How To Compare Exchange Rates

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In our guide to comparing exchange rates, I will explain how to get the best exchange rate when you convert one currency to another and then send it abroad. I’ve been in the industry for 20 years and have been both a currency broker and a customer sending money abroad. Here are my inside tips on how to compare exchange rates so you get more for your money.

Exchange Rate Comparisons Explained

One of the reasons foreign exchange transactions are so expensive is that people, unfortunately, don’t really understand how the pricing works. Because of this, banks have been overcharging people for sending and receiving money abroad for decades. If you use a currency broker for a large transaction instead of your bank it is possbile to save up to 4% on the transaction. But how do you know a currency broker is giving you the best exchange rate? Here we explain what to ask and what to watch out for.

How To Compare Currency Quotes

To compare exchange rates, you need to understand how they are calculated. That is because currency exchange rate quotes are indicative as the underlying exchange rate moves all the time. If a currency broker sends you a quote, it will be indicative and will have changed completely by the time your account is open.

Once you have requested quotes and chosen a currency broker, you need to ask them this very simple question:

“How far from the mid-market are your exchange rates?”

Anything more than 0.5% from the mid-market for a conversion between £50,000 and £250,000 is too expensive. Aim for under 0.3% for between £250,000 and £500,000 and 0.2% for over £500,000.

To clarify, the “mid-market” is the live currency rate between which the banks buy and sell.

You may have noticed that currency brokers do not publish this. That is because most currency brokers’ standard rates are can be higher than what is quoted in our comparison tables as we have worked our exclusive deals with some providers. Whilst standard exchange rates are still a significant discount from the banks who have historically charged around 3-5% for currency conversions who then add fees for international transfers, it is possible to get a much better rate.

So when you compare money transfer services, always go with a broker prepared to offer fixed and transparent exchange rates.

Understanding The FX Mark-up

Another way to have a better understanding when comparing currency broker exchange rates, is to know what a broker’s markup is.

You can find this out by asking these two simple questions:

  1. How far is my price from the mid-market?

  2. Is that rate fixed?

You will get an answer as a percentage, i.e. “Our rates are 0.5% from the mid-market.” What this means is that the broker’s fees are 0.5% of the transaction value. So if you are converting £100,000, it will cost you £500 in fees. You won’t see this on a statement because it will be built into the exchange rate, which the broker widens from the mid-market.

For example:

  • If the broker’s percentage from the mid-market was 0.5%, your price would be a little better.
  • You would be selling 100,000.00 Pound Sterling (GBP)
  • You would be buying 125,690 Euros (EUR)
  • Your exchange rate 1.2569
  • Mid-market exchange rate 1.2632
  • The broker has charged you EUR 630 (£500)

There is a difference between the mark-up being fixed and the exchange rate being fixed.

Exchange rates can move around 1% in a day, so the exchange rate you are given is indicative. By the time you get round to opening an account and arranging the transfer, the price will have moved. But if the mark-up is fixed, you know that your exchange rate will always be a set percentage away from the mid-market price.

Timing Large Currency Transfers

You should also consider the right time to do the actual transaction. Currency prices can move over 5% in a month, so if you are spending too much time on negotiating rates, the actual price may move against you, negating any saving you would have made by using a cheaper provider.

You can use a currency forward to entry stop loss to mitigate this. A currency forward will allow you to lock in an exchange rate for payment later. The benefit of this is that buying currency now won’t cost you any more in the future. The downside is that if the price moves in your favour, you will not benefit from the price reduction.

Using a stop-loss entry order gives you some opportunity to let the rate move in your favour, by allowing it to move against you a bit before doing the deal. However, it stops the price moving a lot against you, protecting most of your downside.

Expert Insider Tips On Comparing Exchange Rrates

Watch our video discussion, where we discuss how currency brokers make money and how to compare exchange rates effectively.

How To Compare Currency Brokers

The two key aspects to compare when comparing currency brokers are price and trustworthiness.

  • Price – this is the comparison of exchange rates offered by different currency brokers.
  • Trustworthiness – currency brokers are not covered by the FSCS so you need to ensure that any currency broker you use can be trusted with your funds

There is a plethora of currency brokers in the UK and they all essentially do the same thing, and that is; provide access to better exchange rates and faster international money transfers than banks. So how do you choose between them?

What will the service be like?

Personal service from a currency broker is one of the most important factors. Some may say even more so than pricing.

Large foreign exchange transactions can seem very daunting and as a client, you need to make sure that the firm has experienced dealers who understand the process and markets.

It’s obvious that every transaction is very important and that some cases, such as foreign property purchases, can be the largest single transaction for an individual.

Therefore, having someone to talk to directly before a large foreign exchange trade is helpful, and one thing that currency brokers are particularly good at.

After all, not correctly timing and executing a foreign exchange transaction are arguably the largest costs.

Compare exchange rates

Currency brokers are far cheaper than banks for foreign exchange and international money transfers. A bank can charge an exchange rate mark up of up to 5%, while most established currency brokers aim to charge up to 1%.

However, most currency brokers only display exchange rates on their website rather than the mark-up.

There should also be no additional fees for conversions as everything is included in the exchange rate.

Get quotes from multiple currency brokers here.

Do they offer currency forwards?

Most banks don’t offer currency forwards and they are perhaps the easiest way to reduce risk and protect your money in the foreign exchange markets.

Using a currency broker for a currency forward means you can lock in the current rate for up to one year in advance. You will need to put down a small deposit, but some currencies can move up to 10% a year, so locking in an exchange rate is a very effective way of budgeting.

Here’s more about currency forwards and how they work.

Check how long transfers take

Banks can take a few days, whereas most currency brokers can transfer funds internationally on the same day.

So if you do a conversion in the morning, a currency broker can send the money and have it in your international beneficiaries account that afternoon.

Sometimes, this can take a little longer due to the procedures of the receiving bank and country; they generally aim to get funds sent from your account as soon as possible.

Can you convert and send funds online?

Some customers, especially corporate foreign exchange clients, are quite happy to convert and transfer currency online. So make sure that your broker can provide you with an online platform for desktop and on mobile so you can check exchange rates, execute conversions and track payments wherever you are, 24/7.

Check they are FCA registered

All financial service businesses in the UK have to be regulated by the FCA, and currency brokers are no different. You can check to see if a currency broker is regulated on the FCA register here.

Being regulated by the FCA means that the broker has been vetted and adheres to certain compliance and client fund safety rules.

Never open a currency brokerage account (or any other financial services account) with a firm that is not FCA registered.

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