The true cost of international money transfers: Part 1, Not all exchange rates are the same

The foreign exchange market is called an Over The Counter (OTC) market because there is no central exchange (like SEATS for shares) and prices are set as an agreement between two parties. This makes it more difficult to truly benchmark or compare the true cost on your international money transfers.

For most, the first point of call is usually the bank. There are many conveniences in using one’s own bank; however, I am surprised at how many small businesses continue to pay extra for this “convenience” when there is nothing really binding one to using their bank. This is especially pertinent for those small businesses still physically presenting themselves at the bank’s branch in order to pay foreign currency bills or, worse still, to cash foreign currency cheques they may have received.

Time to move online

With the advances made in doing business online, many small businesses have adapted to doing their international money transfers online. In particular, those based outside the major cities have been big adopters of online transfer methods. The ability to compare exchange rates in near real time over the internet and execute a transfer online is delivering big savings for those in the know.

Sadly, however, there are still many small businesses not aware that exchange rates between different providers vary. This makes comparing exchange rates vital in order to benchmark the true cost and subsequently potential savings to be had.

Comparing FX transfer costs

There are several ways to compare the cost of international money transfers. Most people simply compare one provider’s exchange rate to another’s for a specific amount on the same day. Whilst there is some validity in this approach, the devil is always in the detail and, as such, there are a few things you need to be aware of:

1. Same day is not good enough (same second or minute is better)

Exchange rates are live and constantly moving hence any time delay between quoted exchange rates can, especially in volatile markets, give inaccurate comparison.

2. Quoted exchange rate is subject to change

Providers often quote an “indicative” exchange rate which is true for that moment, however, may not hold when you revert and wish to transact. This is mainly because the market is most likely to have moved by the time you revert to lock in that actual rate.

3. Fees are not a separate cost

Most people compare the fees separate to the actual exchange rate cost. It’s best to add the value of the fee to the amount you will be paying in the local currency to get an “all up” cost comparison. Sometimes paying a higher fee can be cheaper!

4. Rates may vary for different amounts

If you are specifying one amount for a particular currency transfer you need at one point in time then this may not yield the best rate from the FX provider. You can either ask for rates to be quoted over a spectrum of amounts or an estimated annual FX turnover.

Instead of benchmarking rates amongst FX providers, businesses would be better served focusing on the wholesale, or otherwise known as “interbank rate”. This is the published rate shown on the news that is unachievable for small businesses and is generally reserved for large institutional investors.

The difference between the exchange rate you get from your FX provider for your transfer and the interbank rate is known as the margin or spread – this can and does vary not only between providers but sometimes over time too! The aim should be to consistently get “as close as possible” to the interbank exchange rate.

Jim Vrondas is chief currency and payment strategist, Asia-Pacific, at OzForex, Australia’s leading international payments solution provider.