Even though we have a new era in our global economy, conventional financial services that support cross-border commerce are firmly stuck in the 20th century. In this global society, businesses need a way to pay globally. Whether processing transactions with multiple currencies online, remunerating freelancers who work from around the globe, or transferring capital for use within international partnerships and collaborations, businesses need a fast, reliable, and cost-effective way to pay.
Last year alone, global e-commerce sales totalled $4.2 trillion, a figure expected to rise to almost $6 trillion by 2022. Unfortunately, a significant proportion of that figure is being lost to fees and exchange rates that are both opaque and expensive. Both consumers and businesses are losing money because it's difficult to see what the real cost of exchanging currencies is.
Today, when transferring money between currencies, business owners have to pay a percentage of the amount being transferred towards converting the foreign currency back. These fees will differ depending on a number of factors, and though fees cannot be entirely avoided when converting currencies, they can be greatly reduced. To decrease the sting involved with paying such high costs we’ve put together 5 tips to help your business avoid the expensive exchange rates.
5 Tips to Avoid Expensive Exchange Rate
1. Understand currency conversions
Understanding currency conversions is something that sounds simple and yet provides many stumbling blocks for businesses and individuals. The buying and selling of currencies is one of the most important aspects of trading, both for Forex - or FX - investing and because of the need for cross-border trading. However, a multitude of other factors can see value change dramatically within a very short period of time. These can include:
- Interest and inflation
- Supply and demand for specific currencies
- Government debt and political/economic issues in the respective nation/s
- Trade deficits
Basic exchange rates are calculated simply by dividing the amount of the home currency with the amount of the foreign currency you receive back. If you have $100 and get €80 back, your exchange rate is 100 divided by 80, equating to 1.25 euros per dollar. However, while calculations such as this are simple on the surface, they rarely reflect real-world exchange rates and the associated fees.
2. Understand the interbank exchange rate
The interbank exchange rate is the rate at which banks exchange foreign currencies between themselves on an institutional level. This is known as an interbank transaction, and they are completed at rates that are not available to consumers. The bottom line is, if you are allowing your bank or credit card to do currency exchanges for you, then you will not be getting the best rate. Instead, your bank is taking care of it and they're likely marking up the price.
Interbank exchange rates, or mid-market rates, are usually calculated by taking the midpoint between buy and sell rates for currencies on the open market. Additionally, different rates are offered depending on whether you are buying or selling. In most cases, you will not be able to access the interbank exchange rate because of hefty fees.
3. Compare the exchange rate vs the interbank exchange rate
As previously stated, the fee at which standard financial institutions charge consumers for converting one currency into another is relatively high, whereas the interbank exchange rate is low in comparison. Naturally, you want to find a rate that is as close as possible to the interbank exchange rate, or even better, the baseline exchange rate. However, this is difficult with conventional banking services.
The good news, however, is that Open Banking is set to change this and allow everyone access to fair and transparently priced rates when converting currencies. Shaking up the status quo, open banking provides consumers with a broad range of new, customer-orientated services that may help to sidestep traditional banking fees and charges. In particular, greater transparency and clearer terms put greater emphasis on saving both businesses and consumers money on international transactions through access to near-interbank exchange rates.
4. Consider comparing the interbank exchange rate vs Mastercard
Mastercard facilitates transactions in more than 150 currencies throughout the world. When making international payments or spending money abroad with Mastercard, they essentially operate as a currency retailer, transferring one currency into another. Much like banks, Mastercard adds their own fees to these transactions which result in their own retail exchange rate.
The Mastercard exchange rate can be checked online against the interbank exchange rate. Depending on the amount you want to exchange and the type of currency, you may find a better rate than on more conventional banking or broker services.
5. Consider Intergiro
At Intergiro, we use wholesale FX interbank exchange rates to convert currencies. This means you'll get the best international rate for your money when transferring or paying with our multi-currency wallet. We add a small markup to the interbank rate to produce the Intergiro live FX rate for all currency conversion transactions within our platforms. That means you’ll only pay the interbank exchange rate and a transparent Intergiro markup whenever you transfer money with currency exchange - no hidden fees or charges.
With an Intergiro business account, you can quickly and easily receive, hold, and payout funds in your desired currency. The service is available in 8 different currencies at this time, but Intergiro will be adding more in the near future. This incurs no additional fees or charges, and you can be clear about the figures you send out and receive — it’s the same as paying as a local!