The forex market is the largest market in the world, with $5.3 trillion changing hands every single day. Access to the FX market is dominated by banks and brokers, so, some inevitably take advantage of their position of strength in order to make bigger gains at their customers’ expense. Bigger gains than they should be taking as a commission, and much bigger than their clients are being told. Exchange rates fluctuate by the second, due to a range of supply and demand factors including interest rates, tourism and trade flows. The true exchange rate at any given moment between two currencies is known as the mid-market rate. And guess what? Most banks and brokers will never give clients this rate.
Calculating your total FX costs with a bank or broker is an intricate, complex process. It makes it easier to hide fees, to evade claims of excessive charges and to paint themselves as the expert you can rely on.
The components of a bank or broker FX transaction:
- The exchange rate fee
A hidden charge, known as the spread, is loaded onto the exchange rate to boost the bank or broker’s profit on the transaction. - The wire transfer fee
Banks and brokers regularly charge an additional fee to move the funds to the beneficiary account. Like the exchange rate spread, it is nearly always completely excessive and much higher than the cost incurred by the bank or broker to carry out this step. - The add-ons and small-print fees
Add-ons include account maintenance fees, small-print amendments and other types of charges with the main objective to extract as much money as possible from you through as many different avenues as possible.
Additional bank and broker practices:
- Dumping
Dumping is the industry-wide practice of attracting clients with the promise of incredibly low fees and unbeatable exchange rates. This may occur for the first transaction, only for subsequent transactions to be gradually increasingly loaded with steeper spreads. - Selective exchange rate quotes
Based on your importance in terms of capital to a bank or broker, you will receive a specific type of quote. Only the largest of multinational clients receive treasury desk quotes or anywhere close to the interbank rate. Most SMEs are locked out of these favourable exchange rates only on offer to the largest of firms and given a commercial rate. - Selective exchange rate adjustment
Rather than use the live exchange rate in real-time, you typically receive a daily quote. However, exchange rates move constantly, to the second. Typically, if an exchange rate moves worse than the daily rate, a bank will amend your quote to reflect this market movement though if it moves to a favourable position for the bank, this movement is not passed on to you.
Two companies of similar size and sector can easily have substantially different FX costs. It can help give you a competitive edge.
Optimising cost saving in business foreign exchange is two-fold. One, in obtaining favourable exchange rate prices and two, in knowing and lowering your commission costs. The traditional foreign exchange providers – banks and brokers – do their utmost to ensure neither is straightforward, through an opaque payment structure, hidden spreads and dubious add-ons.
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