A 10 step guide to preparing for a large currency conversion and international transfer

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Preparing for a large foreign exchange transaction and international transfer may seem like a daunting task. This step-by-step guide should help explain the costs, process and risks to help you send and receive more money by making an informed decision about foreign exchange.

1) Find out how much you can really save

One of the key benefits of using a currency broker instead of your bank is the actual exchange rate you get when converting currency and sending it abroad. There are two main ways a currency broker can help you save money:

  • Converting money at a better exchange rate

A currency broker will always offer better exchange rates closer to the interbank mid-market rate. A banks typical rates may be up to 5% from the mid-market rate whereas a currency broker can offer exchange rates of less than 0.5% from the mid-market. On a conversion of £100,000 that would potentially save a customer £4,500.

  • Locking in a beneficial exchange rate up to a year before you need foreign currency

The price of one currency against another can move significantly over the days, weeks and months leading up to a currency conversion. Currency brokers can lock in a favourable exchange rate for settlement up to a year in advance on a “buy now pay later basis” with a forward contract. Some currencies can move up to 10% in 6 months, potentially saving up to £10,000 on a £100,000 transaction.

2) Getting the best exchange rate

Ensuring you get the best possible exchange rate at the time of the transaction is imperative to cost-effective foreign exchange. When you request a foreign exchange quote a broker or bank will usually quote a price based on a percentage from the mid-market. This is generally known as the spread, margin, markup, basis points, pips or clean/dirty price.

Whatever terminology is used the principle is the same, the cost to you is the difference in price between where your bank or broker buys or sells money and the price at which you as a client send or receive it.

When you convert funds with a foreign exchange broker such as you are able to see in real-time where the underlying currency mid-market is as well as your price.

By providing client exchange rates a fixed percentage from the mid-market we are able to provide total transparency in our fees and rates, which will be at a significant discount to the banks and competition.

You may also find our guide on how to compare exchange rates helpful.

3) Reducing your risk by using currency forwards

It is possible to lock in beneficial exchange rates for transactions up to a year in advance.

Using currency forward contracts can help predict cash flow and futures costs without the worry of currency prices moving against you.

If for example you have £12m to convert into EUROs over the course of a year (£1m a month), but were worried that the exchange rate may move against you, therefore reducing the amount EUROs you receive as time goes on. We can convert £12m up front and split it into 12 different settlement dates a month apart. A small deposit would be required of between 5% and 10% but the balance of each transaction would not be due until the currency is needed and the conversion settles.

As an example, the GBPEUR price has moved 6.73% over the last 6 months – which can have big impact on receivable EUROs.

6 months ago converting £1m GBP was worth EUR 1,425,00. Today (1st Feb 2016) £1m is worth EUR 1,315,400.

4) FX costs explained: Zero % commission myth exposed

There is no such thing as zero 0% commission.  Foreign exchange fees are built into the exchange rate.

Your bank may charge an admin fee for each conversion, add commission on top of a widened exchange rate and there may be some charges for receiving funds into a foreign bank account.

When banks advertise FX as 0% they make it notoriously difficult to see your actual transaction costs. The transaction costs would be the difference between the mid-market and your price.

If you have an example of a previous foreign exchange transaction we can tell you how much you are being charged. It is possible to save several percent on the value of a transaction by switching to a currency broker.

However, with a currency broker all fees and charges should be totally transparent. If they are not. DON’T USE THEM

5) An example of how the process works

Unlike your bank, each customer is assigned a dealer who can handle all aspects of the transaction and onward payments.
Your dealer will be familiar with your transaction types and be on hand to provide advice on strategy, market timing and assistance with administrative issues.

The below example assumes you are converting £1m into USD.

  1. When you want to convert money you either go online or give us a call and ask us to convert £1m into USD
  2. We convert £1m GBP into USD at an agreed rate a fixed percentage from the mid-market.
  3. We send you a contract note with the breakdown of the transaction.
  4. You send £1m to our segregated client tier 1 bank account.
  5. When funds arrive and are matched we send the USD out. This can either be to your USD account or an international or domestic single or multiple beneficiaries.

6) How a currency broker can help…

Currency brokers provide the best rates in the business and are some are totally transparent with their pricing. Transparent quotes are a fixed amount from the mid-market interbank rate. When you request a quote online or with your currency broker they show the mid-market price as well as your rate. This is also shown on all your trade confirmations.They should not charge a commission or fee for onward payments – all our charges should be built into the FX rate.

But more importantly, currency brokers can provide advice and strategy that will reduce your foreign currency exposure protecting the value of your money. Including a variety of ways to convert money:

  • Same day/spot – you can convert funds and have it sent out on the same day to either a single or multiple beneficiary
  • Future date/forward – you can lock in today’s rate and convert funds to be used at a future date with only a small deposit. This is a common method of protecting future purchases from currency fluctuations
  • e-wallet – you can convert funds 24 hours a day and leave them in your online account for when you need them.

7) Getting pre-approval from your bank.

If you are making a one-off large foreign purchase you will need to send money from your bank to your currency broker to settle the trade. Most normal bank accounts have limits on the amount you can send in one go without notice, so may cap payments at £10,000.

So make sure you notify your bank that you will be making a large payment. In some cases, you may need to provide your currency brokers banking and settlement details to get it approved from your bank.

8) Receiving foreign currency from abroad.

One of the most expensive mistakes made when it comes to foreign exchange is receiving foreign currency into your GBP bank account. If you have funds coming in from abroad you could lose out significantly on the amount of GBP you receive if you allow your bank to manage the process.

When foreign currency is deposited into your GBP bank account the bank will generally do the conversion automatically at their standard rates.

Something else to avoid is letting the funds be converted into GBP before being sent to you, as this also results in large FX transaction costs.

Both of these scenarios mean you have no control over the exchange rate or timing of the conversion. Which could result in receiving significantly less GBP.

It makes sense to arrange for foreign currency accounts to be set up with your domestic bank, then convert funds into GBP at a beneficial rate using a currency broker.

You can also use a currency forward to lock in the current exchange rate for a payment you are expecting up to a year in the future. By using a currency forward you protect yourself against the actual currency price moving against you and can budget accordingly.

9) Online Currency Conversion & Back Office Demos

When you use a currency broker they should allow clients to choose to convert funds online or over the phone. Online platforms are available 24/7 (although you can’t convert on the weekends) where you can convert money, see live quotes, view your cash balances and check forward prices. You can also add regular beneficiary details and check audit trails of your previous conversions.

Experienced currency brokers can handle all aspects of the transactions over the phone and are on hand to provide expert advice on foreign exchange. All customers should benefit from the same service regardless of if they are a multi-national business or an individual making a one-off foreign purchase.

10) Getting your account in place beforehand

It is sensible to have your currency broker account open well before you may need to convert money or arrange an international money transfer.

I cannot tell you how many times I’ve seen clients leave it to the last minute to open a money transfer account with a currency broker. only to find out they need to supply ID documents or purchase confirmations. This process can take a few days, which you might not have. So make sure you have your account in place well ahead of any large upcoming foreign exchange transaction.

You can apply for an account online and the process takes less than a few minutes.

Compare currency brokers here

If you have any questions at all please ask – as we are happy to explain financial services.

You may also find our guide on how to compare exchange rates useful.

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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.