Foreign exchange rates (also known as FX, or Forex) is the rate at which you can exchange one currency for another. It seems obvious that this figure should be the main thing you look at when making an international bank transfer, right? Not so fast. There are other factors involved in currency transfer that dictate exactly how many euros you get for your sterling, or how much yen for your dollar. A basic knowledge of these can save you huge amounts of cash when transferring money to a foreign bank account.
Explaining the mid-market rate
The global currency markets have two rates: The one they buy a currency at, and the one at which they sell it. These rates are in constant movement. The mid-market rate is set, as the name suggests, mid-way between the buy and sell rates. Because the buy and sell rates are in a state of constant fluctuation, so too is the mid-market rate.
Why does the mid-market rate matter?
The mid-market rate is the one that will come up if you google “How many pounds will I get for 1000 euro” or “What’s the dollar exchange rate right now”. Reuters, Google and other worldwide information giving services all use the mid-market rate. So obviously that’s the rate your high street bank will offer, right? Not necessarily - and in fact, it’s not likely at all. High street banks all set their own rates, and while these will be pinned somewhere near the mid-market rate, they are skewed to make a profit on every international and european bank transfer.
Hidden charges can add up
On top of using a rate that is preferential to them, many high street banks will also charge a flat fee or a percentage for every single international bank transfer you make from your account. To give you an idea, TSB, for example, charge £10 for a transfer under £5,000 and £35 over. HSBC charge between £4 and £30, depending whether you make the transfer online or at a branch*. These charges, combined with an unfavourable exchange rate can really make a dent in the amount received at the far end of your money transfer.
How can you get around this?
Using a service like TransferWise means that you pay the actual mid-market rate. That’s right - the one that a Google search throws up or that Reuters have on their finance page. A flat fixed fee for the transfer means there are no nasty surprises when you look at how much actually arrived compared to how much you were expecting to arrive. If you are concerned about the mid-market rate fluctuating from the time that you set up the transfer to the point when the funds are actually processed (the processing of the order is not instantaneous), TransferWise even allow you to set up a rate limit (although there is a automatic 3% fluctuation limit set on all transfers anyway). It’s a transparent system designed to take any insecurity out of the transfer process. To learn more about transferring money abroad, check out our article on the SWIFT network, and what that means for foreign exchange transfers. * Rates correct as of Nov 2015, taken from the TSB and HSBC websites