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There are a number of different types of business out there that are vying for your custom when it comes to currency transfers. Foreign exchange is big business and there is a lot of money to be made from brokering a trade. The question you need to be asking any company you deal with is how much they are going to make from you!
Before we go any further, it would make sense to briefly go over the simple (but important) concept of spreads. A spread is the margin all foreign exchange brokers charge their clients when facilitating a trade and this is normally how a business will make the majority of its money from you. The whole concept of spreads in often confused with commission but be warned; they are two entirely different entities. Just because a company claims to not charge commission, this does not mean they will not charge an inflated spread.
Most large currency exchanges buy their currency at the Interbank Rate which is essentially the market rate. They will proceed to sell it to their clients at another rate after taking a margin. The margin/spread they take is discretionary and tends to be set in different ways depending upon the business model they employ. The key to optimising your transfer is to find a broker that is very competitive with the spread it charges, is rep
We will now look at the different options you have to consider when conducting a foreign currency purchase.
A bank is one of the most convenient ways to exchange currency. If you are looking for travel money then you can usually pop into the branch and pick it up. If you need to send larger sums of money overseas to another bank account, you can call the bank arrange it. With this convenience though comes extra expense.
The Problem with Using Banks For International Transfers
Because the majority of people use their banks for such transfers, there is no incentive for them to be more competitive with their rates. They tend to add wide spreads onto what they get the currency for and to add insult to injury, most banks will charge you a fee for administering the transfer.
Most banks fix their rates at a particular time every day. For example, HSBC set their rates every morning at X% above the interbank rate. Be aware that this can go for or against you. If your rate pairing swings so that the currency you hold strengthens after they have set the rate, you are going to be out of pocket by transferring at a rate that was fixed potentially hours ago. If on the other hand, your currency weakens, it would be in your interests to use a bank that offers a price that was fixed before it decreased in value.
Foreign Exchange Bureaus
A Bureau De Exchange is a popular option for holiday makers, again due to convenience. As part of their business model, bureaus tend to offer over the counter facilities in popular positions like airports, train stations and popular tourist destinations like the West End of London. The problem with Bureaus is the same as banks – cost. Due to the extra convenience that these businesses offer, the rates on offer tend to be some of the worst around. They know that the people that use their services are normally pretty desperate for their service and they take advantage of this by charging a poor rate.
Popular Bureaus include Moneycorp and Travelex – the two largest of their kind in the world. We would suggest speaking to either company prior to travelling as they will deliver the currency to your door at a much better rate than you will get say, at the airport.
Without doubt, the cheapest way to execute a currency transfer/exchange is to register with a specialised currency broker. These companies are extremely competitive with the spreads they charge, and therefore the rates they offer their clients tend to be the best. To make things even better, many of them refrain from charging their clients admin fees.
To setup a transfer with a broker all you need to do is register, provide details of your transfer and then send the required funds into their client account. The whole process is very straight forward and they will talk you through everything you need to do
Let’s put into context the savings that can be made by using a broker. Lets’ say your bank charges a spread of 5% on a transfer, if you were to exchange 100k GBP into EUR, they would make £5000 from you plus a fee. If you instead decided to use a broker that charged a spread of 0.5%, you would only be £500 out of pocket and in all likelihood, you would save on the fee too. Everything else would be equal like transfer’s speed which would probably take the same amount of time as if you used the bank.
To conclude, no matter how well off you are, it is important to assess the currency exchange market as there are HUGE sums of money to be saved. Try to stay clear of high street bureaus and banks if you can and instead find a specialised currency broker that is reputable and competitive with its rates.