Foreign Exchange Rates: What Is It and How Does It Work

5 min read

A few decades ago, foreign exchange (FX) rates mostly mattered to big businesses and tourists. After all, they were the ones who had to deal with exchanging one currency to another. But with the rise of global trade in many market segments, today’s small businesses can easily find themselves in a situation where they have to send money internationally.

Whether it’s a supplier from the neighboring country offering cheaper products, or a freelancer from the other side of the world, foreign exchange rates can greatly affect your business’ bottom line.

What are foreign exchange rates?

If you’re not familiar with the way international currency markets work, dealing with foreign exchange rates could be a confusing experience. Expressions like forex rate, mid-market rate, or buy-sell rate keep appearing without proper explanations in articles dealing with the issue.

Don’t worry, you won’t have to become an expert in international finance. For the purpose of international money transfers, you’ll only need to know a couple of things. First of all, what foreign exchange rates are.

Simply put, a foreign exchange rate is “the price” of one currency expressed in another. For example, if you want to buy one Canadian dollar, you’ll have to pay around $0.74 USD for it (at least, around the beginning of 2023). Sounds easy, right? And you probably knew that part already.

But wait, there’s more. The rate cited above is called the mid-market rate. This is the only expression you’ll need to understand for the purposes of sending international payments.

The mid-market rate (or alternatively, interbank rate) is the value at which banks are trading currencies among one another. This rate is only available to banks and only for the purpose of interbank transactions.

For customers, banks and other providers offer their own foreign exchange rate, which is usually the mid-market rate plus the bank’s profit margin and any other fees they may add to their rate. However, it also acts as the base price for any given currency on the market.

This is where the situation gets muddy. Some providers put a hefty profit margin on their exchange rates, making them unfavorable for small businesses. Most banks fall into this category. Others claim to offer good exchange rates but may pile a ton of landing fees, processing fees, and other types of additional costs on your transfer.

But because one provider may offer a better deal than another, customers have to do a lot of research and find out which option would be best for them. Albeit quite time-consuming, that doesn’t sound too bad, does it?

But wait, there’s still more.

Fluctuating exchange rates

Depending on the currency, foreign exchange rates can be fairly unstable. In fact, their values are constantly fluctuating against each other, based on a variety of factors. The stability of each country’s political and economic situation, for example, plays a major role in the value of any given currency.

For instance, if there is governmental unrest in a country, its currency is very likely to lose some of its value. Why? In times of political unrest, the economy of nations generally decreases. Inflows and outflows of goods decrease as these nations work to amend their internal turmoil. When investors become uncertain about the future of a country and its economy, they tend to sell their currency stock of said country, thus creating a large unwanted supply on the market. These two factors are major contributors to fluctuating exchange rates around the world. Take Brexit, for example. At the height of uncertainty around the UK leaving the European Union, the Pound Sterling (one of the UK’s official currencies) fluctuated in value.

On the other hand, if a country does well, or even better than expected (i.e. forms a stable government or signs a major trade treaty), investors feel secure about the future of the country and want to buy its currency. This creates a demand on the market that increases the currency’s value.

Long story short, foreign exchange rates fluctuate 24/7 and many people are paid to keep track of this market. Banks put large profit margins on the FX rates they offer to customers in part to mitigate the cost of evaluating this market, and working with the SWIFT network.

Finding the best exchange rates

As you can see, the world of foreign exchange is complicated at best, which means that finding the best exchange rates usually involves a lot of research. There’s no way around it: if you want to get the absolute best rate, you can’t spare yourself some digging around. Luckily, in the age of the internet, this mostly involves some Google searches and checking a few currency-converter services.

If your transfer isn’t urgent, you can look at currency trends. Is the USD getting stronger compared to the currency you need to transfer in? It may help to wait a few days and see if the trend continues. On the other hand, if the other currency is on the rise, you may want to send your transfer as quickly as possible to avoid increasing your costs.

Pick a trustworthy provider

Check out various providers and compare their policies. But, be aware of the tricks some providers use.

A too-good-to-be-true exchange rate is usually exactly that: too good to be true. For example, some providers aren’t upfront about their service fees and put a hefty sum on your transfer at the last minute. Others may take security less seriously and your financial information can easily get in the wrong hands.

Make sure you pick a reliable, trusted provider for your international transfers.

But what about the risks that fluctuating currencies pose on your business? Are you supposed to check every single exchange provider’s rates every single minute before you send every single one of your international payments?

Luckily, that’s not the case.

How to get the best exchange rates

Veem offers competitive foreign exchange rates for all of your international payments. We do not charge any sending fees you’d normally be charged by a bank, while also offering a lower rate.

Veem’s competitive spread is determined based on a number of factors, namely payment amount and destination. Each rate is calculated specifically for that payment, making sure you and your payees get the best deal.

Since Veem offers volume based discounts on foreign exchange rates, there are some things that you can consider when sending and receiving your payments.

  • If you’re the sender, consider consolidating and sending larger payment amounts. This will very likely get you the best rate possible.
  • As a receiver, having smaller payment amounts sent to your Veem wallet is a great way to hold and accumulate funds. Once you’ve accumulated a larger amount you can then withdraw those funds to your local bank account and a favorable rate.

Did you know that you can also use the funds in your wallet to send free USD payments? That’s right, if you also have payments to send, consider using your walleted funds to fund those payments instead of withdrawing them to your bank account. You can also use your debit card to top up your wallet for free!

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* This blog provides general information and discussion about global business payments and related subjects. The content provided in this blog ("Content”), should not be construed as and is not intended to constitute financial, legal or tax advice. You should seek the advice of professionals prior to acting upon any information contained in the Content. All Content is provided strictly “as is” and we make no warranty or representation of any kind regarding the Content.