs in case the market changes. This ensures that they still make a profit on your transaction.
High Street Banks Vs Private Exchange Rate Services
Because private exchange rate services tend to buy currency in bulk and and constantly looking to buy at the bottom of the market, they don’t need to charge as much on your transaction fee in order to make a profit. This means that, on average, you could be saving between 2-3% on your currency exchange, just from using a private service.
These private services will also declare any fees prior to your purchase, so you know exactly how much you’ll be paying beforehand. Whereas banks aren’t obligated to do this, and you have no control over when the transfer happens, meaning you could end up with surprisingly less than you expected at the other end.
Some private exchange services will simply offer a rate of exchange that’s slightly higher than the base rate and not charge a transaction fee. This is beneficial if the rate is currently higher on the market. For example, if a rate of transfer is $1.00 to £1.30, the service may set a rate of £1.35 and the £0.05 is the money that they’ll retain for the service.
For exchanging larger amounts of money, this can be incredibly beneficial and much less than the admin fee plus exchange rate discrepancy that banks offer.
Base Rate Vs Mid-Market Rate
Many people get confused why the rate that you’re offered when going to a bank or exchange office isn’t the exact same rate as the one, you’ll see online or the one that you receive when actually exchanging.
The base rate is the current rate of exchange that’s being traded in the market and will fluctuate based on the trade market at the time, which can be affected by economic or political changes. This rate is the actual exchange rate with no external factors but is never the exchange rate that you’ll receive as this is before the money has been placed in the hands of banks or other exchange bodies.
The mid-market rate is closer to the actual amount that you’ll receive. This is the average of the amounts that are being exchanged in that currency currently away from the market. However, you will always receive slightly less than this figure, as the exchange body that you choose to use will always shave a little off the top before exchanging. When you use an online converter, ensure you take around 5% off the total currency at the other end, as this will likely be removed in the transfer.
How to Avoid Huge Exchange Rate Losses
Understanding Your Losses
One of the biggest issues with exchange rates is not actually understanding how much money is going to be sent to that bank account at the other end. The easiest way to control this is to take the exchange into your own hands. Rather than using a a bank to transfer money straight from bank account to overseas bank account, there are companies out there that will allow you to buy US dollars and will send the money in US dollars. Although there will still be an exchange rate and the money will differ at the other end, you will understand exactly what the exchange rate is before sending. This also allows you to send it while the market is good, making the most out of your money. The company will also often request the set fee for the exchange, which is likely to be much smaller than a bank admin fee and will not shave any extra funds off the top to compensate for market changes.
Less Frequent Transfers
Lots of people are disappointed by their exchange return because of the admin fees taken by banks or other exchange bodies. To avoid this, it’s more sensible to use larger and less frequent transfers as they will often be subjected to the same admin fee. An admin fee of $10 for a $100 transfer seems a lot. However, a $10 admin fee for a $1000 transfer appears a lot more reasonable. To pay wages overseas, it may be beneficial to send once per quarter, rather than once per month to avoid transaction fees.
The More You Send, the Better Your Rate Will Be
For people purchasing foreign currency directly from the market, discounts are provided for larger purchases. This means that your bank or exchange body will purchase large currency amounts at a lower price than buying per small transaction. If you choose to exchange outside a bank, then the service that you’re using to exchange will often be able to give you a better rate of exchange on larger amounts of currency, just because they’ve bought it at a better base rate initially.
What Affects the Exchange Rate?
The base rate of currency can be affected massively by the current economic and political climate. This means that there are good times and bad times to make your exchange depending on external factors. Over the last couple of years, Brexit has been a major issue for certain countries, for example, the pound sterling in the UK has massively decreased in value. This will make exchanges from dollars to pounds less beneficial.
Other factors such as elections and government powers can affect exchange rates of different countries. While the US dollar might be doing incredibly well, the doesn’t necessarily mean that the receiving country is doing equally as well. You might have a large amount in dollars, but because the pound coin has depreciated an exchange will be disappointing.
A private exchange service will keep up to date with any market changes and can advise on the best times in exchange your money.
What is the Best Time of Day to Exchange?
It’s a common misconception that exchanges are best made at certain times during the day or week based on the market at that time. However, the market is run 24/7 and can be affected at any time based on external factors. Don’t really on a specific time of day to make an exchange, as this might not be beneficial for you.
Again, a private exchange service can keep an eye on real time values and make an exchange when this is most beneficial for you.
When considering exchanging foreign currencies, you should try to reduce the transaction frequency as much as possible and use a private exchange rate service so you can ensure that you fully understand the exchange and any fees that are included. This will mean that you aren’t disappointed with the transaction amount when it hits the other account. A private exchange service will explain all the relevant information, help you to understand any costs involved, advise you on the best time to exchange your money based on the current market and give you a clear picture of when the funds will arrive.