Honeymoon Exchange Rates: What are they and how to avoid them?

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One of the main issues with doing a large currency transfer is that it’s a one-off transaction that you probably haven’t done before, and you probably won’t do again. Unless you are a CFO managing corporate FX, this may well be a nerve-racking experience. I spent 5 years as a prime broker to currency brokers doing multi-million dollar conversions and forwards, and even for us, trying to mark up a transaction the correct way got the heart rate going.

Marking up transactions is how currency brokers make money. They buy the currency you need to convert in the market from a prime broker or bank and then add their commission as a mark-up. They deal at one rate and give it to you at another.

Normally, you would agree on what this mark-up would be. For example, when you compare exchange rates, a currency broker should explain that your rate will be a certain percentage from the mid-market rate.

Currency broker fees are rarely displayed on their websites, as they tend to price clients differently based on their needs and how much servicing an account will require.

However, it’s come to my attention that even today, with live currency pricing available for free, some currency brokers still offer honeymoon exchange rates very close to the interbank rate to new prospective customers, but then widen the mark-up when the larger transfer is done.

In this guide, I’ll explain what honeymoon currency exchange rates are, how to spot them, and how to avoid them.

What are “Honeymoon Exchange Rates”?

Honeymoon exchange rates are when a currency transfer provider offers discounted rates to win business from new clients. But after an initial period, these rates are widened. For example, when a customer enquires about converting £250,000 into Euros to buy a property in Italy, a broker may quote a mark-up of 0.5%, but when the actual conversion is done, the exchange rate includes a mark-up of 2%.

Honeymoon exchange rates start off great and then get progressively worse.

Why do they do this?

Obviously, to make more money from customer transactions. Because there isn’t much money to be made from converting £250,000 with a mark-up of 0.5%.

A broker would earn £625 in commission from that transaction. Which may seem like a lot, but there is actually a lot of work involved in converting £250,000 into Euros and sending it abroad.

Firstly, a broker has to win the business – this means spending money on marketing for new clients. To get an enquiry from a customer wanting to do a transaction like that, a broker might have to spend about £200 on Google Ads and quote request landing pages.

Then, a broker has to convert a prospect from lead to customer – this requires a salesman to explain the process, the risks, the benefits of using a currency broker, and make various follow-up calls and emails.

After that, once a customer has decided to deal with a particular currency broker, the client opening an account has to pass anti-money laundering checks. Money transfer services are a hotbed for fraud (people stealing identities and money and sending it abroad so it can’t be recovered). So, an account executive at a broker will have to request proof of funds, do ID checks, and satisfy any AML requirements from their bankers and compliance department.

Finally, once the client has his account open, the broker has to do the actual transaction, which in itself will cost them money. If they are dealing directly with a bank, they will be charged a fee by the bank (albeit a small one). There will also be commission splits with the firm and any technology and compliance providers.

So, of that £625, they may only end up earning 25% of that, around £155. But, if they mark the client up 2% instead, they will earn £5,000 gross or £1,250 net.

Transparency

It’s been a long-running joke in the institutional FX space that if a client is on the golf course, and not in front of the screens, they will get a worse price. Unfortunately, this is just how finance works. This is explained brilliantly in The Trading Game by Gary Stevenson, who was at one point (he claims) one of the largest FX Swaps traders at Citi.

When I was a prime broker, on the desk we would always have a 30 pip rule, which meant you couldn’t mark-up a trade more than that from the mid-market. So if Cable (GBPUSD) was trading at 1.2663, you couldn’t offer it out any higher than 1.2693. But in reality, the volumes we traded meant that we’d charge around 1-5 pips. So if we converted £10,000,000, we’d earn $1,000 for every pip on a transaction.

If the prices we quoted were too wide, we’d get an earful from the client and either have to bring them in line or lose the business.

But, for private clients, this type of random marking up is appalling. Institution to institution is one thing where everyone understands the rules of the game. For private clients and non-finance professionals, transparency on rates should be paramount.

I’ve written many times before (during my “oh it’ll be fun to Blog on the Huffington Post” days: How FinTech is Disrupting Foreign Exchange for the Better) about how non-transparent FX brokerage fees are.

It even annoyed me so much that I set up my own currency brokerage to combat the problem by displaying fixed exchange rates on the website and giving customers an online platform that showed the mid and client rates. You can see the old platform demo from 8 years ago below.

YouTube video

I really enjoyed it, but unfortunately, I’m not a very good salesman and much prefer marketing. So instead, we now just compare currency brokers.

We do this by asking them to provide us with a matrix of exchange rates based on transaction size and putting that into our currency quote comparison tool. They agree with us in writing that any clients introduced from us to them (for which they pay us a fee) will get the mark-up displayed on the tool.

To ensure this happens, we also have a currency mark-up calculator that shows the difference between the mid-market and your exchange rates, so you can check to see what you were charged.

How to Avoid Honeymoon Exchange Rates

To avoid being caught out by honeymoon exchange rates, I’ve also written a guide on Negotiating Better FX Rates & AML Delays For Large Currency Conversions, after a reader wrote in about this. Essentially, here are some top tips:

  • Always get in writing what your mark-up will be and if it’s a fixed percentage.
  • It can be worth opening accounts with two different currency brokers.
  • The slightest hint of high-pressure sales tactics, lots of calls or emails should be a red flag.
  • Make sure a broker has an online conversion platform that can cope with the size of your transaction so you can see the exact rates you will be converting at.
  • Walk away; it’s your money, and if you don’t like the rate you are being given, you don’t have to deal.

What to Do If You Suspect You’ve Been Given a Honeymoon Exchange Rate

In the first instance, notify your currency broker in writing of the mark-up that was not agreed upon.

If you are not given the rate you require, the next step is to report it to the FCA and Financial Ombudsman Service. But you must do this quickly; the longer you leave it, the less chance you will have of recouping any costs.

However, you should be aware that recouping money via the Financial Ombudsman Service doesn’t always work, especially if you have agreed to the rate presented to you. Unfortunately, it’s very difficult to recoup money because you don’t understand a pricing structure.

Also, foreign exchange is largely unregulated and very different from investment accounts, in one respect because there is no central FX exchange like the stock market. Currencies are traded OTC (over-the-counter).

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