Conducting a wire transfer should be an easy process — you select a provider, make a request, furnish the necessary details and you’re done. And while wire transfers have gotten more streamlined with the progress in technology, what is still unnerving is the element of surprise and hidden fees.
It's here: The Definitive Guide to Foreign Exchange for 2019.
Those offering international wire transfers market a variety of benefits, such as “low fees” or “no commission transfers,” which is why so many people are surprised when a wire transfer is sent and they find the transaction is assessed fees they did not anticipate. At this point, they ask, “What happened to no fees?”
Understanding what a mid-market rate is, where to find it, and how it affects your international wire transfer will help you pay less for that next transactions.
At the root of this mystery is a concept most haven’t heard of before: middle-market rates, better known as mid-market rates. Understanding what a mid-market rate is, where to find it, and how it affects your international wire transfer will help you pay less for that next transactions.
What Is a Mid-Market Rate, and How Does It Work?
Currency exchange rates change quickly, by the day, the hour and even the minute. This rate is important because it’s tied to those hidden fees that you’re paying. This mid-market price, which is also called the “inter-bank rate,” the “spot rate” and the “real exchange rate,” is essentially the middle rate, which is the point between the buy and sell prices of two currencies when you’re dealing with international money transfer.
A financial institution takes the mid-market rate and then applies a margin on top of that, passing that additional cost on to the customer.
Banks and brokers typically apply “spread” to this rate, which are hidden charges that amend the “real” rate. For example, a financial institution takes the mid-market rate and then applies a margin on top of that, passing that additional cost on to the customer. The problem is that often the unexpected additional cost is not transparent and catches even the savviest of consumers off guard. The details are in the fine print, but at first glance, how do you know what you’re paying? And equally important, how can you pay less?
The answer lies in understanding what the mid-market rate is, and then figuring out what you’re being charged so you can determine whether that spread is reasonable or too high.
Understanding the Spread
When discussing the question “what are mid-market rates?” and understanding how they work, you might hear people use the term “spread.” This spread refers to the buy and sell rate. For example, let’s say that you’re using euros to purchase a US dollar. To purchase one US dollar, you might have to spend 1.16 euros. However, if you turn around and sell that euro, you may only receive $1.10. The difference between those two points is called the “spread,” and in this case, that spread is $.06.
The mid-market rate is usually lower than what a financial institution charges to convert the currency.
It’s important to know the spread between the buy and sell points, but it’s also important to understand how those two points play into the mid-market rate. So what is the mid-market rate for the example above? You can find out by averaging the buy and sell points ($1.16 + $1.10 / 2 = $1.13). So in this example, the mid-market rate would be $1.13.
The mid-market rate is usually lower than what a financial institution charges to convert the currency. Most often you will not be paying the $1.13 rate but something higher — and in some cases, much higher. But knowing the mid-market rate will give you a starting point to better understand what you’re paying and whether that cost is fair.
Uncovering What You’re Paying
Once you know the mid-market rate, you have more information than most consumers, and you can determine the total cost of your transactions. Let’s take a look at an example.
The reason financial institutions do this is to cover the cost of the transaction, pay any necessary commissions and create profit.
Let’s say that you live in the US and want to send money to a family member living abroad. The wire transfer process includes the need to convert your local currency, which is US dollars, into the family member’s currency. You’ll be charged a fee (which is based on the mid-market rate) for that conversion. You already know how to find that rate, but what do you do next?
You’re sending $1,000 to a family member in Mexico, and consequently those funds must be exchanged to the local currency, which is pesos.
First you determine the mid-market rate (more on how to find this in a minute) and find out that it’s 19.02 pesos/USD. If you calculate the conversion based on the mid-market rate, you’ll find that it converts to $1,000 x 19.02 pesos = 19,020 pesos.
But the exchange rate offered by the financial institution is not the mid-market rate, but instead is $18.50. As a result, you know that the bank is taking 0.52 pesos for every $1 that you send. So what does the actual exchange look like?
