An exchange rate seems like such a simple concept, right? In today’s world, traveling between countries or sending money abroad has become second nature to many. And, as part of that, more and more people are talking about exchange rates.
Even if we use the words, that doesn’t really mean we know how much we’re paying nor what - or if - the exchange rate is fair.
So if you’re exchanging Brazilian money often, it’s probably a good idea to understand how the exchange rate works and what’s really happening behind the scenes when you switch from one currency to another.
There are many ways of explaining what an exchange rate is, but perhaps the most accurate would be just by talking about the value of a certain currency measured against another one.
An exchange rate is essentially a comparison of any two currencies at a moment in time. It shows you, for instance, how much Brazilian Real you’ll get in exchange for each dollar. An exchange rate gives an exact value ratio of how much each country’s currency is worth in comparison to one another at any moment in time.
So far so good?
When you go to a currency exchange bureau or send money overseas through a bank, believe it or not, you’re actually buying and selling money. They tell you what your money’s worth and your completion of the transaction is, in essence, your agreement to that price. In a small way, you’re doing what millions of firms do on global financial markets all the time all over the world.
Why does buying and selling matter, though?
It means if you want to exchange your American dollars for Brazilian “reais”, the exchange rate used to convert your money by banks and other money transfer services will almost never be the same rate - price - you find on Google. That rate you find when you search online is called by many different names: the spot rate, the interbank rate, the mid-market rate. It’s the rate established by global traders; the midpoint between demand and supply for a currency.
Financial institutions, when they exchange money for consumers, add a margin to that rate to be able to offer their customers lower upfront fees but still ensure a profit on the transaction. Which means if you’re buying “reais”, you’ll end up giving more dollars than an online currency converter would say you needed to. The exchange rate reflects the price that an exchange bureau or a bank is charging you to buy the foreign currency. In nearly every case, mainstream banks and exchange services will offer you worse rates than the ones you find online.
Until around a decade ago, Brazil had two currency exchange markets - one for floating rates (the tourism exchange rate), and another for free rates (the commercial rate). In 2005, the Central Bank of Brazil unified them. Today, it’s now a free market in Brazil. Which means financial institutions are allowed to set their own exchange rates. They can charge you different exchange rates, at the same time and on the same day - solely based on their own internal criteria. It’s essentially what happens everywhere, and it’s where it starts to get a bit more confusing.
In Brazil, people still mention 2 exchange rates, but you already know that there’s only 1 market - a free market - instead of 2 these days. Unfortunately, though, to add further confusion, the Central Bank of Brazil still uses the terms dólar comercial (commercial dollar) and dólar turismo (tourism dollar). It gives the impression that there are 2 different types of exchange rates or 2 different markets, but that isn’t the case. The terms are used today as an informal way to classify the rate according to the nature of the different types of transactions.
Dólar comercial (commercial dollar) is the expression used for transactions in the financial market like imports, exports, money transfers, etc. This exchange rate, negotiated by commercial banks and companies, is the one that you usually see on TV. The commercial exchange rate is directly related to the global exchange market and, in Brazil, is the closest equivalent to what you’d call the interbank rate, the spot rate, or the mid-market rate in normal financial markets. However, one major difference is that at any point in time the Central Bank of Brazil can intervene and buy or sell currency if they think a lack of action will lead to greater instability for the Brazilian currency.
Another thing to take note of - since the commercial dollar is the midpoint between supply and demand, it also means that the rate fluctuates minute by minute. If you check at any moment, and then come back 30 minutes later, you’d find the rate has changed ever so slightly. Regardless, though, at the end of each day, the Brazilian market closes with a fixed average rate – the so-called “Ptax”. Instead of a minute-by-minute average of the buy and sell, it’s the daily average.
Dólar turismo (tourism dollar) is a term you’ll usually hear when you buy currency at an exchange bureau. The exchange rate here will differ from the commercial rate. If you buy euros, for instance, you’ll pay more for them than if you bought them at the commercial rate. That’s because the tourism rate is adjusted to make profit as well as cover the costs of importing paper currency.
The parallel dollar is a totally different case. It originated in the 90s when the Brazilian economy was unstable and emerged as an unofficial alternative to traditional currency exchange options. It involves unauthorized agencies exchanging your currency with their own rate and at their own price. The use of the parallel dollar is now considered illegal, and you’d face sanctions and punishment for exchanging money this way.
Though exchange rates themselves aren’t complex as a concept, finding the best providers so you can still be tricky.
Some companies state that there are no fees or commission when you send money abroad or exchange cash, but they’ll nearly always give you a poor exchange rate so that they can profit by pocketing the difference between the price they purchased the currency at, and the price they’re giving you for it. Other services, to gain an advantage, may tell you that they use the commercial dollar – but they still nearly always add a spread.
And you can’t forget about the taxes. And the SWIFT fees if you send money through the bank, because it’s an international transfer. By the time you have to decide which provider to use, you don’t know anymore what you’re paying and why.
This all explains why TransferWise exists. TransferWise has been in Brazil since 2015, helping to make transfers to and from the country simple and transparent.
TransferWise charges a transparent upfront fee, with the Brazilian tax for financial transactions (IOF) already included for you so you don’t have to pay more on top. In addition, you’ll find that TransferWise actually gives you the same rate you find on Google - the same rate that banks and financial companies use when they trade money amongst themselves. So you know you’re always getting the best rate because it’s the real rate. And, unlike a lot of financial institutions, TransferWise have no hidden fees or added costs. TransferWise has bank accounts in all the countries they operate, which means when you send money to their bank account in one country, the same money will be used by someone sending money from the opposite direction. Which means money doesn’t cross borders and all transfers are local ones, so the expensive international transfer fees charged by banks all over are completely cut out. TransferWise makes international transfers affordable. And fair.