Currency exchange brokers; friends or foes?
- by Jimmy Sexton
- April 11th, 2017
Like most people, every time I have to exchange one currency for another, I cringe because I know those thieves, e.g. bankers – my bankers excluded, of course! – are about to financially offend me with their exchange rates and fees. But what other choice does anyone have when making these transactions other than the bank? The answer is a currency exchange broker. Until recently, I thought currency exchange brokers were worse thieves than the banks, and that the only time they really offered any benefit was on transactions of $1M or more.
A recent experience, however, showed me that some currency exchange brokers may offer better rates and lower fees than many banks, even on smaller transactions (e.g. under $10K).
For those of you unfamiliar with how currency exchange transactions work, think buy low/sell high. Say, for example, you read somewhere that the USD-EUR exchange rate is 0.95; meaning for USD 1.00 you should get EUR 0.95. But it doesn’t work like that because the bank exchanging the currency for you needs to profit from you. Assume you go to the bank and want to exchange USD 1.00 for EUR, you won’t get a rate of 0.95, they will exchange it at, say, a rate of 0.94. You would get EUR .94, rather than .95. Now assume you want to exchange your EUR .94 for USD 1.00, you won’t get the same rate. If you want to exchange EUR for USD, you will get a different rate. For example, the EUR-USD rate may be 0.96, meaning you need EUR 0.96 to get USD 1.00. The bank buys USD at 0.94 and sells USD at 0.96, the 0.02 spread is their profit.
Currency exchange brokers do the same thing as banks, buy low/sell high, but they often take a lower spread than the banks, which results in you keeping more of your money. One of the other benefits of currency brokers is that they can often conclude transactions faster than banks, meaning you limit your risk of exchange rate fluctuations.
Here are some examples to help illustrate my point.
On April 1st 2017, an individual, Tina, sold her London home for £750,000 and contacted a currency broker to arrange the transfer of funds to the U.S. Tina and the broker negotiated an exchange rate of 0.7969, equaling $941,158, which was transferred to the U.S. that same day. Had the client used a bank, the transfer could have taken 2+ days and in addition to the transfer fee, they likely would have charged their standard (worse) exchange rate. Even if the bank’s rate was the same, the time it would take them to complete the transaction could have exposed Tina to currency rate fluctuation risks.
Anyway, it’s just something to think about the next time you have to exchange currencies. And remember, like with everything, not all brokers are created equal. Here are some of the things you should consider when choosing a broker:
- Exchange rates they offer
- Speed of transfers
- Accessibility to a wide range of countries or locations
- Ability to fix your rate in advance of a deposit
- Option set up recurring transfers
- Option to be notified when rates reach your desired sell/buy amount
If you are looking for a broker, let us know as we can steer you in the right direction.