$1,000 x 18.50 = 18,500 pesos
The difference between the mid-market rate and what the bank is charging in this example is (19,020 – 18,500) = 520 pesos.
So the bank is charging you 520 pesos.
The problem is that prior to your transaction, you won’t see these figures laid out for you, so you’ll have to do the math yourself. The reason financial institutions do this is to cover the cost of the transaction, pay any necessary commissions and create profit.
Since these fees are not transparent, consumers end up unknowingly paying unexpected fees, which could be saved if they had a better understanding of mid-market rates and what banks are charging.
You can then contact a few different financial institutions and determine whether you can get a better conversion rate elsewhere to save money.
Armed with these details, you can then contact a few different financial institutions and determine whether you can get a better conversion rate elsewhere to save money.
Finding the Mid-Market Rate
Technology and online tools allow you to quickly view the mid-market rate in real time so you can better make decisions about transactions. There are many tools available, but here are a couple to determine the current rate for a variety of currencies exchanges.
The XE tool. The XE tool publishes live currency rates. For example, euros to US dollars was published at a rate of 1.24148. US dollars to Japanese yen is published at 107.050, and Australian dollars to US dollars is 0.79112. This tool publishes the exchanges as a chart, so it’s easy to scroll down and find the right conversion.
There can be a difference between a bank’s conversion rate and the existing mid-market rate. It isn’t always transparent to consumers, and calling to clarify won’t always provide answers.
The Yahoo tool. This tool allows you to view the mid-market rate for specific currencies, but it also shows recent market trends. For example, the tool shows that the conversion rate of the British pound to euros is 1.1255, and it also shows a chart with recent trends to see at a glance how a currency is performing.
Once you have the mid-market rate in hand, you can speak with your financial institution to determine what to expect for currency exchanges and you’ll better understand what type of profit the financial institution is making.
There can be a difference between a bank’s conversion rate and the existing mid-market rate. It isn’t always transparent to consumers, and calling to clarify won’t always provide answers. So instead, figure out the rate yourself, ask for the current exchange rate and then determine whether that cost is reasonable or you should shop around.
Tips to Avoid Overpaying
Not knowing the mid-market rate, especially if you regularly transact internationally, can stack up to higher fees and wasted resources. The best way to prepare and minimize those fees that you pay is to do the following:
Before transacting, find the mid-market rate. Use one of the above calculators, and take note of that rate as a starting point to calculate the exact cost that you’re paying.
Don’t settle for an exchange rate that is too high. Financial institutions charge anywhere from slightly above the market rate to as much as 6 percent for some currencies. Know what is reasonable.
Use alternative wire transfer providers. Using a nonbank provider can help eliminate intermediaries in the wire transfer process, and consequently some of those extra fees. For example, when you traditionally transfer money via wire, funds move from your bank to an intermediary bank and, in some cases, multiple intermediaries before arriving at the designated account. Every time your funds hit an intermediary bank, you may get hit with additional fees. Some alternative methods use “blockchain technology,” which replaces these intermediary banks and reduces unnecessary fees.
At the end of the day, the only “real” exchange rate is the mid-market rate; the rest are subjective based on the specific bank and their internal policies.
At the end of the day, the only “real” exchange rate is the mid-market rate; the rest are subjective based on the specific bank and their internal policies. Previously, customers had very little power, and as a result, generally paid whatever fees were charged for an international wire transfer. The paradigm has shifted, and customers are more empowered by technology. They have the ability to check mid-market rates with a few quick keystrokes, which presents additional options and the ability to mitigate fees that are too high.
Fees should be transparent and fair, and the key to regulating this is understanding what you’re paying and exploring all the options to minimize those unexpected and unwelcome fees.
Veem is a next-generation platform for business-to-business payments. We enable businesses to send and receive payments in local currency in a simple and inexpensive manner by using our unique multi-rail technology across several global networks. Our mission is to change the legacy financial payment system through innovation and improve the costly and outdated payments industry by building a new user-focused financial ecosystem that offer a range of services to businesses globally. For more information, visit www.veem.com.